Document ID: SEC-2014-0532-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-04-01T04:00Z

[Federal Register Volume 79, Number 62 (Tuesday, April 1, 2014)]
[Notices]
[Pages 18357-18364]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07187]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71804; File No. SR-NYSEArca-2013-141]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendment No. 2, To Adopt New NYSE 
Arca Equities Rule 7.25 To Create a Crowd Participant Program on a 
Pilot Basis To Incent Competitive Quoting and Trading Volume in 
Exchange-Traded Products by Market Makers Qualified With the Exchange 
as CPs

March 26, 2014.
    On December 6, 2013, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt the Crowd Participant Program (``CP 
Program'' or ``Program''), a one-year pilot program, to incent 
competitive quoting and trading volume in exchange-traded products 
(``ETPs'') by Market Makers qualified with the Exchange as Crowd 
Participants (``CPs''). The proposed rule change was published for 
comment in the Federal Register on December 26, 2013.\3\ The Commission 
received no comment letters on the proposal. On February 5, 2014, 
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a 
longer period within which to either approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ On March 
19, 2014, the Exchange submitted Amendment No. 2 to the proposed rule 
change.\6\ The Commission is publishing this notice to solicit comments 
on Amendment No. 2 from interested persons, and is approving the 
proposed rule change, as modified by Amendment No. 2 thereto, on an 
accelerated basis.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71146 (Dec. 19, 
2013), 78 FR 78426 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 71479 (Feb. 5, 2014), 79 
FR 8225 (Feb. 11, 2014). The Commission determined that it was 
appropriate to designate a longer period within which to take action 
on the proposed rule change so that it has sufficient time to 
consider the proposed rule change. Accordingly, the Commission 
designated March 26, 2014 as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ Amendment No. 1 was filed by the Exchange on March 18, 2014 
and withdrawn by the Exchange on March 19, 2014 due to a technical 
error. In Amendment No. 2, the Exchange proposes to: (i) Change, 
from two-million shares to one-million shares, the consolidated 
average daily volume (``CADV'') threshold applicable to 
participation eligibility in the proposed CP Program; (ii) change 
the CP Program Fee (as described below) from a fixed amount of 
$50,000 to a range of $50,000 to $100,000, as determined exclusively 
by the issuer; and (iii) clarify that the CP Program Fee cannot be 
refunded to an issuer.
    \7\ Today the Commission also is granting exemptive relief from 
Rule 102 under Regulation M concerning the CP Program. See 
Securities Exchange Act Release No. 71805 (Mar. 26, 2014) (Order 
Granting a Limited Exemption from Rule 102 of Regulation M 
Concerning the NYSE Arca, Inc.'s Crowd Participant Program Pilot).
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I. Description of the Amended Proposal

    As set forth in more detail in the Notice,\8\ the Exchange is 
proposing to adopt new NYSE Arca Equities Rule 7.25 and to amend its 
fee schedules to set forth the requirements for the CP Program, which 
will be a voluntary one-year pilot program for issuers of certain ETPs 
listed on the Exchange. The Exchange states that the CP Program is 
designed to incentivize Market Makers \9\ qualified with the Exchange 
as CPs \10\ to quote and trade in certain low-volume ETPs by offering 
issuers an alternative fee program funded by participating issuers and 
credited to CPs from the Exchange's general revenues.\11\ In addition, 
the Exchange states that the Program is designed to add competition 
among existing qualified Market Makers on the Exchange.\12\ The 
Exchange states that the CP Program will offer an alternative to the 
existing Lead Market Maker program on the Exchange and the ETP 
Incentive Program (under NYSE Arca Equities Rule 8.800) \13\ for 
issuers to consider when determining where to list their 
securities.\14\ The Exchange states that under the voluntary CP 
Program, multiple CPs would compete for daily rebates, which would be 
funded from the Exchange's general revenues and offset by charging 
issuers a non-refundable ``CP Program Fee,'' which would be credited to 
the Exchange's general revenues.\15\
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    \8\ See Notice, supra note 3.
    \9\ A Market Maker is an Equity Trading Permit Holder that acts 
as a Market Maker pursuant to NYSE Arca Equities Rule 7. See NYSE 
Arca Equities Rule 1.1(v). An Equity Trading Permit Holder is a sole 
proprietorship, partnership, corporation, limited liability company, 
or other organization in good standing that has been issued an 
Equity Trading Permit. See NYSE Arca Equities Rule 1.1(n).
    \10\ A ``Crowd Participant'' is defined as an Equity Trading 
Permit Holder that: (1) Is qualified as a Market Maker, and in good 
standing, on the Exchange; (2) electronically enters quotes and 
orders into the systems and facilities of the Exchange; and (3) is 
obligated to maintain a displayed bid or offer at the National Best 
Bid (``NBB'') or the National Best Offer (``NBO''), respectively, in 
each assigned ETP consistent with paragraph (g) of the proposed 
rule. See proposed NYSE Arca Equities Rule 7.25(a).
    \11\ See Notice, supra note 3, at 78427.
    \12\ Id.
    \13\ See Securities Exchange Act Release No. 69706 (June 6, 
2013), 78 FR 35340 (June 12, 2013) (SR-NYSEArca-2013-34).
    \14\ See Notice, supra note 3, at 78427.
    \15\ Id.
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A. Eligible Products; Issuer and CP Application Process

    An ETP will be eligible to participate in the CP Program if (i) it 
is listed on the Exchange as of the commencement of the pilot period or 
becomes listed during the pilot period; (ii) the listing is under NYSE 
Arca Equities Rules 5.2(j)(3) (Investment Company Units), 5.2(j)(5) 
(Equity Gold Shares), 8.100 (Portfolio Depositary Receipts), 8.200 
(Trust Issued Receipts), 8.201 (Commodity-Based Trust Shares), 8.202 
(Currency Trust Shares), 8.203 (Commodity Index Trust Shares), 8.204 
(Commodity Futures Trust Shares), 8.300 (Partnership Units), 8.600 
(Managed Fund Shares), or 8.700 (Managed Trust Securities); (iii) it is 
neither participating in the ETP Incentive Program under Rule 8.800 nor 
has a Lead Market Maker assigned to it; (iv) with respect to an ETP 
that was listed on the Exchange before the commencement of the CP 
Program, the ETP has a CADV of one million shares or less for at least 
the preceding three months; and (v) if the ETP is added to the CP 
Program after listing on the Exchange, it is compliant with continuing 
listing standards.\16\
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    \16\ See proposed NYSE Arca Equities Rule 7.25(b). See also 
Amendment No. 2, supra note 6.
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    An issuer that wishes to have an ETP participate in the CP Program 
and pay the Exchange a non-refundable CP Program Fee will be required 
to submit a written application in a form prescribed by the Exchange 
for each

[[Page 18358]]

ETP.\17\ An issuer may apply to have its ETP participate at the time of 
listing or thereafter at the beginning of each quarter during the pilot 
period.\18\ The Exchange may, on a CP Program-wide basis, limit the 
number of ETPs that any one issuer may have in the CP Program.\19\ In 
addition, in order for its ETP to be eligible to participate in the CP 
Program, an issuer must be current in all payments due to the 
Exchange.\20\
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    \17\ See proposed NYSE Arca Equities Rule 7.25(c)(2). See also 
Amendment No. 2, supra note 6.
    \18\ Id.
    \19\ Id.
    \20\ See proposed NYSE Arca Equities Rule 7.25(c)(1).
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    The Exchange will communicate the ETP(s) proposed for inclusion in 
the CP Program on a written solicitation that will be sent to all 
qualified CPs along with the CP Program Fee the issuer will pay the 
Exchange for each ETP, which will be determined by the issuer based on 
the range of fees set forth in the Exchange's Schedule of Fees and 
Charges for Exchange Listing Services (``Listing Fee Schedule'').\21\
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    \21\ See proposed NYSE Arca Equities Rule 7.25(c)(3).
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    To qualify as a CP, an Exchange Trading Permit Holder must (i) be 
qualified as a Market Maker, and in good standing, on the Exchange; and 
(ii) have adequate information barriers between the business unit of 
the Exchange Trading Permit Holder acting as a CP in a proprietary 
capacity and the Exchange Trading Permit Holder's customer, research 
and investment banking business, if any.\22\ To become a CP, an 
Exchange Trading Permit Holder must submit a CP application form with 
all supporting documentation to the Exchange.\23\ Exchange staff will 
determine whether an applicant is qualified to become a CP based on the 
qualifications described in the proposed rule and shall notify the 
applicant of its decision.\24\ If an applicant is approved by the 
Exchange to receive CP status, such applicant will be required to have 
connectivity with relevant Exchange systems before it will be permitted 
to quote and trade as a CP on the Exchange.\25\ If approved to receive 
CP status, a CP shall be assigned to participating ETPs in the same 
manner that Market Makers are currently assigned to securities listed 
on the Exchange.\26\ If an applicant is disapproved by the Exchange, 
the applicant may seek review under NYSE Arca Equities Rule 10.13 \27\ 
and/or reapply for CP status at least three calendar months following 
the month in which the applicant received the disapproval notice from 
the Exchange.\28\
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    \22\ See proposed NYSE Arca Equities Rule 7.25(d)(1).
    \23\ See proposed NYSE Arca Equities Rule 7.25(d)(2).
    \24\ See proposed NYSE Arca Equities Rule 7.25(d)(3)-(4).
    \25\ See proposed NYSE Arca Equities Rule 7.25(d)(5).
    \26\ Id. The Exchange does not anticipate placing a limit on the 
number of CPs assigned to a particular ETP or on the number of ETPs 
to which a particular CP would be assigned. See Notice, supra note 
3, at 78429.
    \27\ NYSE Arca Equities Rule 10.13 provides the procedure for 
persons aggrieved by certain actions taken by the Exchange to apply 
for an opportunity to be heard and to have the action reviewed.
    \28\ See proposed NYSE Arca Equities Rule 7.25(d)(6).
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B. Disclosure Relating to the CP Program

    Pursuant to proposed NYSE Arca Equities Rule 7.25(c)(4), the 
Exchange will provide notification on a dedicated page on its Web site 
regarding: (i) The ETPs participating in the CP Program; (ii) the date 
a particular ETP begins participating and ceases participating in the 
CP Program; (iii) the date the Exchange receives written notice of an 
issuer's intent to withdraw its ETP from the CP Program, or a CP's 
intent to withdraw from its ETP assignment(s) in the CP Program, and, 
in each case, the intended withdrawal date, if provided; (iv) the CPs 
assigned to each ETP participating in the CP Program; and (v) the 
amount of the CP Program Fee for each ETP. This page will also include 
a fair and balanced description of the CP Program, including: (i) A 
description of the CP Program's operation as a pilot, including the 
effective date thereof; (ii) the potential benefits that may be 
realized by an ETP's participation in the CP Program; (iii) the 
potential risks that may be attendant with an ETP's participation in 
the CP Program; (iv) the potential impact resulting from an ETP's entry 
into and exit from the CP Program; and (v) how interested parties can 
request additional information regarding the CP Program and/or the ETPs 
participating therein.\29\
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    \29\ See proposed NYSE Arca Equities Rule 7.25(c)(4).
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    Under proposed NYSE Arca Equities Rule 7.25(c)(5), an issuer of an 
ETP that is approved to participate in the CP Program will be required 
to issue a press release to the public when an ETP commences or ceases 
participation in the CP Program. The press release will be in a form 
and manner prescribed by the Exchange, and if practicable, will be 
issued at least two days before the ETP commences or ceases 
participation in the CP Program.\30\ The issuer also will be required 
to dedicate space on its Web site, or, if it does not have a Web site, 
on the Web site of the adviser or sponsor of the ETP, to (i) include 
any such press releases and (ii) provide a hyperlink to the dedicated 
page on the Exchange's Web site that describes the CP Program.\31\
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    \30\ The issuer's press release will be required to include 
language describing, for example, that while the impact of 
participation in or exit from the CP Program, which is optional, 
cannot be fully understood until objective observations can be made 
in the context of the CP Program, potential impacts on the market 
quality of the issuer's ETP may result, including with respect to 
the average spread and average quoted size for the ETP. See Notice, 
supra note 3, at 78429, n.13.
    \31\ See proposed NYSE Arca Equities Rule 7.25(c)(5). The 
disclosure requirements set forth in the proposal would be in 
addition to, and would not supersede, the prospectus disclosure 
requirements under the Securities Act of 1933 or the Investment 
Company Act of 1940. See Notice, supra note 3, at 78429, n.14.
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C. CP Program Fee

    An issuer (or sponsor on behalf of the issuer) of an ETP that is 
participating in the CP Program will be required to pay the Exchange a 
non-refundable ``CP Program Fee'' in accordance with the Exchange's 
Listing Fee Schedule, which fee will be credited to the Exchange's 
general revenues.\32\ The Exchange proposes to amend its Listing Fee 
Schedule to provide that the CP Program Fee under NYSE Arca Rule 7.25 
will be determined by the issuer within a range of $50,000-
$100,000.\33\ The CP Program Fee for each ETP will be paid by the 
issuer to the Exchange in quarterly installments at the beginning of 
each quarter and prorated if the issuer commences participation for an 
ETP in the CP Program after the beginning of a quarter.\34\ If the ETP 
has a sponsor, the sponsor may pay the CP Program Fee to the 
Exchange.\35\ The CP Program Fee paid by an issuer will be credited to 
the Exchange's general revenues.\36\ The issuer will not receive a 
credit from the Exchange, even if the assigned CPs did not satisfy 
their daily or monthly quoting requirements in any given month in such 
quarter for the ETP.\37\ The precise amount of the CP Program

[[Page 18359]]

Fee to be paid for an ETP in the CP Program will be determined by the 
issuer.\38\
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    \32\ See proposed NYSE Arca Equities Rule 7.25(e). See also 
Amendment No. 2, supra note 6. An ETP shall not be permitted to 
begin participation in the CP Program, and therefore will not be 
charged the CP Program Fee, unless there are eligible CPs assigned 
to such ETP. See Amendment No. 2, supra note 6.
    \33\ See proposed Listing Fee Schedule; see also Amendment No. 
2, supra note 6. An issuer participating in the CP Program will 
still be required to pay applicable listing and annual fees. See 
Notice, supra note 3, at 78429, n.20.
    \34\ See proposed Listing Fee Schedule.
    \35\ Id. The term ``sponsor'' means the registered investment 
adviser that provides investment management services to an ETP or 
any of such investment adviser's parents or subsidiaries. Id.
    \36\ Id.
    \37\ Id. See also Amendment No. 2, supra note 6.
    \38\ See proposed Listing Fee Schedule; see also Amendment No. 
2, supra note 6.
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D. CP Performance Measurement

    The Exchange will measure the performance of a CP in an assigned 
ETP by calculating Size Event Tests (``SETs'') during Core Trading 
Hours \39\ on every day on which the Exchange is open for business.\40\ 
The Exchange will measure the quoted displayed size at the NBB (NBO) of 
each CP at least once per second to determine bid (offer) SETs (a ``Bid 
(Offer) SET'').\41\ A CP will be considered to have a winning Bid 
(Offer) SET (a ``Winning Bid (Offer) SET'') for a particular ETP if, at 
the time of the SET, the CP: (i) Is quoting at least 500 shares of the 
ETP at the NBB (NBO); (ii) has the greatest aggregate displayed size at 
the NBB (NBO); and (iii) is quoting an offer (bid) of at least 100 
shares at a price at or within 1.2% of the CP's best bid (offer).\42\
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    \39\ See NYSE Arca Equities Rule 1.1(j).
    \40\ See proposed NYSE Arca Equities Rule 7.25(f)(1).
    \41\ See proposed NYSE Arca Equities Rule 7.25(f)(2).
    \42\ See proposed NYSE Arca Equities Rule 7.25(f)(3).
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E. CP Quoting Requirements

    Each CP that is assigned to one or more ETPs in the CP Program will 
be required to maintain continuous, two-sided displayed quotes or 
orders in accordance with existing NYSE Arca Equities Rule 7.23(a)(1) 
for each such ETP.\43\ In addition, CPs have additional daily and 
monthly quoting requirements under the proposal. First, a CP must have 
Winning Bid (Offer) SETs equal to at least 10% of the total Bid (Offer) 
SETs on any trading day in order to meet its daily quoting requirement 
and be eligible for the daily CP Payments for an ETP (described in the 
Exchange's Schedule of Fees and Charges for Exchange Services 
(``Trading Fee Schedule'')).\44\ Furthermore, a CP must have displayed 
quotes or orders of at least 100 shares at the NBB (NBO) at least 10% 
of the time that the Exchange calculates Bid (Offer) SETs to meet its 
monthly quoting requirement.\45\ For purposes of meeting these daily 
and monthly quoting requirements, CP quotes may be for the account of 
the CP in either a proprietary capacity or a principal capacity on 
behalf of an affiliated or unaffiliated person.\46\ For purposes of 
measuring CP quoting, the Exchange will include all Market Maker quotes 
and orders in assigned ETPs of an Equity Trading Permit Holder that is 
a CP.\47\
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    \43\ See proposed NYSE Arca Equities Rule 7.25(g)(1).
    \44\ See proposed NYSE Arca Equities Rule 7.25(g)(2).
    \45\ See proposed NYSE Arca Equities Rule 7.25(g)(3).
    \46\ See proposed NYSE Arca Equities Rule 7.25(g)(4). A CP's 
quotes in a principal capacity could include quotes submitted to the 
Exchange on behalf of customers or other unaffiliated or affiliated 
persons. See Notice, supra note 3, at 78430, n.26.
    \47\ See proposed NYSE Arca Equities Rule 7.25(g)(4).
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F. CP Payment

    Proposed NYSE Arca Equities Rule 7.25(h) provides that the Exchange 
will credit a CP for a ``CP Payment'' from its general revenues in 
accordance with the Exchange's Trading Fee Schedule.
    The Exchange proposes to amend its Trading Fee Schedule to specify 
the amount of the total daily rebate, which would be an amount not to 
exceed the CP Program Fee paid to the Exchange by an issuer under Rule 
7.25, less a 5% Exchange administration fee, divided by the number of 
trading days in the calendar year.\48\ Half of this amount will be 
allocated to bid SETs and half will be allocated to offer SETs.\49\
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    \48\ See proposed Trading Fee Schedule.
    \49\ Id.
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    Furthermore, 70% of the bid (offer) SET amount will be credited to 
the CP with the highest number of Winning Bid (Offer) SETs and 30% of 
the bid (offer) SET amount will be credited to the CP with the second-
highest number of Winning Bid (Offer) SETs.\50\ If only one CP is 
eligible for the bid (offer) SET amount, 100% of such rebate will be 
provided to such CP.\51\ If more than two CPs have an equal number of 
Winning Bid (Offer) SETs, the CP with the higher executed volume in the 
ETP on the Exchange on the particular trading day will be awarded the 
applicable daily CP Payment.\52\ A rebate will not be provided if no 
eligible CPs exist (e.g., if CPs are assigned to the ETP but do not 
satisfy the requirements to have a Winning Bid or Winning Offer).\53\
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    \50\ Id.
    \51\ Id.
    \52\ Id.
    \53\ Id.
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    The Exchange will credit a CP for the CP Payment at the end of each 
month.\54\ If the ETP is withdrawn from the CP Program pursuant to 
proposed Rule 7.25(i) (as described below) during the month, then the 
CP will not be eligible for a CP Payment after the date of such 
withdrawal.\55\ Furthermore, if an issuer does not pay its quarterly 
installments to the Exchange on time and the ETP continues to be 
included in the CP Program, the Exchange will continue to credit CPs in 
accordance with the Exchange's Trading Fee Schedule.\56\
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    \54\ Id.
    \55\ Id.
    \56\ Id.
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G. Withdrawal

    The Exchange will withdraw an ETP from the CP Program upon request 
from the issuer.\57\ If an ETP liquidates or suspends the redemption of 
shares, it will be automatically withdrawn from the CP Program as of 
the ETP liquidation or suspension date.\58\ An ETP will be 
automatically removed from the CP Program if the issuer is not current 
in all payments due to the Exchange after two consecutive quarters.\59\ 
Finally, if an ETP maintains a CADV of one million shares or more for 
three consecutive months, it will be automatically withdrawn from the 
CP Program within one month thereafter.\60\
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    \57\ See proposed NYSE Arca Equities Rule 7.25(i)(2).
    \58\ See proposed NYSE Arca Equities Rule 7.25(i)(1).
    \59\ See proposed NYSE Arca Equities Rule 7.25(i)(3). Only the 
ETP for which an issuer is not current in payments would be subject 
to withdrawal. For example, if an issuer listed two ETPs on the 
Exchange that participated in the CP Program and was current in 
payments for one but not for the other, only the latter ETP would be 
subject to withdrawal from the CP Program. See Notice, supra note 3, 
at 78430, n.32.
    \60\ See proposed NYSE Arca Equities Rule 7.25(i)(4); see also 
Amendment No. 2, supra note 6. If after such automatic withdrawal 
the ETP fails to maintain a CADV of one million shares or more for 
three consecutive months, the issuer of the ETP may reapply for the 
CP Program one month thereafter. See proposed NYSE Arca Equities 
Rule 7.25(i)(4).
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    A CP that does not satisfy the monthly quoting requirement for 
three consecutive months will be subject to the potential withdrawal of 
its CP status.\61\ Any such withdrawal determinations would be for a 
specific ETP.\62\ A CP can also initiate withdrawal from an ETP 
assignment in the CP Program by giving notice to the Exchange.\63\ The 
Exchange will effect such withdrawal as soon as practicable, but no 
later than 30 days after the date the notice is received by the 
Exchange.\64\ Such withdrawal can be for a specific ETP or for all ETPs 
to which the CP is assigned.\65\
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    \61\ See proposed NYSE Arca Equities Rule 7.25(j)(1).
    \62\ Id. For example, if a CP satisfied its monthly quoting 
requirement for one ETP but not for another ETP that it was assigned 
to, the CP would be subject to withdrawal for the latter ETP but not 
the former. See Notice, supra note 3, at 78431, n.35.
    \63\ See proposed NYSE Arca Equities Rule 7.25(j)(2).
    \64\ Id.
    \65\ Id.

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[[Page 18360]]

H. Implementation of Pilot

    The CP Program will be offered to issuers from the date of 
implementation, which will occur no later than 90 days after Commission 
approval of the filing, until one calendar year after 
implementation.\66\ During the pilot period, the Exchange will assess 
the CP Program and may expand the criteria for ETPs that are eligible 
to participate.\67\ At the end of the pilot period, the Exchange will 
determine whether to continue or discontinue the CP Program or make it 
permanent.\68\
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    \66\ See Notice, supra note 3, at 78431.
    \67\ Id. The Commission notes that any modifications to the 
terms of the proposal would require a rule filing with the 
Commission pursuant to Section 19(b) of the Exchange Act and Rule 
19b-4 thereunder.
    \68\ The Commission notes that any proposed continuance of the 
CP Program or proposal to make the CP Program permanent would 
require a rule filing with the Commission pursuant to Section 19(b) 
of the Exchange Act and Rule 19b-4 thereunder.
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    During the pilot period, the Exchange will provide the Commission 
with certain market quality reports each month, which will also be 
posted on the Exchange's Web site.\69\ Such reports will include the 
Exchange's analysis regarding the CP Program and whether it is 
achieving its goals,\70\ as well as market quality data such as, for 
all ETPs listed as of the date of implementation of the CP Program and 
listed during the pilot period (for comparative purposes, including 
comparable ETPs that are listed on the Exchange but not participating 
in the CP Program): volume (CADV and NYSE Arca average daily volume); 
NBBO bid/ask spread differentials; CP participation rates; NYSE Arca 
market share; CP time spent at the inside; CP time spent within $0.03 
of the inside; percent of time NYSE Arca had the best price with the 
best size; CP quoted spread; CP quoted depth; and Rule 605 statistics 
(one-month delay).\71\ These reports will also compare, to the extent 
practicable, ETPs before and after they are in the CP Program, and will 
further provide data and analysis about the market quality of ETPs that 
exceed the one million share CADV threshold and ``graduate,'' or are 
otherwise withdrawn or terminated from, the CP Program.\72\ These 
reports will also compare, to the extent practicable, the CP Program 
against the ETP Incentive Program, including with respect to the 
potential impact that one program may have on the other and how the 
analysis described above with respect to the CP Program compares to the 
Exchange's similar analysis with respect to the ETP Incentive 
Program.\73\ In connection with the proposal, the Exchange will provide 
other data and information related to the CP Program as may be 
periodically requested by the Commission.\74\ In addition, the Exchange 
states that issuers may utilize ArcaVision to analyze and replicate 
data on their own.\75\
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    \69\ See Notice, supra note 3, at 78431.
    \70\ The Exchange believes that an initial indicator of the 
success of the CP Program will be the extent to which issuers elect 
to have their ETPs participate therein, as well as the number of 
Market Makers that choose to act as CPs. See Notice, supra note 3, 
at 78431, n. 36.
    \71\ See Notice, supra note 3, at 78431.
    \72\ Id. See also Amendment No. 2, supra note 6.
    \73\ See Notice, supra note 3, at 78431.
    \74\ Id.
    \75\ Id. NYSE Arca provides ArcaVision free of charge to the 
public via the Web site www.ArcaVision.com. According to the 
Exchange, ArcaVision offers a significant amount of trading data and 
market quality statistics for every Regulation NMS equity security 
traded in the United States, including all ETPs. Publicly available 
reports within ArcaVision, which include relevant comparative data, 
are the Symbol Summary, Symbol Analytics, Volume Comparison and 
Quotation Comparison reports, among others. In addition, users can 
create the reports on a per[hyphen]symbol basis over a flexible time 
frame and can also take advantage of predefined symbol sets based on 
type of ETP or issuer. Users can also create their own symbol lists. 
The Exchange states that ArcaVision allows an ETP issuer to see 
additional information specific to its CPs and other Market Makers 
in each ETP via the ``ArcaVision Market Maker Summary'' reporting 
mechanism. Id. at 78431, n.37.
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I. Surveillance

    The Exchange represents that its surveillance procedures will be 
adequate to properly monitor the trading of ETPs participating in the 
CP Program on the Exchange during all trading sessions and to detect 
and deter violations of Exchange rules and applicable federal 
securities laws.\76\ The Exchange states that trading of the ETPs 
through the Exchange will be subject to the Financial Industry 
Regulatory Authority's (``FINRA'') surveillance procedures for 
derivative products including ETFs,\77\ and that the Exchange may 
obtain information via the Intermarket Surveillance Group (``ISG'') 
from other exchanges that are members or affiliates of the ISG; and 
from issuers and public and non-public data sources such as, for 
example, Bloomberg.\78\
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    \76\ See Notice, supra note 3, at 78433.
    \77\ FINRA surveils trading on the Exchange, including ETP 
trading, pursuant to a Regulatory Services Agreement (``RSA''). The 
Exchange is responsible for FINRA's performance under this RSA. Id. 
at 78432, n.39.
    \78\ Id. at 78433.
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II. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
as modified by Amendment No. 2 thereto, and finds that the proposed 
rule change, as modified by Amendment No. 2 thereto, is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to national securities exchanges. In particular, as 
discussed below, the Commission finds that the proposed rule change, as 
modified by Amendment No. 2 thereto, is consistent with Section 6(b)(4) 
of the Act,\79\ which requires that the rules of a national securities 
exchange provide for the equitable allocation of reasonable dues, fees, 
and other charges among its members and issuers and other persons using 
its facilities, and with Section 6(b)(5) of the Act,\80\ which 
requires, among other things, that the rules of a national securities 
exchange 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 a national market system, and, in general, to protect 
investors and the public interest, and that the rules not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers. Further, as required by Section 3(f) of the Act, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation.\81\
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    \79\ 15 U.S.C. 78f(b)(4).
    \80\ 15 U.S.C. 78f(b)(5).
    \81\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The CP Program, as proposed to be implemented on a pilot basis, is 
designed to enhance the market quality for certain lower volume ETPs 
participating in the program by incentivizing Market Makers to take CP 
assignments in such ETPs by offering an alternative fee structure for 
such CPs. As proposed by the Exchange, each CP must comply with a 
monthly quoting requirement in order to remain a CP, and must comply 
with a daily quoting requirement in order to be eligible for the daily 
CP Payments, which are higher than the standard quoting requirements 
applicable to Market Makers on the Exchange. Specifically, in addition 
to satisfying the requirements of NYSE Arca Equities Rule 7.23, with 
respect to the daily quoting requirement, the CP with the greatest 
aggregate size at the NBB or NBO at each SET will be considered to have 
the Winning Bid (Offer) SET, provided the CP is quoting at least 500 
shares of the ETP at the NBB (NBO) and is quoting at least 100 shares 
on the other side of the market at a price at or within 1.2% of the 
CP's best bid (offer). The CPs with the highest and second highest 
number of Winning Bid (Offer) SETs each day will receive a portion of 
the daily rebate, provided

[[Page 18361]]

that such CPs have Winning Bid (Offer) SETs equal to at least 10% of 
the total Winning Bid (Offer) SETs on any trading day. With respect to 
the monthly quoting requirement, a CP must be quoting at least 100 
shares at the NBB or NBO at least 10% of the time that the Exchange is 
calculating Bid (Offer) SETs. Thus, the proposal is designed to 
incentivize both quoting frequency at the NBBO and quoted size at the 
NBBO, by conditioning eligibility for CP status, eligibility for the 
daily CP Payment, and allocation of the daily CP Payment on whether a 
CP meets or exceeds various quoting requirements. In addition, the 
Program is separately designed to incentivize CPs to compete with each 
other to receive the CP Payments, as only the eligible CPs with the 
highest and second highest numbers of Winning Bid (Offer) SETs will 
receive a portion of the daily CP Payment, and if more than two CPs 
have an equal number of Winning Bid (Offer) SETs, the CP with the 
higher executed volume in the ETP on the Exchange on the particular 
trading day will be awarded the applicable portion of the daily CP 
Payment. As a result, the proposal has the potential to improve the 
market quality of the ETPs that participate in the CP Program by 
encouraging CPs to provide liquidity in such ETPs consistent with the 
performance standards. This potential improved market quality, were it 
to occur, could benefit investors in the form of enhanced liquidity, 
narrowed spreads, and reduced transaction costs.
    In addition, because the quoted bid-ask spread in a security 
represents one of the main drivers of transaction costs for investors, 
and because high price volatility should generally deter investors from 
trading low-liquidity ETPs, the CP Program, were the potential benefits 
of the program to occur, should facilitate a more-efficient and less-
uncertain trading environment for investors.\82\ Furthermore, were the 
potential benefits of the CP Program to occur, improving the liquidity 
of certain low-volume ETPs may lead to both an overall increase in ETP 
trading volume and a redistribution of trading volume toward lower-
volume ETPs that would not otherwise attract sufficient liquidity to 
successfully participate in the market.
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    \82\ Transaction costs are generally defined as the penalty that 
an investor pays for transacting. Transaction costs have four 
components: Commissions; bid/ask spread; market impact; and 
opportunity cost. See Grinold, Kahn. Active Portfolio Management, 
Second Edition, Chapter 16. An increase in bid-ask spreads will 
inevitably increase the transaction costs of an investor. In 
addition, transactions in low-liquidity securities have a higher 
market impact when compared to other more liquid securities. See 
Albert Kyle's (1985) measure of market impact (Kyle's Lambda), 
defining an inverse relationship between volume and price impact. 
Therefore, the lower the volume of the ETP or stock, the higher the 
market impact of any transaction in that stock. This last effect 
acts as a disincentive to trading that security. Therefore, an 
environment where an ETP trades more often and with a larger number 
of shares will reduce transaction costs both through the narrowing 
of spreads and lower market impact.
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    While the Commission believes that the CP Program has the potential 
to improve market quality of the ETPs participating in the Program, the 
Commission is concerned about unintended consequences of the CP 
Program. For example, the CP Program could have the potential to 
distort market forces because the CP Program may act to artificially 
influence trading in ETPs that otherwise would not be traded. 
Similarly, the Commission recognizes concerns about the potential 
negative impact on an ETP participating in the Program, such as reduced 
liquidity and wider spreads, when an ETP is withdrawn or terminated 
from the CP Program. While the Commission is mindful of these concerns, 
the Commission believes, for the reasons described below, that certain 
aspects of the CP Program could help mitigate these concerns.
    First, the proposal contains disclosure provisions that will help 
to alert and educate potential and existing investors in the ETPs 
participating in the Program about the Program. Specifically, the 
Exchange will disclose on its Web site the following information: (i) 
The ETPs participating in the CP Program and the CPs assigned to each 
participating ETP; (ii) the date a particular ETP begins participating 
or ceases participating in the CP Program; (iii) the date the Exchange 
receives written notice of an issuer's intent to withdraw its ETP from 
the CP Program, or a CP's intent to withdraw from its ETP assignment(s) 
in the CP Program, and, in each case, the intended withdrawal date, if 
provided; and (iii) the amount of the CP Program Fee for each ETP. The 
Exchange also will include on its Web site a fair and balanced 
description of the CP Program, including a description of the potential 
benefits and risks that may be attendant with an ETP's participation in 
the Program. Furthermore, an issuer of an ETP that is approved to 
participate in the CP Program will be required to issue a press release 
to the public when an ETP commences or ceases participation in the CP 
Program, to post such press release on its Web site, and to provide on 
its Web site a hyperlink to the Exchange's Web page describing the CP 
Program. This disclosure will help to inform investors and other market 
participants which ETPs are participating in the CP Program, which CPs 
are assigned to each ETP, the amount of CP Program Fee an issuer will 
incur as a result of participating in the CP Program, the amount of the 
daily CP Payments that CPs may be eligible to receive from the Exchange 
under the CP Program, and the potential benefits and risks of the 
Program. A wide variety of ETPs are currently listed and trading today, 
and the Commission believes that such disclosure could be helpful for 
investors and other market participants to discern which ETPs listed on 
the Exchange are and are not subject to the CP Program and to make 
informed investment decisions with respect to ETPs.\83\
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    \83\ The concurrent exemptive relief the Commission is issuing 
today from Rule 102 under Regulation M concerning the CP Program 
also contains additional disclosure requirements. See Securities 
Exchange Act Release No. 71805 (Mar. 26, 2014), supra note 7.
---------------------------------------------------------------------------

    Second, the CP Program is targeted at a subset of ETPs, namely 
those ETPs that are generally less liquid and which the Exchange 
believes might benefit most from the CP Program. Specifically, as 
proposed, ETPs that are otherwise eligible for the CP Program will not 
be eligible if they have a CADV of more than 1,000,000 shares for three 
consecutive months. Likewise, the CP Program will terminate with 
respect to a particular ETP if the ETP sustains a CADV of 1,000,000 
shares or more for three consecutive months.
    Finally, as proposed by the Exchange, the CP Program will be 
limited to a one-year pilot. The Commission believes that it is 
important to implement the CP Program as a pilot. Operating the CP 
Program as a pilot will allow assessment of whether the Program is in 
fact achieving its goal of improving the market quality of ETPs by 
increasing the supply of Market Makers seeking to take on CP 
assignments in ETPs, prior to any proposal or determination to make the 
program permanent.\84\ In addition, approval on a pilot basis will 
allow the assessment, prior to any proposal or determination to make 
the Program permanent, of whether the Program has any unintended impact 
on the participating ETPs, securities not participating in the Program, 
or the market or market participants generally.
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    \84\ The Exchange would be required to file with the Commission 
any proposal to extend the CP Program beyond the pilot period or to 
make the program permanent pursuant to Section 19(b) of the Exchange 
Act and the rules and regulations thereunder. Such a filing would be 
published for comment in the Federal Register pursuant to Section 
19(b) and Rule 19b-4.
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    The Exchange has represented that during the pilot it will submit 
monthly reports to the Commission about market quality in respect of 
the CP Program and

[[Page 18362]]

that these reports will be posted on the Exchange's public Web site. 
The Exchange has represented that such reports will include the 
Exchange's analysis regarding the CP Program and whether it is 
achieving its goals, as well as market quality data for all ETPs listed 
as of the date of implementation of the CP Program and listed during 
the pilot period (for comparative purposes, including comparable ETPs 
that are listed on the Exchange but not participating in the CP 
Program) such as volume (CADV and NYSE Arca average daily volume), NBBO 
bid/ask spread differentials, CP participation rates, NYSE Arca market 
share, CP time spent at the inside, CP time spent within $0.03 of the 
inside, percent of time NYSE Arca had the best price with the best 
size, CP quoted spread, CP quoted depth, and Rule 605 statistics (one-
month delay). In addition, the Exchange has represented that it will 
provide in the monthly public report to the Commission data and 
analysis on the market quality of ETPs after they exceed the one 
million CADV threshold and ``graduate'' from the Program or are 
otherwise withdrawn or terminated from the Program. The Exchange has 
also represented that the monthly public reports to the Commission will 
also compare the CP Program against the ETP Incentive Program, 
including with respect to the potential impact that one program may 
have on the other and how the analysis described above with respect to 
the CP Program compares to the Exchange's similar analysis with respect 
to the ETP Incentive Program. The Exchange also has represented that it 
will provide to the Commission any other data and information related 
to the CP Program as may be periodically requested by the Commission in 
connection with the proposal. Furthermore, the Exchange has represented 
that issuers may utilize ArcaVision to analyze and replicate data on 
their own.\85\ This information will help the Commission, the Exchange, 
and other interested persons to evaluate whether the CP Program has 
resulted in the intended benefits it is designed to achieve, any 
unintended consequences resulting from the CP Program, and the extent 
to which the CP Program alleviates or aggravates the concerns the 
Commission has noted, including previously-stated Commission concerns 
relating to issuer payments to market makers.\86\
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    \85\ See supra note 75 and accompanying text.
    \86\ See infra notes 88-91 and accompanying text.
---------------------------------------------------------------------------

    For example, the Exchange and the Commission will look to assess 
what impact, if any, there is on the market quality of ETPs that 
withdraw or are otherwise terminated from the CP Program. One way for 
an ETP to be terminated from the CP Program is if it exceeds the 
1,000,000 CADV threshold included within the rules. The Commission 
recognizes that the CP Program may not, in the one-year pilot period, 
produce sufficient data (i.e., a large number of ETPs that enter and 
exit the Program) to allow a full assessment of whether termination (or 
withdrawal) of an ETP from the Program has resulted in any unintended 
consequences on the market quality of the ETP or otherwise. However, 
the Commission believes that the proposal strikes a reasonable balance 
between (i) setting the threshold for ``graduation'' from the CP 
Program high enough to encourage participation in the Program and (ii) 
setting the threshold low enough to have a sufficient number of ETPs 
graduate from the CP Program within the pilot period so that the 
Exchange, the Commission, and other interested persons can assess the 
impact, if any, of the CP Program, including ``graduation'' of ETPs 
from the Program.
    Furthermore, the pilot structure of the CP Program will provide 
information to help determine whether any provisions of the CP Program 
should be modified. For example, based on data from the pilot, the 
Exchange may determine that the 1,000,000 CADV termination threshold is 
not an appropriate threshold on which to base eligibility for the 
Program or that the Program should be time-limited.
    The Commission believes that the design of the CP Program and the 
public disclosure requirements, coupled with implementation of the 
proposal on a pilot basis, should help mitigate potential concerns the 
Commission has noted above relating to any unintended or negative 
effects of the CP Program on the ETP market and investors.
    The Commission has previously expressed concerns relating to 
payments by issuers to market makers. FINRA Rule 5250 (formerly NASD 
Rule 2460) prohibits FINRA members and their associated persons from 
directly or indirectly accepting any payment from an issuer for acting 
as a market maker.\87\ FINRA Rule 5250 was implemented, in part, to 
address concerns about issuers paying market makers, directly or 
indirectly, to improperly influence the price of an issuer's stock and 
because of conflict of interest concerns between issuers and market 
makers.\88\ FINRA Rule 5250 was designed to preserve ``the integrity of 
the marketplace by ensuring that quotations accurately reflect a 
broker-dealer's interest in buying or selling a security.'' \89\ 
Specifically, in the NASD Rule 2460 Approval Order, the Commission 
found that the
---------------------------------------------------------------------------

    \87\ FINRA has amended Rule 5250 to create an exception for 
payments to members that are expressly provided for under the rules 
of a national securities exchange that are effective after being 
filed with, or filed with and approved by, the Commission pursuant 
to the requirements of the Act. See Securities Exchange Act Release 
No. 69398 (Apr. 18, 2013), 78 FR 24261 (Apr. 24, 2013). This 
amendment to FINRA Rule 5250 became effective May 15, 2013.
    \88\ See Securities Exchange Act Release No. 38812 (July 3, 
1997), 62 FR 37105 (July 10, 1997) (SR-NASD-97-29) (``NASD Rule 2460 
Approval Order''), at 37107.
    \89\ See id. at 37107.

decision by a firm to make a market in a given security and the 
question of price generally are dependent on a number of factors, 
including, among others, supply and demand, the firm's expectations 
toward the market, its current inventory position, and exposure to 
risk and competition. This decision should not be influenced by 
payments to the member from issuers or promoters. Public investors 
expect broker-dealers' quotations to be based on the factors 
described above. If payments to broker-dealers by promoters and 
issuers were permitted, investors would not be able to ascertain 
which quotations in the marketplace are based on actual interest and 
which quotations are supported by issuers or promoters. This 
structure would harm investor confidence in the overall integrity of 
the marketplace.\90\
---------------------------------------------------------------------------

    \90\ See id.

    The Commission also added that ``such payments may be viewed as a 
conflict of interest since they may influence the member's decision as 
to whether to quote or make a market in a security and, thereafter, the 
prices that the member would quote.'' \91\
---------------------------------------------------------------------------

    \91\ See id. at 37106.
---------------------------------------------------------------------------

    The Commission believes that a number of aspects of the CP Program 
mitigate the concerns that FINRA Rule 5250 was designed to address. 
First, the Commission believes that the terms of the CP Program are 
generally objective, clear, and transparent. The standards for the CP 
Program are set forth in proposed NYSE Arca Equities Rule 7.25 and the 
Exchange's Listing Fee Schedule and Trading Fee Schedule (further 
described above) \92\ and describe the ETP eligibility criteria, 
application process, fee and payment structure, CP performance 
standards, CP Payment allocation, and withdrawal standards. These 
requirements apply to all ETPs, issuers, and CPs participating in the 
CP Program.\93\
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    \92\ See supra Section I.
    \93\ While the Exchange will have some amount of discretion 
pursuant to the proposed rules to limit the number of ETPs that any 
one issuer may have in the CP Program, the Commission believes such 
limit would not be unfairly discriminatory, as it would be imposed 
on a Program-wide basis.

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[[Page 18363]]

    Second, the Exchange also will provide notification on its public 
Web site regarding the various aspects of the CP Program. As discussed 
above, this disclosure will include: (i) The ETPs participating in the 
CP Program and the CPs assigned to each participating ETP; (ii) the 
date a particular ETP begins participating or ceases participating in 
the CP Program; (iii) the date the Exchange receives written notice of 
an issuer's intent to withdraw its ETP from the CP Program, or a CP's 
intent to withdraw from its ETP assignment(s) in the CP Program, and, 
in each case, the intended withdrawal date, if provided; (iv) the 
amount of the CP Program Fee for each ETP; and (v) a fair and balanced 
description of the CP Program, including the potential benefits and 
risks that may be attendant with an ETP's participation in the Program. 
In addition, an issuer of an ETP participating in the CP Program will 
be required to issue a press release when an ETP commences or ceases 
participation in the CP Program, to post such press release on its Web 
site, and to provide on its Web site a hyperlink to the Exchange's Web 
page describing the CP Program.
    And third, ETPs participating in the CP Program will be traded on 
the Exchange, which is a regulated market, pursuant to the current 
trading and reporting rules of the Exchange, and pursuant to the 
Exchange's established market surveillance and trade monitoring 
procedures. The Exchange will administer the application and acceptance 
of the ETPs and CPs into the CP Program, as well as the continuation in 
and withdrawal from the Program. The Exchange will collect the CP 
Program Fees from issuers and credit them to the Exchange's general 
revenues. A CP will be eligible to receive a CP Payment from the 
Exchange's general revenues only after it meets the proposed CP quoting 
requirements, as determined by the Exchange. Furthermore, the CP 
Program Fees will be paid into the Exchange's general revenues, and the 
CP Payments will be paid out of the Exchange's general revenues. If no 
eligible CP exists for particular ETP on a particular day, no CP 
Payment will be provided on that day. If the assigned CPs in a 
particular ETP do not satisfy their daily or monthly quoting 
requirements in any given day or month in a quarter, the issuer will 
not receive any credit from the Exchange following the end of the 
quarter. If an issuer does not pay its quarterly installment of the CP 
Program Fee for a particular ETP to the Exchange on time and the ETP 
continues to be included in the CP Program, the Exchange will continue 
to credit CPs in accordance with the Trading Fee Schedule. The 
Commission believes that these factors, taken together, should help to 
mitigate the conflict of interest and other concerns that the 
Commission has previously identified \94\ relating to issuers paying 
for market making.
---------------------------------------------------------------------------

    \94\ See NASD Rule 2460 Approval Order, supra note 88, and supra 
notes 88-91. See also Securities Act Release No. 6334 (Aug. 6, 
1981), 46 FR 42001 (Aug. 18, 1981), at Section IV.B (Treatment as 
Statutory Underwriter).
---------------------------------------------------------------------------

    The Commission believes that it is reasonable and consistent with 
the Act for the Exchange to limit the CP Program to certain types of 
securities to allow the Exchange, through a pilot, to assess whether 
the Program will have the desired effect of improving the market 
quality of these securities before implementing the Program on a 
permanent basis. The Commission believes that it is reasonable and 
consistent with the Act for the Exchange to limit the CP Program to 
products under the 1,000,000 CADV threshold, to support the Exchange's 
stated purpose to ``incentivize Market Makers on the Exchange to quote 
and trade in certain low-volume ETPs.'' \95\
---------------------------------------------------------------------------

    \95\ See Notice, supra note 3, at 78427.
---------------------------------------------------------------------------

    The Commission believes that the CP Program Fees are an equitable 
allocation of reasonable fees. First, participation in the CP Program 
is voluntary. An entity is free to determine whether it would be 
economically desirable to pay the CP Program Fee, given the permitted 
range of the fee, the trading characteristics of the ETP, and the 
anticipated benefit. If an issuer chooses to participate in the CP 
Program with respect to an ETP, it will have the discretion to 
determine the amount of the CP Program Fee it will pay, between $50,000 
and $100,000. The CP Program Fee will be paid for by either the issuer 
that has an ETP participating in the CP Program or the sponsor 
associated with such issuer. Thus, the CP Program Fee will be incurred 
and paid for by an entity that has chosen to participate in, and that 
may potentially benefit from, the CP Program.\96\ An entity that 
chooses not to participate will not be required to pay any additional 
fee beyond the standard listing and annual fees. Further, the permitted 
range of CP Program Fees will be the same for any issuer wishing to 
participate in the Program. The Commission also believes that allowing 
the issuer some discretion when determining the amount of the CP 
Program Fee amount is consistent with the Act. Not all ETPs are alike, 
and trading in certain products may be riskier or more costly than 
trading in others. The Commission believes that it is reasonable to 
allow each issuer to choose to participate in the Program and to 
determine the amount, subject to a permitted range, at which it is 
desirable to incentivize CPs through the CP Program Fee to improve the 
market quality of ETPs participating in the Program. Finally, as 
discussed above, the payment of the CP Program Fee will be transparent 
to the marketplace, as this information will be disclosed on the 
Exchange's Web site.
---------------------------------------------------------------------------

    \96\ Issuers of exchange-traded funds registered under the 1940 
Act are prohibited from paying directly or indirectly for 
distribution of their shares (i.e., directly or indirectly financing 
any activity that is primarily intended to result in the sale of 
shares), unless such payments are made pursuant to a plan that meets 
the requirements of Rule 12b-1 under the 1940 Act. Although the 
services at issue could be primarily intended to result in the sale 
of fund shares, the Commission has stated that such a determination 
will depend on the surrounding circumstances. See Payment of Asset-
Based Sales Loads by Registered Open-End Management Investment 
Companies, Investment Company Act Release No. 16431 (June 13, 1988) 
(``1988 12b-1 Release''). As the Commission has noted previously, if 
a fund makes payments that are ostensibly for a non-distribution 
purpose, and the recipient of those payments finances distribution, 
the question arises whether the fund's assets are being used 
indirectly for distribution. The Commission has stated that there 
can be no precise definition of what types of expenditures 
constitute indirect use of fund assets, and this determination is 
based on the facts and circumstances of each individual case. In 
addition, fund directors, particularly independent directors bear 
substantial responsibility for making that judgment. See Bearing of 
Distribution Expenses by Mutual Funds, Investment Company Act 
Release No. 11414 (October 28, 1980).
---------------------------------------------------------------------------

Section 11(d)(1) of the Exchange Act

    Section 11(d)(1) of the Exchange Act \97\ generally prohibits a 
broker-dealer from extending or maintaining credit, or arranging for 
the extension or maintenance of credit, on shares of new issue 
securities, if the broker-dealer participated in the distribution of 
the new issue securities within the preceding 30 days. The Commission's 
view is that shares of open-end investment companies and unit 
investment trusts registered under the 1940 Act, such as ETP shares, 
are distributed in a continuous manner, and broker-dealers that sell 
such securities are therefore participating in the ``distribution'' of 
a new issue for purposes of Section 11(d)(1).\98\
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    \97\ 15 U.S.C. 78k(d)(1)
    \98\ See, e.g., Exchange Act Release Nos. 6726 (Feb. 8, 1962), 
27 FR 1415 (Feb. 15, 1962) and 21577 (Dec. 18, 1984), 49 FR 50174 
(Dec. 27, 1984).
---------------------------------------------------------------------------

    The Division of Trading and Markets, acting under delegated 
authority, granted an exemption from Section 11(d)(1) and Rule 11d1-2 
thereunder for broker-dealers that have entered into an agreement with 
an exchange-traded fund's distributor to place orders with

[[Page 18364]]

the distributor to purchase or redeem the exchange-traded fund's shares 
(``Broker-Dealer APs).\99\ The SIA Exemption allows a Broker-Dealer AP 
to extend or maintain credit, or arrange for the extension or 
maintenance of credit, to or for customers on the shares of qualifying 
exchange-traded funds subject to the condition that neither the Broker-
Dealer AP, nor any natural person associated with the Broker-Dealer AP, 
directly or indirectly (including through any affiliate of the Broker-
Dealer AP), receives from the fund complex any payment, compensation, 
or other economic incentive to promote or sell the shares of the 
exchange-traded fund to persons outside the fund complex, other than 
non-cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or 
(C). This condition is intended to eliminate special incentives that 
Broker-Dealer APs and their associated persons might otherwise have to 
``push'' exchange-traded fund shares.\100\
---------------------------------------------------------------------------

    \99\ See Letter from Catherine McGuire, Chief Counsel, Division 
of Trading and Markets, Securities and Exchange Commission to 
Securities Industry Association (Nov. 21, 2005) (``SIA Exemption'').
    \100\ Trading and markets staff provided no-action relief from 
Section 11(d)(1) for broker-dealers engaging in secondary market 
proprietary or customer transactions in securities of Commodity-
based Exchange-Traded Trusts (``CBETTs'') similar to the 
Commission's SIA Exemption. This relief is conditioned on the 
broker-dealer and any natural person associated with the broker-
dealer not receiving from the Fund complex, directly or indirectly, 
any payment, compensation or other economic incentive to promote or 
sell Shares to persons outside of the Fund complex, other than non-
cash compensation permitted under NASD Rule 2830(1)(5)(A), (B), or 
(C). See No-Action Letter re: DB Commodity Index Tracking Fund and 
DB Commodity Services LLC (Jan. 19, 2006); No-Action Letter re: 
Rydex Specialized Products LLC (Dec. 5, 2005); No-Action Letter re: 
streetTRACKS Gold Trust (Dec. 12, 2005); and No-Action Letter re: 
iShares COMEX Gold Trust (Dec. 12, 2005).
---------------------------------------------------------------------------

    The CP Program will permit certain ETPs to voluntarily incur 
increased listing fees payable to the Exchange. In turn, the Exchange 
will use the fees to make CP Payments to market makers that improve the 
liquidity of participating issuers' securities, and thus enhance the 
market quality for the participating issuers. CP Payments will be 
accrued for, among other things, maintaining continuous, two-sided 
displayed quotes or orders. Receipt of the CP Payments by certain 
broker-dealers will implicate the conditions of the SIA Exemption \101\ 
from the new issue lending restriction in Section 11(d)(1) of the 
Exchange Act discussed above. The Commission's view is that the CP 
Payments market makers will receive under the proposal are indirect 
payments from the fund complex to the market maker and that those 
payments are compensation to promote the shares of the ETP. Therefore, 
a market maker that is also a broker-dealer receiving the incentives 
will not be able to rely on the SIA Exemption from Section 
11(d)(1).\102\ This does not mean that broker-dealers cannot 
participate in the CP Program; it merely means they cannot rely on the 
SIA Exemption \103\ while doing so. Thus, broker-dealers that 
participate in the CP Program will need to comply with Section 11(d)(1) 
unless there is another applicable exemption.
---------------------------------------------------------------------------

    \101\ See also note 100, supra.
    \102\ Id.
    \103\ Id.
---------------------------------------------------------------------------

III. Solicitation of Comments on Amendment No. 2

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 2 
to 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-2013-141 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-2013-141. 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 the filing also will be available 
for inspection and copying at the principal office 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-2013-141 and should 
be submitted on or before April 22, 2014.

IV. Accelerated Approval of Proposed Rule Change as Modified by 
Amendment No. 2

    As discussed above, the Exchange submitted Amendment No. 2 to (i) 
change, from two-million shares to one-million shares, the CADV 
threshold applicable to participation eligibility in the proposed CP 
Program; (ii) change the CP Program Fee from a fixed amount of $50,000 
to a range of $50,000 to $100,000, as determined exclusively by the 
issuer; and (iii) clarify that the CP Program Fee cannot be refunded to 
an issuer. The Commission believes that the modification to the CADV 
threshold and the clarification regarding the CP Program Fee in 
Amendment No. 2 cause the proposed CP Program to more closely mirror 
the respective features of the Exchange's existing pilot ETP Incentive 
Program under NYSE Arca Equities Rule 8.800. In addition, the 
modification in Amendment No. 2 to the CP Program Fee causes it to be 
similar to the fee imposed by another exchange in a similar 
program.\104\ Accordingly, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\105\ for approving the proposed rule 
change, as modified by Amendment No. 2, prior to the 30th day after the 
date of publication of notice in the Federal Register.
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    \104\ See Nasdaq Rule 5950(b)(2).
    \105\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\106\ that the proposed rule change (SR-NYSEArca-2013-141), as 
modified by Amendment No. 2 thereto, be, and it hereby is, approved.
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    \106\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\107\
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    \107\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07187 Filed 3-31-14; 8:45 am]
BILLING CODE 8011-01-P