Document ID: SEC-2015-0308-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market, LLC
Posted Date: 2015-02-24T05:00Z

[Federal Register Volume 80, Number 36 (Tuesday, February 24, 2015)]
[Notices]
[Pages 9778-9788]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-03713]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74299; File No. SR-NASDAQ-2014-065]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, To Adopt New Rule 5713 and List Paired Class Shares Issued by 
AccuShares[supreg] Commodities Trust I

February 18, 2015.

I. Introduction

    On June 11, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``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: (1) Adopt listing standards for Paired Class 
Shares in new Rule 5713; and (2) list and trade Paired Class Shares 
(``Shares'') issued by AccuShares[supreg] Commodities Trust I 
(``Trust'') relating to the following funds pursuant to new Rule 5713: 
(a) AccuShares S&P GSCI[supreg] Spot Fund; (b) AccuShares S&P 
GSCI[supreg] Agriculture and Livestock Spot Fund; (c) AccuShares S&P 
GSCI[supreg] Industrial Metals Spot Fund; (d) AccuShares S&P 
GSCI[supreg] Crude Oil Spot Fund; (e) AccuShares S&P GSCI[supreg] Brent 
Oil Spot Fund; (f) AccuShares S&P GSCI[supreg] Natural Gas Spot Fund; 
and (g) AccuShares Spot CBOE[supreg] VIX[supreg] Fund (each 
individually, ``Fund,'' and, collectively, ``Funds'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on June 23, 2014.\3\ On August 6, 2014, pursuant to Section 
19(b)(2) of the Act,\4\ 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.\5\ On September 18, 
2014, the Commission instituted proceedings to determine whether to 
approve or

[[Page 9779]]

disapprove the proposed rule change,\6\ and on December 16, 2014, the 
Commission extended the deadline for Commission action until February 
18, 2015.\7\ The Commission received six comment letters regarding the 
proposal, including one from the Exchange and two from AccuShares 
Investment Management LLC (``Sponsor''), the sponsor of the Funds.\8\ 
On February 10, 2015, the Exchange submitted Amendment No. 1 to the 
proposed rule change.\9\
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    \3\ See Securities Exchange Act Release No. 72412 (June 17, 
2014), 79 FR 35610 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 72779, 79 FR 47162 
(Aug. 12, 2014). The Commission designated a longer period within 
which to take action on the proposed rule change and designated 
September 19, 2014 as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ See Securities Exchange Act Release No. 73142, 79 FR 57150 
(Sept. 24, 2014) (``OIP'').
    \7\ See Securities Exchange Act Release No. 73843, 79 FR 76428 
(Dec. 22, 2014).
    \8\ See Letter from Jack Fonss, CEO and Co-Founder of the 
Sponsor, to Kevin O'Neill, Deputy Secretary, Commission (Sept. 25, 
2014) (``Sponsor Letter''); Letter from Robert E. Whaley, Valere 
Blair Potter Professor of Finance, Director, Financial Markets 
Research Center, Vanderbilt Owen Graduate School of Management, to 
Kevin O'Neill, Deputy Secretary, Commission (Oct. 8, 2014) (``Whaley 
Letter''); Letter from David B. Allen to Commission (Oct. 11, 2014) 
(``Allen Letter''); Letter from Mark Kassner to Commission (Oct. 13, 
2014) (``Kassner Letter''); Email from Ned Cataldo, Chief Operating 
Officer and Co-Founder of the Sponsor, to Heather Seidel, Associate 
Director, Commission (Oct. 24, 2014) (``Sponsor Email''); Letter 
from Jurij Trypupenko, Associate General Counsel, Exchange, to Brent 
J. Fields, Secretary, Commission (Oct. 28, 2014) (``Exchange 
Letter''). All comment letters are available at: http://www.sec.gov/comments/sr-nasdaq-2014-065/nasdaq2014065.shtml.
    \9\ In Amendment No. 1, the Exchange (a) corrected references to 
the entity that will be calculating and publishing the CBOE 
Volatility Index[supreg], (b) deleted Commentary .05 to Rule 5713 
due to its inapplicability to Paired Class Shares, and (c) made 
technical re-numbering changes to Rule 5713 as a result of the 
deletion of Commentary .05. Amendment No. 1 provided clarification 
to the proposed rule change, and because it does not materially 
affect the substance of the proposed rule change, Amendment No. 1 is 
not subject to notice and comment.
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    This order approves the proposed rule change, as modified by 
Amendment No. 1 thereto.

II. Description of the Proposal

    The Exchange proposes to adopt new Rule 5713, which permits the 
listing of Paired Class Shares, and to list and trade Shares of the 
Funds.

A. General Description of Paired Class Shares \10\
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    \10\ A complete description of Rule 5713 and Paired Class Shares 
can be found in the Notice, supra note 3.
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    Paired Class Shares will be structured with the objective of 
providing investors with exposure to changes in an index or other 
numerical variable (``Underlying Benchmark''). Paired Class Shares will 
be issued by a trust on behalf of a fund, and each fund will be a 
segregated series of that trust.\11\ Paired Class Shares will have 
values that are based on an Underlying Benchmark where the value of the 
underlying benchmark reflects the value of assets, prices, price 
volatility, or other economic interests (``Reference Asset'').\12\
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    \11\ See NASDAQ Rule 5713(c).
    \12\ See id. The Exchange states that other economic interests 
would include, for example, currencies, interest rates, non-
investable economic indices, and other measures of financial 
instrument value. See Notice, supra note 3, 79 FR at 35611, n.11. 
The Exchange will file separate proposals under Section 19(b) of the 
Act before listing and trading each series of Paired Class Shares. 
See Commentary .02 to NASDAQ Rule 5713.
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    The trust for each fund of Paired Class Shares will always issue 
and redeem Paired Class Shares in pairs of shares of opposing classes 
of each fund: Up Shares and Down Shares. The values of the opposing 
classes will move in opposite directions as the value of the fund's 
Underlying Benchmark varies from its starting level. Up Shares will be 
positively linked to the fund's Underlying Benchmark, and Down Shares 
will be negatively linked to the fund's Underlying Benchmark.\13\ The 
rate of linkage or leverage of a fund's Up Shares and Down Shares 
performance to the performance of the fund's referenced Underlying 
Benchmark will be one-to-one.\14\ Each fund will use a mathematical 
formula to calculate the liquidation value attributable to each of its 
classes of Paired Class Shares (``Class Value'') and to each share of 
each class (``Class Value per Share'').\15\
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    \13\ See NASDAQ Rule 5713(c).
    \14\ See Notice, supra note 3, 79 FR at 35611.
    \15\ See id. The Exchange represents that the mathematical 
formula is based on the following factors: (1) The value of the 
fund's assets; (2) the allocation of that value based on changes in 
the level of the fund's Underlying Benchmark, which may be limited, 
reduced, capped, or otherwise modified according to formula or pre-
set parameters; and (3) the daily accrual of gain and income or loss 
on the assets of the fund, less the liabilities of the fund, as such 
gains, income losses, and liabilities are allocated to each class of 
the fund. See id. at n.12.
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    Each fund will engage in regular distributions \16\ and may also 
engage in special distributions \17\ or corrective distributions.\18\ 
Immediately after each distribution, the fund's Underlying Benchmark 
participation or exposure will be reset, and the fund's Class Value per 
Share for each of its classes will be set to equal the lowest Class 
Value per Share of the two classes of Paired Class Shares.
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    \16\ On a scheduled basis, funds would make regular 
distributions, paying a dividend to the class of shares that had 
increased in value since the last distribution. According to the 
Exchange, regular and special distributions will be made in the form 
of cash during the first six months of trading in Paired Class 
Shares. Thereafter, each fund will pay all or any part of any 
regular or special distribution in Paired Class Shares instead of 
cash, where further cash distributions would adversely affect the 
liquidity of the market for the fund's shares or impact the fund's 
ability to meet minimum Exchange distribution requirements. See id. 
at 35619 (further stating that all payments made in Paired Class 
Shares will be made in equal numbers of Up and Down Shares, and 
that, to the extent a share distribution would result in the 
distribution of fractional Paired Class Shares, cash in an amount 
equal to the value of the fractional Paired Class Shares will be 
distributed rather than fractional Paired Class Shares).
    \17\ Funds would make special distributions when movement in the 
Underlying Benchmark exceeded a specified rate of change since the 
previous distribution. Special Distributions are designed to prevent 
rapid movements in the Underlying Benchmark from transferring all 
value in the fund either to the Up Shares or to the Down Shares. See 
id. (describing regular and special distributions to be made in the 
form of cash during the first six months of trading in Paired Class 
Shares, and thereafter, in Paired Class Shares instead of cash).
    \18\ Funds would make corrective distributions when the trading 
price of a class of shares deviates from its class value by a 
specified amount for a specified period. Corrective distributions 
are designed to prevent the Up Shares and Down Shares from becoming 
locked in a persistent state of equal and opposite deviations from 
class value. In a corrective distribution, a fund will issue each 
holder of Up Shares an equal number of Down Shares, and each holder 
of Down Shares an equal number of Up Shares.
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    Paired Class Shares of a fund will be created and redeemed in 
specified aggregations of equal quantities of Up Shares and Down Shares 
\19\ at their respective Class Values per Share. Paired Class Shares 
can only be created or redeemed by authorized participants 
(``Authorized Participants'').\20\ Paired Class Shares creation and 
redemption transactions will only occur (a) for cash consideration, and 
(b) in equal pre-determined quantities of Up Shares and Down Shares.
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    \19\ A Creation Unit for each Fund will comprise 25,000 Up 
Shares and 25,000 Down Shares. See id. at 35612, n.14.
    \20\ See id. at 35612.
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B. The Exchange's Description of the Funds

    The Exchange has made the following representations and statements 
in describing, among other things, the Funds, the corresponding 
Underlying Benchmarks, arbitrage, and distributions.\21\
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    \21\ The Commission notes that additional information regarding 
the Trust, the Funds, and the Shares, including risks, information 
relating to the Underlying Benchmarks and Reference Assets, Class 
Value and Class Value per Share calculations, creation and 
redemption procedures, trading halts and pauses, applicable Exchange 
trading rules, surveillance, information circulars, fees, disclosure 
policies, distributions, and taxes, among other information, is 
included in the Notice and the Registration Statement, as 
applicable. See Notice, supra note 3, and Registration Statement, 
infra note 22, respectively.
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    The Shares will be offered by the Trust, which is a Delaware 
statutory trust.\22\ Wilmington Trust, N.A., a

[[Page 9780]]

national banking association, will serve as the trustee (``Trustee'') 
and the investment advisor (``Investment Advisor'') for each Fund. The 
Investment Advisor, which is chosen by the Sponsor, is responsible for 
investing each Fund's available cash in bills, bonds, and notes issued 
and guaranteed by the United States Treasury (``United States Treasury 
Securities'') with remaining maturities of 90 days or less (``Eligible 
Treasuries'') and over-night repurchase agreements collateralized by 
United States Treasury Securities (``Eligible Repos,'' and together 
with cash and Eligible Treasuries, collectively, ``Eligible Assets''). 
State Street Bank and Trust Company (``State Street''), a Massachusetts 
trust company, will serve as the custodian, administrator, and transfer 
agent (``Custodian,'' ``Administrator,'' or ``Transfer Agent'') for 
each Fund.\23\
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    \22\ The Exchange states that the offer and sale of Paired Class 
Shares of each Fund will be registered with the Commission by means 
of the Trust's registration statement on Form S-1 under the 
Securities Act of 1933 (``Securities Act''). According to the 
Exchange, the Registration Statement was filed on March 18, 2014 and 
will be effective as of the date of such offer and sale. See Notice, 
supra note 3, 79 FR at 35615. The Commission notes that a pre-
effective amendment No. 1 to the registration statement 
(``Registration Statement'') was filed on July 17, 2014 (File No. 
333-194666).
    \23\ The Custodian will hold each Fund's securities and cash and 
will perform each Fund's Class Value and Class Value per Share 
calculations. As Administrator, State Street will, among other 
things, perform or supervise the performance of services necessary 
for the operation and administration of the Funds (other than making 
investment decisions or providing services provided by other service 
providers), including accounting and other fund administrative 
services. As Transfer Agent, State Street will, among other things, 
provide transfer agent services with respect to the creation and 
redemption of Creation Units. The Transfer Agent will receive from 
Authorized Participants creation and redemption orders and deliver 
acceptances and rejections of such orders to Authorized Participants 
as well as coordinate the transmission of such orders and 
instructions among the Sponsor and the Authorized Participants.
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    The Underlying Benchmark of each Fund, other than the AccuShares 
Spot CBOE VIX Fund (``VIX Fund''), is constructed, calculated, and 
published by S&P[supreg] Dow Jones Indices LLC (``Index 
Provider'').\24\ The CBOE Volatility Index[supreg] (``VIX''), which is 
the Underlying Benchmark of the VIX Fund, is calculated and published 
by CBOE. According to the Exchange, both the Index Provider and CBOE 
are unaffiliated with the Trust and the Sponsor.\25\ To the extent that 
an Underlying Benchmark is maintained by a broker-dealer or investment 
advisor, such broker-dealer or investment advisor will erect a 
``firewall'' around personnel who have access to information concerning 
changes and adjustments to the Underlying Benchmark.\26\
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    \24\ The Underlying Benchmarks for all of the Funds other than 
the VIX Fund are: (1) The S&P GSCI Spot index; (2) the S&P GSCI 
Agricultural and Livestock Spot index; (3) the S&P GSCI Industrial 
Metals Spot index; (4) the S&P GSCI Crude Oil Spot index; (5) the 
S&P GSCI Brent Crude Oil Spot index; and (6) the S&P GSCI Natural 
Gas Spot index, (collectively, ``S&P GSCI Commodity Indices'').
    \25\ See Notice, supra note 3, 79 FR at 35615.
    \26\ See id.
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    As described above, the Trust will issue Shares on behalf of each 
Fund in offsetting pairs, where one constituent of the pair, the Up 
Shares, is positively linked to the Fund's Underlying Benchmark, and 
the other constituent, the Down Shares, is negatively linked to the 
Fund's Underlying Benchmark. Once created, a Fund's Paired Class Shares 
will trade independently of each other on the Exchange. The cash 
proceeds from the creation of Paired Class Shares may be held by a Fund 
only in Eligible Assets designed to preserve capital while earning an 
investment return that is consistent with the preservation of capital. 
Upon any redemption of a Fund's Creation Units by an Authorized 
Participant, the cash of the Fund will be used to pay the proceeds of 
the redemption to the redeeming Authorized Participant.
    Each Fund engaging in a regular distribution,\27\ a special 
distribution,\28\ a corrective distribution,\29\ or a net income 
distribution \30\ will provide at least three business days' advance 
notice (or longer advance notice as may be required by the Exchange) 
\31\ of such an event. Each Fund engaging in a share split \32\ will 
provide at least ten calendar days' advance notice (or longer advance 
notice as may be required by the Exchange) of such an event. In each 
instance, the Sponsor will notify the Exchange, and post a notice of 
such event and its details on the Sponsor's Web site 
(www.AccuShares.com). For regular distributions that occur on schedule, 
the Sponsor will cause a press release to be issued identifying the 
receiving class, the amount of cash, the amount of Paired Class Shares 
(if any), and any other information the Sponsor deems relevant 
regarding the distribution and will post this information on the 
Sponsor's Web site. With respect to special distributions, corrective 
distributions, and share splits, the information provided will include 
the relevant ex-, record, and payment dates for each such event and 
relevant data concerning each such event. These events will also be 
reported in press releases, on the Sponsor's Web site, and in current 
reports on Form 8-K as material events, as well as in the Fund's 
periodic reports.
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    \27\ See supra note 16.
    \28\ See supra note 17.
    \29\ See supra note 18.
    \30\ In a net income distribution, cash is distributed to 
investors based on income (after expenses) from the financial 
instruments held by the Fund.
    \31\ The Exchange states that it may determine that a longer 
notice is advisable in certain circumstances (e.g., an extended, or 
unexpected, market break).
    \32\ Reverse share splits will be declared to maintain a 
positive Class Value per Share for either the Up Shares or the Down 
Shares of an AccuShares Fund should the Class Value per Share of 
either class approach zero. Reverse share splits are expected to 
occur in the context of special distributions and are expected to be 
triggered after Class Value per Share declines below a specified 
dollar threshold as set forth in the applicable Fund prospectus.
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C. Summary of the Comments

    In the OIP, the Commission posed questions regarding the proposed 
rule change. Commenters responded to those questions and offered other 
comments as well. The comments are summarized below.
1. The Effect of the Distributions on the Premiums and Discounts 
Between the Trading Price and Class Value per Share
    In response to Commission questions about the effect of the Funds' 
distributions on premiums and discounts,\33\ the Sponsor asserts that 
the presence of regular, special, and corrective distributions will aid 
in the reduction of premiums and discounts.\34\ With regard to both 
regular and special distributions, the Sponsor asserts that a Fund will 
make these types of distributions based on the movement of the 
Underlying Benchmark since the last distribution date, and will then 
reset the index to the current market level.\35\ According to the 
Sponsor, two positive effects relating to potential discounts or 
premiums from regular and special distributions are: (1) An investor 
will enjoy an actual distribution relating to the index move rather 
than having to rely on trading out of an intrinsic gain that could be 
subject to market lags, frictions, or a lack of realizable trading 
price responsiveness; and (2) the index reset will re-equate the 
intrinsic share prices, having the effect of further highlighting any 
deviations between trading prices and Class Values, and consequently 
all investors (not just market professionals) will more clearly observe 
any premium or discount, and

[[Page 9781]]

any investor can execute a trade in response to these deviations.\36\
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    \33\ See OIP, supra note 6, 79 FR at 57157.
    \34\ See Sponsor Letter, supra note 8, at 4. Similarly, the 
Exchange states that the corrective distribution feature is designed 
to prevent losses that have occurred in other ETPs in the past. See 
Exchange Letter, supra note 8, at 22-23. See also Notice, supra note 
3, 79 FR at 35611 (``Immediately after each regular, special and 
corrective distribution, the Fund's Underlying Benchmark 
participation or exposure will be reset and the Fund's Class Value 
per Share for each of its classes will be set to equal the lowest 
Class Value per Share of the two classes of Paired Class Shares.'').
    \35\ See Sponsor Letter, supra note 8, at 4.
    \36\ See id.
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    The Sponsor states its view that almost all premium and discount 
combinations of the Up Shares and Down Shares of a Fund will be readily 
cured by conventional arbitrage. According to the Sponsor, the 
corrective distribution is an investor safety feature, above and beyond 
conventional arbitrage, designed to remedy those unique scenarios where 
the material discount amount of one Fund share is exactly equal to the 
material premium amount of the opposing share.\37\
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    \37\ See id.
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    The Sponsor states that the corrective distribution \38\ is 
expected to have both a preventative effect and a curative effect 
relating to premiums and discounts between trading prices and Class 
Values per Share.\39\ The Sponsor asserts that the possibility of a 
corrective distribution will disincentivize market participants from 
buying or selling shares at material premiums or discounts to the Class 
Values per Share.\40\ Relating to the curative impact, the Sponsor 
states that following the corrective distribution: (1) The discount 
class holder, potentially stranded by low available bid prices, would 
have the correct aggregate value (inclusive of index movements) in a 
50/50 position in the discount shares and premium shares; and (2) a 
premium class holder would also have the correct aggregate value 
(inclusive of index movements) in a 50/50 position in discount shares 
and premium shares.\41\ The Sponsor asserts that these positions would 
be unaffected by a single share class premium or discount, and would be 
readily saleable at a stable and readily identifiable price (especially 
because the Fund is limited to holding cash equivalents).\42\ 
Authorized Participants, the Sponsor notes, may redeem these positions 
in sufficient aggregate amount.\43\
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    \38\ A corrective distribution will result in: (1) The investors 
holding the share class associated with the favorable index move to 
realize a gain equal to the realized move in the index; and (2) all 
investors receiving an equal quantity of each share class of a Fund. 
See id. at 5.
    \39\ See id. at 4.
    \40\ See id.
    \41\ See id. at 5.
    \42\ See id.
    \43\ See id.
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    One commenter, who recommends that the Commission approve the 
proposed rule change, asserts that the regular, special, and corrective 
distributions will help prevent the significant premiums and discounts 
that have occurred in other ETPs in recent years.\44\
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    \44\ See Whaley Letter, supra note 8, at 1-2.
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    Another commenter expressed concern that the structure of Paired 
Class Shares will result in persistent premiums and discounts that will 
fundamentally invalidate the premise of the products in the market, 
making them misleading to investors.\45\ This commenter asserts that 
the arbitrage mechanism will not work to keep each of the products 
trading closely to its intrinsic value; instead, the commenter argues 
that the arbitrage mechanisms will, in theory, keep the sum of the 
discount on one class and the premium on the other at zero. The 
commenter states its view that it is not economically possible to 
maintain intrinsic value in the secondary market, and predicts that any 
attempt to do so will lead to massive speculation in the products until 
they are pushed to a breaking point, at which point less-sophisticated 
investors will suffer significant losses.\46\ To support these 
conclusions, the opposing commenter provides a number of hypothetical 
situations involving the trading relationship between the VIX index, 
VIX futures, and the proposed VIX Fund.\47\ According to the commenter, 
the core of the issue is that the products are simply not 
hedgeable.\48\ The commenter predicts that there will be very 
significant arbitrage pressures attempting to exploit the ``economic 
perversity of the products'' and significant activity around prices 
that reflect a corrective distribution.\49\
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    \45\ See Kassner Letter, supra note 8, at 1.
    \46\ See id. This commenter further states that, while his 
assertions regarding the possibility of persistent premiums and 
discounts and the potential failure of an effective arbitrage 
mechanism for Paired Class Shares focus on the proposed VIX Fund and 
VIX futures, the commenter points out that the same economic 
principles apply to any futures. See id.
    \47\ See id. at 1-3.
    \48\ See id. at 2.
    \49\ See id.
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    The Exchange asserted that underlying the opposing commenter's 
arguments regarding ineffective arbitrage is the misunderstanding that 
spot levels and futures levels are equivalent and interchangeable.\50\ 
The Exchange agrees that global markets will be broadly inter-related, 
including spot markets, futures markets, stock markets, and bond 
markets, but argues that, in the case of volatility, and VIX in 
particular, the spot market is not ``in line'' and directly comparable 
with VIX futures prices.\51\ To support this assertion, the Exchange 
cites guidance from the CBOE VIX Primer Basics on the educational 
section of CBOE's Web site.\52\ Additionally, the Exchange states that, 
contrary to the assumptions implicit in the opposing commenter's 
numerical examples, the Fund's creations, redemptions, and other 
operations are not limited by VIX futures expiration dates.\53\ The 
Exchange asserts that, uniquely, the intrinsic Class Values of the 
Funds are not dependent upon successful trading, rolling, or otherwise 
rebalancing of securities or futures contracts.\54\
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    \50\ See Exchange Letter, supra note 8, at 17.
    \51\ See id. at 18. The Exchange asserts that the willingness of 
market participants to trade options overlying both the spot VIX and 
VIX futures demonstrates that the market understands the differences 
between spot VIX and the range of VIX futures prices. See id. at 19.
    \52\ See id. at 18.
    \53\ See id. at 16, n.28, 18.
    \54\ See id. at 17.
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    The Exchange also asserts that one part of the arbitrage process 
for Paired Class Shares will operate the same way as it does for all 
exchange-traded funds (``ETFs''); namely, a share trading above or 
below an intrinsic Class Value can be transacted, hedged, and traded. 
Paired Class Shares have an additional arbitrage mechanism, according 
to the Exchange: Intra-fund arbitrage--through the valuation and 
trading of both Up and Down Shares--limits the discounts, premiums, or 
any combination thereof of the share classes to a value indicated by 
the readily determinable net asset value of the Fund's cash equivalent 
assets.\55\ The Exchange argues that arbitrage opportunities are 
uniquely easy to identify because of the direct observability of the 
Underlying Benchmark, the direct linkage of the intrinsic Class Values 
to the Underlying Benchmark, and the simplicity and very limited number 
of the moving parts in a creation or redemption--i.e., the two Fund 
Share prices versus the readily determinable value of the Fund's cash 
equivalent assets.\56\
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    \55\ See id.
    \56\ See id.
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2. The Ability of Investors To Understand the Operation of the Funds
    The Sponsor asserts that retail investors and other market 
participants will be able to understand the Fund's redemption mechanics 
and the types and timing of distributions.\57\ Generally, the Sponsor 
states that the Funds' distributions are limited to scheduled dates or 
the occurrence of large and rare underlying index moves.\58\ The 
Sponsor asserts that movements of the underlying indexes will be easy 
to track using public sources and therefore

[[Page 9782]]

concludes that investors will have the information necessary to 
transact in the Shares and respond to distributions.\59\ In addition, 
the Sponsor represents that the consensus of qualified investors and 
market makers is that the frequency of the Funds' distributions is 
consistent with customary review (e.g., monitoring prices and returns) 
and customary reevaluation of share positions.\60\
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    \57\ See Sponsor Letter, supra note 8, at 6.
    \58\ See id. at 2.
    \59\ See id.
    \60\ See id. The Sponsor states that its opinions and views 
expressed in the Sponsor Letter were informed by conversations with 
the Exchange, prospective authorized participants, other market 
makers, traders, and qualified investors. See id.
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    The Sponsor states that the prospectus contains detailed examples, 
and the Funds' Web site will contain infographics describing each 
distribution as well as the courses of action available to 
investors.\61\ The Sponsor also states that, except in limited and 
unanticipated conditions (listed in the prospectus), regular and 
special distributions will be made to shareholders in cash, and 
therefore investors will generally be making a straightforward decision 
with respect to deploying or maintaining received cash.\62\ With 
respect to corrective distributions, the Sponsor states that they are a 
direct response to retail investor experiences in ETPs where obscure 
technical forces or market illiquidity have caused both large premiums 
and large discounts to persist.\63\ The Sponsor asserts that these 
distributions, as a self-policing and self-corrections measure, are an 
alternative to real-time estimates of indicative portfolio values, 
which investors may not necessarily consider before transacting in ETP 
shares.\64\
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    \61\ See id. at 6.
    \62\ See id.
    \63\ See id.
    \64\ See id.
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    The Sponsor also states that: (1) Corrective distributions are 
expected to be rare; (2) without them, retail investors otherwise may 
be exposed to either paying a material premium relating to a purchase 
or suffering a material discount relating to a sale of Shares; (3) 
before receipt of a distribution, investors will see a Form 8-K, a 
notice from the Exchange, and a notice on the Fund's Web site; and (4) 
upon receipt of a corrective distribution, investors may take any of 
the following actions, all of which the Sponsor asserts are not 
materially different from the options available to investors upon the 
receipt of cash or shares from any distribution or traditional 
corporate action: (a) Sell their entire positions for cash, (b) sell a 
portion of their positions for cash for a modulated exposure to the 
Fund index, or (c) sell part of a position and reinvest proceeds to 
maximize a particular market exposure.\65\ According to the Sponsor, 
prospective investors view the corrective distribution feature as an 
effective balance of ``newness'' and ``benefit'' for the entire range 
of Fund shareholders.\66\ The Sponsor states that the corrective 
distribution is expected to encourage more active and accurate market 
making and more liquidity-enhancing position-taking by Authorized 
Participants, all of which are more likely to actually reduce the 
likelihood and occurrences of a corrective distribution 
declaration.\67\
---------------------------------------------------------------------------

    \65\ See id. at 6-7.
    \66\ Specifically, the Sponsor states that, while prospective 
participants with expertise in retail investing believed the 
corrective distribution feature to be engineered solely for the 
benefit of the retail investor and questioned whether institutional 
traders would lose profitable trading opportunities, market makers 
(including Authorized Participants) applauded the addition of a 
corrective distribution. See id. at 7. See supra note 60 (regarding 
with whom the Sponsor consulted).
    \67\ See id.
---------------------------------------------------------------------------

    The opposing commenter asserts that, because of the persistent 
premiums and discounts he predicts, investors would have to be 
extremely diligent in tracking their positions because the Up Shares 
might frequently turn into both Up Shares and Down Shares, which would 
result in inattentive investors paying fees to the issuer but not 
receiving any notional exposure whatsoever.\68\ According to the 
commenter, an investor in the Shares would require extensive knowledge 
of the financial markets to understand why, when being required to re-
enter the market after a distribution to reestablish a position, the 
product could be trading already at a significant premium or 
discount.\69\ The commenter also states its view that the investor 
would have to have intimate knowledge of the VIX futures market to 
understand from where the premium or discount was actually derived.\70\ 
The opposing commenter states that investors would likely receive 
Shares with the opposite economics for some distributions, and predicts 
that this would confuse them.\71\ The commenter distinguishes regular 
share distributions, with which the commenter concedes investors are 
familiar, by stating that Share distributions would include Shares with 
the opposite economics and different tickers.\72\ Further, the opposing 
commenter asserts that, unlike products that trade at or close to their 
intrinsic value, an investor in Shares needs to know a considerable 
amount of information at every point in time when investing in the 
product, including for example the coefficient of variation and the 
number of days there has been a premium or discount (in light of the 
corrective distribution threshold).\73\ The opposing commenter also 
asserts that the investor also must check his or her account every day, 
to see if there has been a Special Distribution, and on every 
Distribution Date, to see what is in his or her account (i.e., whether 
there is cash or a neutral basket, which may be subject to fees).\74\
---------------------------------------------------------------------------

    \68\ See Kassner Letter, supra note 8, at 3.
    \69\ See id.
    \70\ See id.
    \71\ See id.
    \72\ See id.
    \73\ See id. at 4.
    \74\ See id.
---------------------------------------------------------------------------

3. The Ability of Investors To Understand the Funds' ``Resets'' to the 
Then-Current Reference Index Value
    The Sponsor states its view that the Funds are similar to 
comparable ETPs in the market and that, accordingly, it expects that 
both retail investors and other market participants will understand the 
effect of resets (which will occur when regular, special, or corrective 
distributions are made) on their investments in a Fund.\75\ The Sponsor 
states that in other comparable ETFs and exchange-traded notes 
(``ETNs'') the impact of resetting comes through the re-trading of 
futures, options, or other contracts either daily, monthly, or on 
another cycle, and that this conventional resetting has transaction 
costs that are often difficult to isolate within the context of overall 
fund performance.\76\ Additionally, according to the Sponsor, because 
the traditional method of resetting is accomplished through the trading 
of underlying positions at telegraphed times under prescribed fund 
rules, ETFs and ETNs can be disadvantaged from having to be a ``price 
taker'' in possibly adverse or challenging markets.\77\ The Sponsor 
states that the Funds' resets allow the Funds to reduce their 
transaction expenses and eliminate the need to transact in underlying 
positions. The Sponsor also asserts that individual investors will be 
able to more easily track and monitor the resets of the Funds than the 
resetting impact in conventional funds.\78\
---------------------------------------------------------------------------

    \75\ See id. at 7.
    \76\ See id.
    \77\ See id. at 7-8.
    \78\ See id. at 8.
---------------------------------------------------------------------------

    A supporting commenter asserts that the Funds would deliver exact 
holding period returns, which he contrasts to the returns of levered 
and inverse funds that implicitly rebalance daily and which he

[[Page 9783]]

asserts can be a source of confusion for retail customers.\79\
---------------------------------------------------------------------------

    \79\ See Whaley Letter, supra note 8, at 2.
---------------------------------------------------------------------------

4. The Adequacy of the Exchange's Suitability Rules
    The Sponsor states its view that the Exchange's rules governing 
sales practices adequately ensure the suitability of recommendations 
regarding the Shares and that enhancement is unnecessary.\80\ The 
Sponsor states that NASDAQ Rule 2111A requires that an exchange member 
have a reasonable basis to believe that a recommended transaction or 
investment strategy involving a security or securities is suitable for 
the customer, based on the information obtained through the reasonable 
diligence of the exchange member to ascertain the customer's investment 
profile.\81\ According to the Sponsor, a customer's investment profile 
would, in general, include the customer's age, other investments, 
financial situation and needs, tax status, investment objectives, 
investment experience, investment time horizon, liquidity needs, and 
risk tolerance.\82\ The Sponsor also states that the rule explicitly 
covers recommended investment strategies involving securities, 
including recommendations to ``hold'' securities.\83\
---------------------------------------------------------------------------

    \80\ See Sponsor Letter, supra note 8, at 8, 9.
    \81\ See id. at 8.
    \82\ See id.
    \83\ See id.
---------------------------------------------------------------------------

    The Sponsor also discusses the Exchange's information circular. 
Prior to the commencement of trading of Fund shares, the Exchange will 
inform its members through an information circular of the suitability 
requirements of NASDAQ Rule 2111A. Specifically the information 
circular will remind members that, in recommending transactions in 
Shares, they must: (1) Have a reasonable basis to believe that (a) the 
recommendation is suitable for a customer given reasonable inquiry 
concerning the customer's investment objectives, financial situation, 
needs, and any other information known by such member, and (b) the 
customer can evaluate the special characteristics and is able to bear 
the financial risks of an investment in the shares; and (2) make 
reasonable efforts to obtain the following information: (a) The 
customer's age; (b) the customer's other investments; (c) the 
customer's financial situation and needs; (d) the customer's tax 
status; (e) the customer's investment objectives, experience, time 
horizon, liquidity needs and risk tolerance; and (f) such other 
information used or considered to be reasonable by such members or 
registered representatives in making recommendations to the 
customer.\84\
---------------------------------------------------------------------------

    \84\ See id. at 8-9. In its comment letter, the Exchange 
repeated the Sponsor's statements regarding the Exchange's rules and 
information circular. See id. at 13-14.
---------------------------------------------------------------------------

5. The Relationship Between the Funds' Holdings and Their Investment 
Objective
    The Sponsor states its view that investors will understand that the 
Funds hold cash and cash equivalent securities, and the Cash Values per 
Share will be directly responsive to changes in the underlying 
index.\85\ The Sponsor asserts that ETNs are similar to the Shares in 
that an ETN does not have identified ``portfolio assets'' and that this 
aspect of ETNs has been well understood.\86\
---------------------------------------------------------------------------

    \85\ See id. at 9.
    \86\ See id. The Sponsor, however, distinguishes the Shares from 
ETNs in that, with ETNs, an investor is subject to the performance 
risk of the obligor and a market maker is subject to ETN creation 
and redemptions processes which are sometimes less standardized than 
ETF processes. See id. at 10.
---------------------------------------------------------------------------

    The Sponsor asserts that the Funds' structure is appropriate, and 
will result in certain advantages: (1) Lower fund operating costs, 
because the Class Value per Share amounts are directly related to an 
independent and readily observable index and there is no need for a 
Fund to incur trading costs over assets in an effort to track the 
index; (2) improved fund performance transparency, because the return 
of Shareholders will not be impacted by transactions costs that are 
difficult to observe and underlying assets whose pricing is opaque; (3) 
a higher certainty of redemption values because the Shares will be 
readily created and redeemed at a certain and readily determinable 
value, thereby eliminating the frictions often caused where (a) a 
potentially large number of in-kind securities are challenging to value 
or (b) a cash creation or redemption is based on trading illiquid 
securities or trading securities in a fast-moving market; and (4) 
direct indexing, which the Sponsor states prospective investors believe 
to be more easily followed through readily observable and free data 
services.\87\
---------------------------------------------------------------------------

    \87\ See id. at 9-10.
---------------------------------------------------------------------------

6. Other Comments
    One commenter recommends that the Commission approve the proposed 
rule change because, in its view, the AccuShares' products are simple 
and transparent, and will provide investors, institutions and retail 
customers alike with the returns that they want.\88\ He also recommends 
approval of the proposed rule change because: (1) The Shares would 
provide exposure to spot market benchmarks that are popular to large 
segments of the asset management community; (2) the Up Shares and Down 
Shares are direct investments that track readily-observable spot market 
benchmarks, unlike the futures indexes, which he characterizes as 
complicated dynamic futures trading strategies; (3) changes in the 
values of the Up Shares and Down Shares would be purely mechanical and 
would correspond directly to the price changes in the underlying index, 
which is distinctly different from many current products; (4) unlike 
ETNs, investors in the Funds would have no credit risk; and (5) 
actively-managed products add market complexity, and the Paired Class 
Shares would not be actively-managed.\89\
---------------------------------------------------------------------------

    \88\ See Whaley Letter, supra note 8, at 2.
    \89\ See id. at 1-2.
---------------------------------------------------------------------------

    Similarly, another commenter asserts that the Funds would be both 
highly relevant to a wide range of investors and highly approachable to 
all of them.\90\ He asserts that indexes underlying the Funds are 
arguably better for individual investors because they are easier to 
follow than the indexes that underlie some existing products.\91\ This 
commenter also asserts that the market has been clamoring for better 
spot market proxies since the beginning of the ETF market.\92\ Further, 
the commenter recommends approval of the proposed rule change because 
the ``best ETFs also help solve existing structural problems for 
traders and investors regarding term structure of price and/or 
volatility, beta to cash prices and tracking errors, and rebalancing 
inefficiencies . . .'' \93\
---------------------------------------------------------------------------

    \90\ See Allen Letter, supra note 8.
    \91\ See id.
    \92\ See id.
    \93\ Id.
---------------------------------------------------------------------------

    The opposing commenter asserts that the premiums and discounts, 
which he predicts will result in corrective distributions that are more 
frequent than the Exchange has suggested, will result in high implicit 
fees and large tracking

[[Page 9784]]

errors.\94\ He argues that the products are not suitable for any 
investor.\95\
---------------------------------------------------------------------------

    \94\ See Kassner Letter, supra note 8, at 3. For example, the 
commenter characterizes the ``Daily Amount'' as a fee. During any 
single distribution measurement period that starts with the prior 
distribution date and to create a balanced market for the Up Shares 
and Down Shares of the VIX Fund, the Class Value per Share of each 
Up Share of the VIX Fund will be reduced and the Class Value per 
Share of each Down Share of the VIX Fund will be increased by an 
additional daily amount, the ``Daily Amount.'' See Notice, supra 
note 3, 79 FR at 35617. The opposing commenter asserts that the 
investors in the Up Shares of the VIX Fund will be charged will be 
charged 4.5% in Daily Amount charges.
    \95\ See Kassner Letter, supra note 8, at 3.
---------------------------------------------------------------------------

    In response, the Exchange asserts that the Daily Amount is not a 
charge, fee, or amount that leaves the Fund, but rather is an amount 
applied to both share classes.\96\ The Exchange characterizes the Daily 
Amount as ``one of the unique structural features of the Funds which 
leads to complete transparency of intrinsic Class Value entitlements.'' 
\97\
---------------------------------------------------------------------------

    \96\ See Exchange Letter, supra note 8, at 19.
    \97\ Id. at 22.
---------------------------------------------------------------------------

III. Discussion and Commission's Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\98\ In particular, and as discussed further below, the 
Commission finds that the proposed rule change is consistent with: (1) 
The requirements of Section 6(b)(5) of the Act,\99\ which requires, 
among other things, that the Exchange's rules be designed to promote 
just and equitable principles of trade; to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest; and (2) Section 
11A(a)(1)(C)(iii) of the Act,\100\ which sets forth Congress' finding 
that it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities.
---------------------------------------------------------------------------

    \98\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \99\ 15 U.S.C. 78f(b)(5).
    \100\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
---------------------------------------------------------------------------

A. NASDAQ Rule 5713

    NASDAQ Rule 5713 sets forth provisions regarding the listing and 
trading of Paired Class Shares on the Exchange. The rule defines Paired 
Class Shares,\101\ establishes specific recordkeeping and reporting 
requirements for registered market makers in Paired Class Shares,\102\ 
and sets forth initial and continued listing criteria, some of which 
are more fully discussed below.\103\ In addition, Commentary .05 to 
Nasdaq Rule 5713 states that the Exchange will implement written 
surveillance procedures for trading Paired Class Shares.\104\
---------------------------------------------------------------------------

    \101\ See NASDAQ Rule 5713(c). The operation of Paired Class 
Shares is described above. See supra section II.A.
    \102\ In accordance with NASDAQ Rule 5713(h), market makers in 
Paired Class Shares must file with the Exchange and keep current a 
list identifying all accounts for trading in the applicable 
securities or physical commodities included in, or options, futures 
or options on futures on, the Reference Asset of the Underlying 
Benchmark of any Paired Class Shares or any other derivatives based 
on such Reference Asset or based on any security or Reference Asset 
included in the Underlying Benchmark, which the registered market 
maker may have or over which it may exercise investment discretion. 
In addition, market makers are prohibited from trading in the 
applicable securities or physical commodities included in, or 
options, futures or options on futures on, the Reference Asset of 
the Underlying Benchmark of any Paired Class Shares or any other 
derivatives based on such Reference Asset or based on any security 
or Reference Asset included in the Underlying Benchmark, in an 
account in which a market maker, directly or indirectly, controls 
trading activities, or has a direct interest in the profits or 
losses thereof. See NASDAQ Rule 5713(h)(i). In addition, market 
makers in Paired Class Shares are required to make available to the 
Exchange any and all books, records, or other information pertaining 
to transactions by such entity or registered or non-registered 
employee affiliated with such entity for its or their own accounts 
for trading the applicable securities or physical commodities 
included in, or options, futures or options on futures on, the 
Reference Asset of the Underlying Benchmark of any Paired Class 
Shares or any other derivatives based on such Reference Asset or 
based on any security or Reference Asset included in the Underlying 
Benchmark, as may be requested by the Exchange. See NASDAQ Rule 
5713(h)(ii).
    \103\ The Commission notes that any securities listed in the 
future under NASDAQ Rule 5713 must be the subject of a rule filing 
by the Exchange under Section 19(b) of the Exchange Act--providing 
the Commission with the opportunity to review and to approve or 
disapprove that rule filing--and that all securities listed under 
NASDAQ Rule 5713 will be subject to the full set of bylaws and other 
rules and procedures of the Exchange. While Nasdaq Rule 5713(e) 
provides that Paired Class Shares may have values based on assets, 
prices, price volatility, or other economic interests, such as 
currencies, interest rates, non-investable economic indices, and 
other measures of financial instrument value, the specific products 
approved for listing pursuant to this order will have values based 
on price volatility and commodity indices. The Commission staff will 
consider any future proposals to list products under Nasdaq Rule 
5713 with values based on these and other types of benchmarks and 
reference assets, evaluating the specific facts and circumstances 
associated with each proposal under Section 19(b) of the Exchange 
Act. Further, the Commission staff will continue to analyze the 
development of exchange-traded products and their impact on market 
structure and will monitor the development of the market for Paired 
Class Shares.
    \104\ The Exchange stated that trading in Paired Class Shares 
will be subject to the existing trading surveillances, administered 
by both the Exchange and FINRA on behalf of the Exchange, which are 
designed to detect violations of Exchange rules and applicable 
federal securities laws. See Notice, supra note 3, 79 FR at 35621. 
FINRA surveils trading on the Exchange pursuant to a regulatory 
services agreement, and the Exchange is responsible for FINRA's 
performance under this regulatory services agreement. See Notice, 
supra note 3, 79 FR at 35621, n.51. The Exchange represented that 
FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Paired Class Shares and in the securities 
in which the Fund will invest with other markets and other entities 
that are members of the Intermarket Surveillance Group (``ISG'') or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement. See Notice, supra note 3, 79 FR at 35621. 
Additionally, the Exchange represented that FINRA may obtain trading 
information regarding trading in the Shares from markets and other 
entities that are members of the ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement. See Notice, 
supra note 3, 79 FR at 35621. For a list of the current members of 
ISG, see http://www.isgportal.org/.
---------------------------------------------------------------------------

    Pursuant to NASDAQ Rule 5713(f)(i)(B), the Exchange will obtain a 
representation from the Trust on behalf of each Fund that the Class 
Value per Share of each of its Up Shares and Down Shares will be 
calculated daily and that these Class Values per Share and information 
about the assets of the Fund will be made available to all market 
participants at the same time.\105\ NASDAQ Rule 5713(f)(ii)(B) permits 
the Exchange to suspend trading in or remove from listing Paired Class 
Shares whose Underlying Benchmark, or a substitute or replacement 
Underlying Benchmark based on the same Reference Asset,\106\ is no 
longer calculated or available on at least a 15-second delayed basis 
during the Regular Market Session from a major market data vendor 
unaffiliated with the sponsor, the custodian, the trustee of the Trust, 
the Fund, or NASDAQ. Further, NASDAQ Rule 5713(f)(ii)(C) permits the 
Exchange to suspend trading in or remove from

[[Page 9785]]

listing Paired Class Shares whose Class Value per Share becomes no 
longer available on a daily basis to all market participants at the 
same time. NASDAQ Rule 5713(f)(ii)(D) permits the Exchange to suspend 
trading in or remove from listing Paired Class Shares whose Intraday 
Indicative Value is no longer made available on at least a 15-second 
delayed basis by a major market vendor during the Exchange's Regular 
Market Session. The Commission also notes that NASDAQ Rules 
5713(f)(i)(C) and 5713(f)(ii)(E) require the establishment of 
information barriers concerning changes and adjustments to the 
Underlying Benchmark.\107\
---------------------------------------------------------------------------

    \105\ The Commission notes that these requirements are 
substantively identical to provisions applicable to other exchange-
traded derivative securities products, including Managed Fund Shares 
under NASDAQ Rule 5735(d)(1)(B). See Securities Exchange Act Release 
No. 57962 (June 13, 2008), 73 FR 35175 (June 20, 2008) (SR-NASDAQ-
2008-039) (approving NASDAQ listing standards applicable to Managed 
Fund Shares). For a specific product approved for listing under 
NASDAQ Rule 5735, see Securities Exchange Act Release No. 73480 
(October 31, 2014), 79 FR 66022 (November 6, 2014) (SR-NASDAQ-2014-
090) (approving the listing and trading of Shares of the Validea 
Market Legends ETF under NASDAQ Rule 5735).
    \106\ Commentary .04 to Rule 5713 states that, prior to a 
substitute or replacement Underlying Benchmark being selected for 
the Fund, NASDAQ must file a related proposed rule change pursuant 
to Rule 19b-4 under the Exchange Act to continue trading the Paired 
Class Shares.
    \107\ The Commission notes that these provisions are 
substantively identical to the firewall requirements in NASDAQ Rule 
5705(b)(2)(B)(i), which governs the listing and trading of Index 
Fund Shares.
---------------------------------------------------------------------------

    Based on the foregoing, the Commission believes that the 
requirements of NASDAQ Rule 5713, taken together with other NASDAQ 
Rules regarding the trading of equity securities on the Exchange, are 
consistent with the requirement of Section 6(b)(5) of the Act that 
requires that the Exchange's rules 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 to promote just and equitable 
principles of trade and to protect investors and the public interest.

B. Issues Raised by the Opposing Commenter

1. Effectiveness of Arbitrage
    In the OIP, the Commission asked for commenters' views on the 
effect that Paired Class Share distributions would have on premiums and 
discounts between the trading price of the Paired Class Shares and 
their respective Class Value per Share.\108\
---------------------------------------------------------------------------

    \108\ See OIP, supra note 6, 79 FR at 57157.
---------------------------------------------------------------------------

    The opposing commenter asserts that the structure of Paired Class 
Shares will result in significant and persistent premiums and discounts 
because ``it is not economically possible to construct a two sided 
market for spot exposure that does not trade in line with VIX futures 
prices.'' \109\ This commenter argues that the arbitrage mechanism of 
the Funds will not work to keep Up Shares and Down Shares trading close 
to their intrinsic value, but will instead ``in theory keep the sum of 
the premium on one and the discount on the other at zero.'' \110\ To 
support these conclusions, the opposing commenter provides a number of 
hypothetical situations involving the trading relationship between the 
VIX index, VIX futures, and the proposed VIX Fund.\111\ Further, the 
opposing commenter argues that the ``daily amount'' applied to the VIX 
Fund--a 15 basis point amount transferred from Up Shares to Down Shares 
when the VIX is at 30 or below--means that investors in Up Shares will 
suffer a 4.5% loss over a 30-day period, even if the VIX does not 
move.\112\ The opposing commenter also argues that, because the 
arbitrage mechanism will not work as described by the Exchange, 
multiple corrective distributions will be required per year, causing 
investors to incur reinvestment expenses to maintain their desired 
position.\113\
---------------------------------------------------------------------------

    \109\ Kassner Letter, supra note 8, at 1. See also supra notes 
45-48 and accompanying text.
    \110\ Id.
    \111\ See Kassner Letter, supra note 8.
    \112\ Id.
    \113\ Id. at 2-3.
---------------------------------------------------------------------------

    The Exchange argues in response that, underlying this commenter's 
argument is a mistaken assumption that spot levels and futures levels 
are equivalent and interchangeable.\114\ The Exchange agrees that 
markets such as spot markets, futures markets, stock markets, and bond 
markets will be broadly inter-related, but argues that, in the case of 
volatility in general and VIX in particular, the spot market is not 
``in line'' and directly comparable with VIX futures prices. The 
Exchange cites the willingness of market participants to trade options 
overlying both the spot VIX and VIX futures as evidence that the market 
would understand the differences between spot VIX and the range of VIX 
futures prices. The Exchange notes that the Web site of CBOE, the 
provider of the VIX, states, ``The price of a VIX futures contract can 
be lower, equal to or higher in the 30-day forward period covered by 
the VIX futures contract than in the 30-day spot period covered by 
VIX.'' \115\ The Exchange also notes that, unlike VIX futures, 
``because the shares of the Fund are both available for creation and 
redemption daily, the Fund provides for spot VIX positions to be 
created or redeemed daily, and for returns to be realized on a daily 
basis.'' \116\
---------------------------------------------------------------------------

    \114\ See Exchange Letter, supra note 8, at 17.
    \115\ Id. at 18.
    \116\ Id. at 21.
---------------------------------------------------------------------------

    Additionally, the Exchange argues that the existence of the Daily 
Amount applied to the VIX Fund is disclosed clearly and referenced more 
than 90 times in the prospectus for the VIX Fund, and the Exchange 
argues that the amount of the Daily Amount is closely aligned with the 
estimates of several market experts as to the roll cost incurred by 
long positions in volatility futures (e.g., VIX futures).\117\ As a 
result, the Exchange argues, the expected premiums and discounts 
encountered by the VIX Fund should be substantially less that the 
opposing commenter predicts.\118\ The Exchange also argues that the 
corrective distribution mechanism is designed to prevent the type of 
investor losses that occurred when an ETN designed to track the VIX 
moved substantially away from the value of the VIX.\119\
---------------------------------------------------------------------------

    \117\ See id. at 20-21.
    \118\ See id. at 21.
    \119\ See id. at 22-23.
---------------------------------------------------------------------------

    The Commission believes that the Exchange has met its burden to 
demonstrate that its proposal is consistent with the Act. The Exchange 
has reasonably explained in the Notice, the Exchange's response 
letter,\120\ and, as to the VIX Fund, in the Registration Statement for 
the VIX Fund,\121\ the methodology for the calculation of the 
Underlying Benchmarks and the differences between the value of the 
Underlying Benchmark indexes and the prices of the relevant near-month 
futures contracts. In particular the Exchange explains that, with 
respect to the VIX Fund, the purpose and derivation of the 0.15% Daily 
Amount by which the Up Shares will be reduced and the Down Shares 
increased, which, as cited by the Exchange, is consistent with price 
patterns historically observed when comparing VIX futures and spot 
prices.\122\ The Exchange further notes the extent to which the 
Registration Statement discloses the Daily Amount transfer.\123\ The 
Exchange has also reasonably explained the operation of the Funds; the 
creation and redemption process and procedures; the regular, special, 
and corrective distributions to be employed by the Funds; and the 
resulting resetting process.
---------------------------------------------------------------------------

    \120\ See Exchange Letter, supra note 8.
    \121\ See Registration Statement, supra note 22.
    \122\ See Exchange Letter, supra note 8, at 22.
    \123\ See id.
---------------------------------------------------------------------------

    In addition, with respect to arbitrage in Fund Shares, and, 
consistent with Section 11A(a)(1)(C)(iii) of the Act,\124\ which sets 
forth Congress' finding that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities, the Commission notes that market 
information regarding the value of the Shares and of the Underlying 
Benchmarks will be continuously available to market participants.

[[Page 9786]]

Quotation and last-sale information for the Shares will be available 
via NASDAQ proprietary quote and trade services, as well as in 
accordance with any UTP plans for a Fund's Shares.\125\ Additionally, 
information regarding market price and volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services.\126\ Further, 
information regarding the previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers.\127\
---------------------------------------------------------------------------

    \124\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \125\ See Notice, supra note 3, 79 FR at 35621.
    \126\ See id.
    \127\ See id.
---------------------------------------------------------------------------

    The value of each Fund's Underlying Benchmark, as well as 
information about each Fund's Underlying Benchmark constituents, the 
weighting of the constituents, the Underlying Benchmark's methodology, 
and the Underlying Benchmark's rules, will be available at no charge on 
the Index Provider's Web site at us.spindices.com or, in the case of 
the VIX Fund, the CBOE's Web site at www.cboe.com/VIX.\128\ The value 
of each Fund's Underlying Benchmark also will be published by one or 
more major market data vendors on at least a 15-second delayed basis 
during the Regular Market Session.\129\ An Intraday Indicative Value 
for each Fund will be disseminated and made available by a major market 
vendor, and will be updated and widely disseminated and broadly 
displayed on at least a 15-second delayed basis during the Regular 
Market Session.\130\ Class Values and Class Values per Share of each 
Fund will be calculated by the Fund's Custodian at the end of each 
Regular Market Session.\131\
---------------------------------------------------------------------------

    \128\ See id.
    \129\ See NASDAQ Rule 5713(f)(2)(B).
    \130\ See Notice, supra note 3, 79 FR at 35622.
    \131\ NASDAQ Rule 5713(f)(ii)(C) is designed to ensure that the 
Class Values and Class Values per Share of each Fund will be made 
available to all market participants at the same time.
---------------------------------------------------------------------------

    Under NASDAQ Rule 5713(f)(i)(B), the Exchange will obtain a 
representation from the Trust on behalf of each Fund that the Class 
Value per Share of each of its Up Shares and Down Shares will be 
calculated daily and that these Class Values per Share and information 
about the assets of the Fund will be made available to all market 
participants at the same time.\132\ In addition, NASDAQ Rule 
5713(f)(2)(B) permits the Exchange to suspend trading in or remove from 
listing Paired Class Shares whose Underlying Benchmark, or a substitute 
or replacement Underlying Benchmark based on the same Reference 
Asset,\133\ is no longer calculated or available on at least a 15-
second delayed basis during the Regular Market Session from a major 
market data vendor unaffiliated with the sponsor, the custodian, the 
trustee of the Trust, the Fund or NASDAQ.
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    \132\ The Commission notes that these requirements are 
substantively identical to provisions applicable to other exchange-
traded derivative securities products, including Managed Fund Shares 
under NASDAQ Rule 5735(d)(1)(B).
    \133\ Commentary .04 to Rule 5713 states that, prior to a 
substitute or replacement Underlying Benchmark being selected for 
the Fund, NASDAQ must file a related proposed rule change pursuant 
to Rule 19b-4 under the Act to continue trading the Paired Class 
Shares.
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    The Commission believes that, in light of the continuous 
dissemination of information about the Shares' current market prices, 
the Funds' Underlying Benchmarks, and the Funds' intraday estimated 
Class Value per Share, arbitrage opportunities will be readily 
identifiable to market participants. The Commission also believes that 
the creation and redemption process, which, under Rule 5713(c), uses a 
neutral basket of Up Shares and Down Shares, is reasonably designed to 
allow market participants to arbitrage away premiums and discounts that 
may develop, as long as the Up Shares and Down Shares do not become 
locked in a persistent state of approximately equal and opposite 
premiums or discounts.\134\
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    \134\ Because the funds would create and redeem their shares 
only in equal amounts of Up Shares and Down Shares, if one class of 
shares traded at a premium, and the other class traded at an 
approximately equal discount, arbitrage using the creation or 
redemption process could not eliminate those price deviations. For 
example, if Up Shares traded at a $0.50 premium, and down shares 
traded at a $0.50 discount, the value per share of a creation unit, 
composed of equal amounts of each class, would be equal to the NAV 
of the fund (i.e., the premium would cancel out the discount).
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    The Commission acknowledges, however, that the normal arbitrage 
mechanism of the Funds will not be effective if equal and opposite 
premiums and discounts persist between the Up Shares and Down Shares of 
a Fund. Because no existing exchange-traded products use a paired-class 
structure, the Commission does not have a basis for comparison from 
which to predict how frequently such conditions are likely to occur. As 
noted above, however, the Funds would provide for a corrective 
distribution when the magnitude of the equal and opposite premiums and 
discounts exceeds a certain threshold.\135\ The Exchange has 
represented that, ``[e]ven if a corrective distribution is not 
triggered, the existence of a Fund's corrective distribution feature is 
expected to modify investor and Authorized Participant behavior to 
prevent persistent and material premium and discount conditions for 
Paired Class Shares from becoming locked.'' \136\ Based on the 
Exchange's representation, the Commission believes that the corrective 
distribution mechanism is reasonably designed to limit the magnitude of 
such premiums and discounts and that, when triggered, it will provide 
investors with a market neutral position that should allow them to exit 
the affected Fund at Class Value. Further, the underlying value of the 
Funds and the extent of the premiums and discounts would not be subject 
to uncertainty, because, as explained above,\137\ the Funds' market 
prices, Class Values per Share, and reference benchmark values and 
methodologies would be publicly available in real time. In addition, 
and significantly, to the extent that equal and opposite premiums and 
discounts persist within a Fund's threshold for a corrective 
distribution, all investors in the affected Fund would be subject to 
the same pricing conditions, and Authorized Participants would not be 
able to use the creation and redemption process to trade in the primary 
market for the shares at prices more favorable than those available to 
investors trading at market prices on the Exchange.
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    \135\ See supra note 18.
    \136\ See Notice, supra note 3, at 9, 79 FR at 35612.
    \137\ See supra text accompanying notes 125-133.
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    Thus, for the reasons described above, the Commission believes that 
the Exchange's rules are reasonably designed 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, 
in general, to protect investors and the public interest.
2. Investor Understanding and Suitability
    In the OIP, the Commission solicited comments about whether retail 
investors and other market participants would be able to understand the 
types and timing of distributions as well as the periodic resets of 
Paired Class Shares' exposure to their Underlying Benchmarks.\138\
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    \138\ See OIP, supra note 6, 79 FR at 57157.
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    The opposing commenter argues that the operational complexity of 
Paired Class Shares renders them unsuitable for any investor. As 
discussed above, this commenter argues that extreme diligence would be 
required of investors in tracking their positions because the Up Shares 
might frequently turn into both Up Shares and Down Shares, and that 
investors would need to know a

[[Page 9787]]

considerable amount of information at every point in time when holding 
Shares.\139\
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    \139\ See Kassner Letter, supra note 8, at 3-4.
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    The Sponsor asserts that retail investors and other market 
participants will be able to understand the types and timing of fund 
distributions. The Sponsor states that the Registration Statement 
contains detailed examples, and the Funds' Web site will contain 
infographics describing each distribution, as well as the courses of 
action available to investors. According to the Sponsor, distributions 
will generally be limited to scheduled dates or the occurrence of large 
and rare underlying index moves, and movements of the underlying 
indexes will be easy to track using public sources. The Sponsor states 
that the consensus of qualified investors and market makers to whom it 
has spoken is that the frequency of the Funds' distributions is 
consistent with customary review (e.g., monitoring prices and returns) 
and customary re-evaluation of share positions. Additionally, the 
Sponsor states that, except in limited and unanticipated conditions 
which are identified in the Registration Statement, regular and special 
distributions will be made to shareholders in cash, and therefore 
investors generally will face a straightforward decision with respect 
to deploying or maintaining received cash. With respect to corrective 
distributions (in which a fund would issue each holder of Up Shares an 
equal number of Down Shares, and each holder of Down Shares an equal 
number of Up Shares), the Sponsor asserts that such distributions are 
expected to be rare and to encourage among Authorized Participants both 
more active and accurate market making and more liquidity-enhancing 
position-taking. The Sponsor also argues that corrective distributions, 
as a self-policing and self-correcting measure, are a better 
alternative to detailed disclosures about premiums and discounts in 
prospectuses, which investors may not necessarily read and which would 
require affirmative investor action, and the dissemination of real-time 
estimates of indicative portfolio values, which investors may not 
necessarily consider before transacting in other types of ETP shares. 
Further, the Sponsor states that prospective investors to whom it has 
spoken believe that the corrective distribution will benefit the entire 
range of shareholders.
    With respect to the resets, the Sponsor states that the Funds are 
similar to comparable ETPs in the market and that it expects that both 
retail investors and other market participants will understand the 
effect of Paired Class Share resets on their investments.\140\ The 
Sponsor also asserts that individual investors will be able to more 
easily track and monitor Paired Class Share resets than the resetting 
impact in other types of ETPs.
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    \140\ Specifically, the Sponsor states that for comparable ETPs 
that seek commodity or volatility exposure through trading in 
derivative products, the impact of resetting comes through the ``re-
trading'' of futures, options, or other contracts. These ETFs effect 
the resetting either daily, monthly, or on another cycle. This 
conventional resetting has transaction costs, which are often 
difficult to isolate within the context of overall fund performance. 
The Sponsor adds that, since the traditional method of resetting is 
accomplished through the trading of underlying positions at 
telegraphed times under prescribed fund rules, ETFs can be 
disadvantaged from having to be a ``price taker'' in possibly 
adverse or challenging markets. The Sponsor asserts that these 
resetting considerations in these other types of ETPs are well known 
by retail investors. See Sponsor Letter, supra note 8, at 7-8.
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    The Sponsor also argues that the Exchange's sales practice rules 
adequately ensure the suitability of sales recommendations regarding 
the Funds' Shares, citing NASDAQ Rule 2111A, which requires that an 
exchange member have a reasonable basis to believe that a recommended 
transaction or investment strategy is suitable for a given customer, 
based on information obtained through reasonable diligence.\141\ 
Additionally, the Sponsor notes that, before trading in the Shares 
begins, the Exchange will inform its members in an information circular 
of the special characteristics and risks associated with trading Paired 
Class Shares.\142\
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    \141\ See id. at 8-9.
    \142\ The Exchange has represented that the information circular 
will discuss (a) the procedures for purchases and redemptions of 
Paired Class Shares; (b) Rule 2111A, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in Paired Class Shares to customers; (c) how 
information regarding the Underlying Benchmark and Intraday 
Indicative Value is disseminated; (d) the risks involved in trading 
Paired Class Shares during the Pre-Market and Post-Market sessions 
when an updated Underlying Benchmark and Intraday Indicative Value 
will not be calculated or publicly disseminated; (e) the requirement 
that members deliver a prospectus to investors purchasing newly 
issued Paired Class Shares; (g) trading information; and (h) how 
information regarding distributions and share splits is disseminated 
and the requirements of public notification of these events.
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    The Commission notes that the Exchange's suitability rule, NASDAQ 
Rule 2111A, requires that Exchange members and associated persons of a 
member comply with Financial Industry Regulatory Authority (``FINRA'') 
Rule 2111, which requires member firms and their associated persons to 
``have a reasonable basis to believe'' that a transaction or investment 
strategy involving securities that they recommend is suitable for the 
customer. Specifically, this reasonable belief must be based on the 
information obtained through the reasonable diligence of the firm or 
associated person to ascertain the customer's investment profile. The 
rule requires firms and associated persons to seek to obtain 
information about the customer's age; other investments; financial 
situation and needs, which might include questions about annual income 
and liquid net worth; tax status, such as marginal tax rate; investment 
objectives, which might include generating income, funding retirement, 
buying a home, preserving wealth, or market speculation; investment 
experience; investment time horizon, such as the expected time 
available to achieve a particular financial goal; liquidity needs, 
which is the customer's need to convert investments to cash without 
incurring significant loss in value; and risk tolerance, which is a 
customer's willingness to risk losing some or all of the original 
investment in exchange for greater potential returns.
    Additionally, the Commission notes that the Funds will issue 
specific, public notifications regarding the unique distributions that 
the Funds would provide. Each Fund engaging in a regular 
distribution,\143\ a special distribution, a corrective distribution, 
or a net income distribution \144\ will provide at least three business 
days' advance notice (or longer advance notice as may be required by 
the Exchange) \145\ of such an event. Each Fund engaging in a share 
split will provide at least ten calendar days' advance notice (or 
longer advance

[[Page 9788]]

notice as may be required by the Exchange) \146\ of such an event. In 
each instance, the Sponsor will notify the Exchange and post a notice 
of the event and its details on the Sponsor's Web site.
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    \143\ With respect to regular distributions, the information 
provided will consist of the schedule of distributions and 
associated distribution dates, and a notification, as of the record 
date for such regular distribution, on the Sponsor's Web site 
(www.AccuShares.com) as to whether or not the regular distribution 
will occur. See Notice, supra note 3, 79 FR at 35620. For regular 
distributions that occur on schedule, the Sponsor will cause a press 
release to be issued identifying the receiving class, the amount of 
cash, the amount of Paired Class Shares (if any), and any other 
information the Sponsor deems relevant regarding the distribution 
and post such information on the Sponsor's Web site. See id.
    \144\ With respect to special distributions, corrective 
distributions, and share splits, the information provided will 
include the relevant ex-, record, and payment dates for each such 
event and relevant data concerning each such event. In addition, 
notice of net income distributions for each class of a Fund, if any, 
will also be included in the notifications of regular, special, and 
corrective distributions. See id.
    \145\ The Exchange may determine that longer notice is advisable 
in some circumstances (e.g., an extended, or unexpected, market 
break). See id. at 35620, n.46.
    \146\ See id.
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    The Commission further notes that the prospectus disclosures for 
the Funds state prominently that the Funds are not suitable for all 
investors, and include the following disclosures: (1) Stating that the 
funds may not be suitable for all investors; (2) describing the effect 
of distributions on an investor's exposure; and (3) stating that 
``Investors who do not intend to actively manage and monitor their Fund 
investments at least as frequently as each distribution date should not 
buy shares of the Fund.'' (Emphasis in original.)
    Based on all of the foregoing, the Commission believes that the 
Exchange has adequately responded to the opposing commenter's concerns 
about investor understanding and suitability, and that the Exchange's 
proposal is consistent with the public interest and the protection of 
investors.
    For the foregoing reasons, the Commission finds that the Exchange's 
proposal to adopt NASDAQ Rule 5713 and to list and trade the Funds 
pursuant to that rule is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\147\
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    \147\ This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice.
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\148\ that the proposed rule change (SR-NASDAQ-2014-065), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved.
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    \148\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2015-03713 Filed 2-23-15; 8:45 am]
BILLING CODE 8011-01-P