Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, To Implement a One-Year Pilot Program for Issuers of Certain Exchange-Traded Products Listed on the Exchange, 35340-35349 [2013-13886]

Download as PDF 35340 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices • Send an email to rulecomments@sec.gov. Please include File Number SR–BOX–2013–29 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BOX–2013–29. 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 (https://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–BOX– 2013–29 and should be submitted on or before July 3, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Kevin M. O’Neill, Deputy Secretary. mstockstill on DSK4VPTVN1PROD with NOTICES [FR Doc. 2013–13882 Filed 6–11–13; 8:45 am] BILLING CODE 8011–01–P 13 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69706; File No. SR– NYSEArca–2013–34] Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, To Implement a One-Year Pilot Program for Issuers of Certain Exchange-Traded Products Listed on the Exchange June 6, 2013. On March 21, 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 implement the NYSE Arca ETP Incentive Program (‘‘Incentive Program’’), a one-year pilot program for issuers of certain exchange-traded products (‘‘ETPs’’) listed on the Exchange. On April 5, 2013, the Exchange submitted Amendment No. 1 to the proposed rule change, which replaced and superseded the proposed rule change in its entirety.3 The proposed rule change, as modified by Amendment No. 1, was published for comment in the Federal Register on April 11, 2013.4 The Commission received two comment letters on the proposal.5 On May 29, 2013, the Exchange submitted Amendment No. 2 to the proposed rule change.6 This order 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 SR–NYSEArca–2013–34 replaced and superseded SR–NYSEArca–2012–37, which was withdrawn by the Exchange. See Securities Exchange Act Release Nos. 66966 (May 11, 2012), 77 FR 29419 (May 17, 2012) and 68616 (Jan. 10, 2013), 78 FR 3482 (Jan. 16, 2013) (SR–NYSEArca– 2012–37). 4 See Securities Exchange Act Release No. 69335 (Apr. 5, 2013), 78 FR 21681 (‘‘Notice’’). 5 See Letter from John T. Hyland, Chief Investment Officer, United States Commodity Funds LLC, dated Apr. 10, 2013 (‘‘USCF Letter’’), and Letter from Stanislav Dolgopolov, Assistant Adjunct Professor, UCLA School of Law, dated Apr. 26, 2013 (‘‘Dolgopolov Letter’’). 6 In Amendment No. 2, the Exchange proposed to: (i) amend the rule text to provide that an LMM in the Incentive Program will remain obligated to satisfy the general requirements of NYSE Arca Equities Rule 7.23, rather than the general requirements of NYSE Arca Rule 7.23; (ii) amend the rule text to provide that the Exchange will disclose on its Web site the date it receives written notice of an issuer’s intent to withdraw its ETP from the Incentive Program, or an LMM’s (as defined herein) intent to withdraw from its ETP assignment(s) in the Incentive Program, and, in each case, the intended withdrawal date, if provided; and (iii) clarify that the Exchange’s monthly public report to the Commission relating to the Incentive Program will (a) compare, to the extent practicable, ETPs before and after they are in 2 17 PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 grants approval of the proposed rule change, as modified by Amendment Nos. 1 and 2 thereto.7 I. Description of the Proposal As set forth in more detail in the Notice,8 the Exchange is proposing to adopt new NYSE Arca Equities Rule 8.800 and to amend its fee schedules to set forth the requirements for the Incentive Program, which will be a oneyear pilot program for issuers of certain ETPs listed on the Exchange.9 The Exchange states that the Incentive Program is designed to enhance the market quality for ETPs by incentivizing Market Makers 10 to take Lead Market Maker (‘‘LMM’’) assignments in certain lower volume ETPs by offering an alternative fee structure for such LMMs that would be funded from the Exchange’s general revenues.11 The Exchange states that participation in the Incentive Program would be entirely voluntary on the part of both LMMs and issuers, and that the costs of the Incentive Program would be offset by charging participating issuers nonrefundable ‘‘Optional Incentive Fees,’’ which would be credited to the Exchange’s general revenues.12 A. Eligible Products, Issuer Application, and LMM Assignment An ETP will be eligible to participate in the Incentive Program if (i) it is listed the Incentive Program, and will further provide data and analysis about the market quality of ETPs that exceed the one million CADV (as defined herein) threshold and ‘‘graduate,’’ or are otherwise withdrawn or terminated from, the Incentive Program, and (b) include market quality data for comparable ETPs that are listed on the Exchange but not participating in the Incentive Program. Amendment No. 2 provides clarification to the proposed rule change, and because it does not materially affect the substance of the proposed rule change, Amendment No. 2 does not require notice and comment. 7 Today the Commission also is granting exemptive relief from Rule 102 under Regulation M concerning the Incentive Program. See Securities Exchange Act Release No. 69707 (June 6, 2013) (Order Granting a Limited Exemption from Rule 102 of Regulation M Concerning the NYSE Arca, Inc.’s Exchange-Traded Product Incentive Program Pilot Pursuant to Regulation M Rule 102(e)). 8 See Notice, supra note 4. 9 The Exchange currently has two Schedules of Fees and Charges for Exchange Services; one that is for listings (‘‘Listing Fee Schedule’’) and another that is for trade-related charges (‘‘Trading Fee Schedule’’). To differentiate them, the Exchange also proposes to change the name of the Listing Fee Schedule to ‘‘Schedule of Fees and Charges for Exchange Listing Services.’’ 10 A Market Maker is an Equity Trading Permit Holder (‘‘ETP Holder’’) that acts as a Market Maker pursuant to NYSE Arca Equities Rule 7. See NYSE Arca Equities Rule 1.1(v). An ETP 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). 11 See Notice, supra note 4, at 21682. 12 Id. E:\FR\FM\12JNN1.SGM 12JNN1 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices 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) with respect to an ETP that listed on the Exchange before the commencement of the Incentive Program, the ETP has a consolidated average daily volume (‘‘CADV’’) of one million shares or less for at least the preceding three months and the issuer of such ETP has not suspended the issuance or redemption of new shares; 13 and (iv) it is compliant with continuing listing standards, if the ETP was added to the Incentive Program after listing on the Exchange.14 An issuer that wishes to have an ETP participate in the Incentive Program and pay the Exchange an Optional Incentive Fee will be required to submit a written application in a form prescribed by the Exchange for each ETP.15 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.16 An issuer may not have more than five ETPs that were listed on the Exchange prior to the pilot period participate in the Incentive Program.17 However, there will be no limitation on the number of ETPs per issuer listed during the pilot period that can participate in the program.18 In order for its ETP to be eligible to participate in the Incentive Program, an issuer must be current in all payments due to the Exchange.19 Proposed NYSE Arca Equities Rule 8.800(b)(3) provides that the Exchange will communicate the ETP(s) proposed for inclusion in the Incentive Program on a written solicitation that will be sent to all qualified LMMs 20 along with the mstockstill on DSK4VPTVN1PROD with NOTICES 13 The Exchange maintains a list of ETPs that have suspended the issuance of new shares, which is available at https://etp.nyx.com/en/tradinginformation/us/funds-closed-creation. 14 See proposed NYSE Arca Equities Rule 8.800(a). 15 See proposed NYSE Arca Equities Rule 8.800(b)(1). 16 Id. 17 Id. 18 See Notice, supra note 4, at 21685. 19 See proposed NYSE Arca Equities Rule 8.800(b)(2). 20 The written solicitation will be included in the ‘‘Green Sheet,’’ which is the common term for an email communication sent by Exchange staff VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 Optional Incentive Fee the issuer will pay the Exchange for each ETP. The issuer will determine the amount of the Optional Incentive Fee for each ETP within a permitted range that will be set forth in the Exchange’s Listing Fee Schedule.21 Proposed NYSE Arca Equities Rule 8.800(b)(4) provides that after the Exchange provides the written solicitation to LMMs, no individual associated with an LMM may contact such issuer or the Exchange staff about that ETP until the assignment of the LMM is made, except as otherwise permitted in the proposed rules. If more than one qualified LMM proposes to serve as such for a particular ETP, Exchange staff will select the LMM pursuant to the provisions set forth in the proposed rules.22 The issuer of the ETP may choose to submit a letter to the Exchange staff indicating its preference and supporting justification for a particular LMM, and the Exchange staff may consider such letter in performing its duty to select an LMM, but such letter will not be determinative of the particular LMM selected by the Exchange.23 Within two business days after the final LMM interview, the Exchange staff, in its sole discretion, will select an LMM and notify the LMM and the issuer.24 B. Disclosure Relating to the Incentive Program Pursuant to proposed NYSE Arca Equities Rule 8.800(b)(6), the Exchange will provide notification on a dedicated page on its Web site regarding: (i) The ETPs participating in the Incentive members to all qualified LMMs prior to an LMM selection. The Green Sheet includes, among other things, the name, symbol and description of the ETP(s) as well as the name of the issuer and a link to the ETP prospectus. A qualified LMM must complete the application for a specific ETP or group of ETPs. See Notice, supra note 4, at 21685–6, n.15. 21 See proposed NYSE Arca Equities Rule 8.800(b)(3). See also Section I(C) infra for further discussion of the Optional Incentive Fee. 22 See proposed NYSE Arca Equities Rule 8.800(b)(5). An LMM may provide material to the Exchange staff, which may include a corporate overview of the LMM and the trading experience of its personnel. Exchange staff will meet with representatives of each LMM if requested by the LMM, and no more than three representatives of each LMM may participate in the meeting, each of whom must be employees of the LMM, and one of whom must be the individual trader of the LMM who is proposed to trade the ETP. If the LMM is unavailable to appear in person, a telephone interview with that LMM would be acceptable. Meetings will normally be held at the Exchange, unless the Exchange agrees that they may be held elsewhere. Id. 23 Id. 24 Id. Proposed NYSE Arca Equities Rule 8.800(b)(5) is modeled in part on New York Stock Exchange Rule 103B(III)(B)(1), which governs Designated Market Maker unit assignments for equities listed on the NYSE. See Notice, supra note 4, at 21686, n.20. PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 35341 Program; (ii) the date a particular ETP begins participating and ceases participating in the Incentive Program; (iii) the LMM assigned to each ETP participating in the Incentive Program; (iv) the date the Exchange receives written notice of an issuer’s intent to withdraw its ETP from the Incentive Program, or an LMM’s intent to withdraw from its ETP assignment(s) in the Incentive Program, and, in each case, the intended withdrawal date, if provided; and (v) the amount of the Optional Incentive Fee for each ETP.25 This page will also include a fair and balanced description of the Incentive Program, including: (i) a description of the Incentive 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 Incentive Program; (iii) the potential risks that may be attendant with an ETP’s participation in the Incentive Program; (iv) the potential impact resulting from an ETP’s entry into and exit from the Incentive Program; and (v) how interested parties can request additional information regarding the Incentive Program and/or the ETPs participating therein.26 Under proposed NYSE Arca Equities Rule 8.800(b)(7), an issuer of an ETP that is approved to participate in the Incentive Program will be required to issue a press release to the public when an ETP commences or ceases participation in the Incentive 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 Incentive Program.27 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 25 See proposed NYSE Arca Equities Rule 8.800(b)(6). See also Amendment No. 2, supra note 6. 26 See proposed NYSE Arca Equities Rule 8.800(b)(6). 27 See proposed NYSE Arca Equities Rule 8.800(b)(7). 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 Incentive Program, which is optional, cannot be fully understood until objective observations can be made in the context of the Incentive 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 4, at 21686, n.21. E:\FR\FM\12JNN1.SGM 12JNN1 35342 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices Exchange’s Web site that describes the Incentive Program.28 C. Optional Incentive Fee The Exchange proposes to amend its Listing Fee Schedule to provide that the Optional Incentive Fee under NYSE Arca Rule 8.800 may initially range from $10,000 to $40,000, as determined by the issuer of an ETP.29 The Optional Incentive Fee for each ETP will be paid by the issuer to the Exchange in quarterly installments at the beginning of each quarter and prorated if the issuer commences participation for an ETP in the Incentive Program after the beginning of a quarter.30 If an LMM does not meet its performance standards (as described below) for an ETP in any given month in such quarter, the issuer would not receive any refund or credit from the Exchange following the end of the quarter.31 If the ETP has a sponsor, the sponsor may pay the Optional Incentive Fee to the Exchange.32 D. Incentive Program LMM Performance Standards Proposed NYSE Arca Equities Rule 8.800(c) describes the proposed Incentive Program LMM performance standards (‘‘Incentive Program LMM Performance Standards’’) that will apply to an LMM for each ETP participating in the Incentive Program to which it is assigned. An LMM in the Incentive Program also will remain obligated to satisfy the general requirements of NYSE Arca Equities Rule 7.23.33 Pursuant to proposed NYSE Arca Equities Rule 8.800(c)(2), an LMM will be subject to a ‘‘Market-Wide Requirement.’’ Specifically, an LMM will be required to maintain quotes or orders at the National Best Bid or Offer (‘‘NBBO’’) or better (‘‘Inside’’) during the month during Core Trading Hours in accordance with the following maximum width and minimum depth thresholds, which are provided in proposed Commentary .01 to Rule 8.800.34 Prices ($) Daily share volume Quote type Requirement 0–4.99 0–4,999 ..................... Inside ........................ 5,000–24,999 ............ Inside ........................ 25,000–74,999 .......... Inside ........................ 75,000–199,999 ........ Inside ........................ 200,000–499,999 ...... Inside ........................ 500,000 or more ....... Inside ........................ Width (%) .................. Depth (sh) ................. Width (%) .................. Depth (sh) ................. Width (%) .................. Depth (sh) ................. Width (%) .................. Depth (sh) ................. Width (%) .................. Depth (sh) ................. Width (%) .................. Depth (sh) ................. 15.00 700 7.00 700 5.00 700 3.00 700 2.00 700 1.00 2000 5–14.99 15–49.99 6.00 400 3.00 400 1.50 400 1.00 400 0.60 400 0.30 1000 5.00 300 2.00 300 1.00 300 0.50 300 0.30 300 0.20 500 50 or more 4.00 200 1.50 200 0.70 200 0.30 200 0.20 200 0.10 300 mstockstill on DSK4VPTVN1PROD with NOTICES However, the Market-Wide Requirement will not apply to an LMM if these thresholds are otherwise met by quotes or orders of all market participants across all markets trading the ETP.35 Pursuant to proposed NYSE Arca Equities Rule 8.800(c)(3), an LMM also will be subject to a NYSE Arca-specific requirement, which can be satisfied in one of two ways. First, an LMM may satisfy the ‘‘Time-at-the-Inside Requirement’’ under proposed NYSE Arca Equities Rule 8.800(c)(3)(A), pursuant to which an LMM will be required to maintain quotes or orders on the Exchange at the NBBO or better at least 15% of the time when quotes may be entered during Core Trading Hours each trading day, as averaged over the course of a month.36 Alternatively, an LMM may choose to satisfy the ‘‘SizeSetting NBBO Requirement’’ under proposed NYSE Arca Equities Rule 8.800(c)(3)(B), pursuant to which an LMM will be required to maintain ‘‘sizesetting’’ quotes or orders on the Exchange, as compared to trading interest on other markets, at the NBBO or better at least 25% of the time when quotes may be entered during Core Trading Hours each trading day, as averaged over the course of a month; provided, however, that the Size-Setting NBBO Requirement will not apply to an LMM if this threshold is otherwise met by quotes or orders of other market participants on NYSE Arca.37 Finally, under proposed NYSE Arca Equities Rule 8.800(c)(4), for at least 90% of the time when quotes may be entered during Core Trading Hours each trading day, as averaged over the course of a month, an LMM will be required to maintain (A) at least 2,500 shares of attributable, displayed posted buy liquidity on the Exchange that is priced no more than 2% away from the NBB for the particular ETP, and (B) at least 28 See proposed NYSE Arca Equities Rule 8.800(b)(7). 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 4, at 21686, n.22. 29 See proposed Listing Fee Schedule. Optional Incentive Fees paid by an issuer will be credited to the Exchange’s general revenues. An issuer participating in the Incentive Program will still be required to pay applicable listing and annual fees. See Notice, supra note 4, at 21686, n.16. 30 See proposed Listing Fee Schedule. 31 Id. 32 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. 33 See proposed NYSE Arca Equities Rule 8.800(c)(1). See also Amendment No. 2, supra note 6. 34 See proposed NYSE Arca Equities Rule 8.800(c)(2). Proposed Commentary .01 to NYSE Arca Equities Rule 8.800 provides that (i) the spread thresholds will be calculated as the time-weighted average throughout the trading day and then averaged, by day, across the month and (ii) the depth thresholds will be calculated as the average of (a) the average time-weighted bid depth and (b) the average time-weighted ask depth. 35 Id. 36 Proposed Commentary .01 to NYSE Arca Equities Rule 8.800 provides that the Time-at-theInside Requirement will be calculated as the average of (a) the percentage of time the LMM has a bid on the Exchange at the National Best Bid (‘‘NBB’’) and (b) the percentage of time the LMM has an offer on the Exchange at the National Best Offer (‘‘NBO’’). 37 Proposed Commentary .01 to NYSE Arca Equities Rule 8.800 provides that: (i) The SizeSetting NBBO Requirement will be calculated throughout the trading day and then averaged, by day, across the month; (ii) quotes and orders of all market participants across all markets trading the security will be considered when calculating the Size-Setting NBBO Requirement; (iii) a quote or order will be considered ‘‘size-setting’’ if it is at the NBB or NBO; (iv) if multiple quotes or orders exist at the same price, the quote or order with the largest size will be considered ‘‘size-setting;’’ and (v) if multiple quotes or orders exist at the same price and the same size, the quote or order with the earliest entry time will be considered ‘‘size-setting.’’ VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 E:\FR\FM\12JNN1.SGM 12JNN1 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices 2,500 shares of attributable, displayed posted offer liquidity on the Exchange that is priced no more than 2% away from the NBO for the particular ETP. Proposed Commentary .01 to NYSE Arca Equities Rule 8.800 provides that only displayed quotes and orders will be considered for purposes of the Incentive Program LMM Performance Standards. E. LMM Payment Proposed NYSE Arca Equities Rule 8.800(d) provides that the Exchange will credit an LMM for an ‘‘LMM Payment,’’ which will be determined by the Exchange and set forth in the Trading Fee Schedule. An LMM participating in the Incentive Program would not be entitled to an LMM Payment unless and until it meets or exceeds the Incentive Program LMM Performance Standards for an assigned ETP, as determined by the Exchange.38 LMM Payments will be paid by the Exchange from its general revenues.39 The Exchange proposes to amend its Trading Fee Schedule to provide that at the end of each quarter, the Exchange will credit an LMM an LMM Payment for each month during such quarter that the LMM meets or exceeds its Incentive Program LMM Performance Standards for an assigned ETP. If an LMM does not meet or exceed the Incentive Program LMM Performance Standards for an assigned ETP for a particular month, or the ETP is withdrawn from the Incentive Program, then the LMM Payment will be zero for such month.40 The amount of the LMM Payment for a particular month will not exceed 1⁄3 of the quarterly Optional Incentive Fee, as determined by the issuer, less an Exchange administration fee of 5%.41 LMMs participating in the Fixed Incentive Program will be subject to the transaction fees and credits applicable to ETP Holders and Market Makers for transactions in their assigned ETPs during the quarter instead of the LMM transaction fees and credits.42 If an issuer does not pay its quarterly installments to the Exchange on time and the ETP continues to be listed, the Exchange will continue to credit the LMM if the LMM meets its Incentive 38 See Notice, supra note 4, at 21687. mstockstill on DSK4VPTVN1PROD with NOTICES 41 Id. 42 Id. The Exchange currently provides LMMs with an opportunity to receive incrementally higher transaction credits and incur incrementally lower transaction fees (‘‘LMM Rates’’) compared to standard liquidity maker-taker rates (‘‘Standard Rates’’). See Notice, supra note 4, at 21682. LMMs in the Incentive Program would be subject to the Standard Rates instead of the LMM Rates. Id. at 21687. 16:32 Jun 11, 2013 Jkt 229001 Proposed NYSE Arca Equities Rule 8.800(e) describes the circumstances for withdrawal from the Incentive Program. First, if an ETP no longer meets continuing listing standards, suspends the creation and/or redemption of shares, or liquidates, it will be automatically withdrawn from the Incentive Program as of the ETP suspension date.44 Second, the Exchange, in its discretion, may allow an issuer to withdraw an ETP from the Incentive Program before the end of the pilot period if the assigned LMM is unable to meet its Incentive Program LMM Performance Standards for any two of the three months of a quarter or for five months during the pilot period and no other qualified ETP Holder was able to take over the assignment.45 Third, an LMM may withdraw from all of its ETP assignments in the Incentive Program, or the Exchange, in its discretion, may allow an LMM to withdraw from a particular ETP before the end of the pilot period if the Exchange determines that there are extraneous circumstances that prevent the LMM from meeting its Incentive Program LMM Performance Standards for such ETP that do not affect its other ETP assignments in the Incentive Program.46 In either case, the LMM’s ETP(s) will be reallocated in accordance with proposed NYSE Arca Equities Rule 8.800(f) (described below). Fourth, if an ETP maintains a CADV of one million shares or more for three consecutive months, it will be automatically withdrawn from the Incentive Program within one month thereafter.47 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 Incentive Program one month thereafter.48 Finally, if the issuer is not current in all payments due to the Exchange for two consecutive quarters, its ETP will be automatically terminated from the Incentive Program.49 proposed Trading Fee Schedule. proposed NYSE Arca Equities Rule 8.800(e)(1). 45 See proposed NYSE Arca Equities Rule 8.800(e)(2). 46 See proposed NYSE Arca Equities Rule 8.800(e)(3). 47 See proposed NYSE Arca Equities Rule 8.800(e)(4). 48 Id. 49 See proposed NYSE Arca Equities Rule 8.800(e)(5). 44 See proposed Trading Fee Schedule. VerDate Mar<15>2010 F. Withdrawal and Reallocation 43 See 39 Id. 40 See Program LMM Performance Standards.43 PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 35343 Proposed NYSE Arca Equities Rule 8.800(f) describes the LMM reallocation process. If the LMM for a particular ETP does not meet or exceed its Incentive Program LMM Performance Standards for any two of the three months of a quarter or for five months during the pilot period, or chooses to withdraw from the Incentive Program, and at least one other qualified Market Maker has agreed to become the assigned LMM under the Incentive Program, then the ETP will be reallocated and another LMM will be solicited and assigned in accordance with proposed NYSE Arca Equities Rule 8.800(b).50 The reallocation process will be completed no sooner than the end of the current quarter and no later than the end of the following quarter.51 G. Implementation of Pilot The Incentive 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.52 During the pilot period, the Exchange will assess the Incentive Program and may expand the criteria for ETPs that are eligible to participate, for example, to permit issuers to include more than five ETPs that were listed on the Exchange before the pilot period commenced.53 At the end of the pilot period, the Exchange will determine whether to continue or discontinue the Incentive Program or make it permanent.54 During the Incentive Program, the Exchange will provide the Commission with certain market quality reports each month, which will also be posted on the Exchange’s Web site.55 Such reports will include the Exchange’s analysis regarding the Incentive Program and whether it is achieving its goals, as well as market quality data such as (for all ETPs listed as of the date of implementation of the Incentive Program and listed during the pilot period for comparative purposes, including comparable ETPs that are listed on the Exchange but not participating in the Incentive Program): 50 See proposed NYSE Arca Equities Rule 8.800(f). 51 Id. 52 See Notice, supra note 4, at 21688. 53 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. 54 The Commission notes that any proposed continuance of the Program or proposal to make the Program permanent would require a rule filing with the Commission pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder. 55 See Notice, supra note 4, at 21688. E:\FR\FM\12JNN1.SGM 12JNN1 35344 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices volume (CADV and NYSE Arca average daily volume); NBBO bid/ask spread differentials; LMM participation rates; NYSE Arca market share; LMM time spent at the inside; LMM time spent within $0.03 of the inside; percent of time NYSE Arca had the best price with the best size; LMM quoted spread; LMM quoted depth; and Rule 605 statistics (one-month delay).56 These reports will also compare, to the extent practicable, ETPs before and after they are in the Incentive Program, and will further provide data and analysis about the market quality of ETPs that exceed the one million CADV threshold and ‘‘graduate,’’ or are otherwise withdrawn or terminated from, the Incentive Program.57 In connection with the proposal, the Exchange will provide other data and information related to the Incentive Program as may be periodically requested by the Commission.58 In addition, the Exchange states that issuers may utilize ArcaVision to analyze and replicate data on their own.59 H. Surveillance The Exchange represents that its surveillance procedures will be adequate to properly monitor the trading of ETPs participating in the Incentive Program on the Exchange during all trading sessions and to detect and deter violations of Exchange rules and applicable federal securities laws.60 The Exchange states that trading of the ETPs through the Exchange will be subject to FINRA’s surveillance procedures for derivative products,61 and that the Exchange may obtain information via the Intermarket Surveillance Group (‘‘ISG’’) from other 56 Id. See also Amendment No. 2, supra note 6. Amendment No. 2, supra note 6. 58 See Notice, supra note 4, at 21688. 59 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-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 LMM and other Market Makers in each ETP via the ‘‘ArcaVision Market Maker Summary’’ reporting mechanism. Id. 60 See Notice, supra note 4, at 21690. 61 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 21689, n.29 mstockstill on DSK4VPTVN1PROD with NOTICES 57 See VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 exchanges that are members or affiliates of the ISG; and from issuers and public and non-public data sources such as, for example, Bloomberg.62 II. Summary of Comment Letters The Commission received two comment letters in support of the proposed rule change.63 One commenter states that it supports regulatory changes that result in more efficient markets for issuers of ETPs and thus supports the Incentive Program.64 This commenter encourages programs that make it possible for all firms to attempt to list new and innovative securities in the marketplace and have an opportunity to receive adequate support from the market making community, as the commenter believes such developments directly benefit new entrants, existing small competitors, and investors.65 This commenter emphasizes that the program is being implemented as a pilot and thus will be fairly easy for either the Exchange or the Commission to alter or terminate with little or no negative consequences to the marketplace.66 Further, the commenter states its observation that the current market model does not encourage broker/dealers to assume the additional responsibilities of being an LMM and that this proposal should encourage more market makers to become LMMs.67 The commenter suggests that the success of the program should be measured by the increase in the number of firms willing to act as an LMM under the proposal, rather than how tight spreads are in ETPs subject to the pilot.68 Another commenter points out that several academic studies have found that the imposition of market making obligations in exchange for certain privileges tends to enhance market quality, resulting in improved economic efficiency rather than mere wealth transfers.69 This commenter states that, 62 Id. at 21690. USCF Letter and Dolgopolov Letter, supra 63 See note 5. 64 See USCF Letter, supra note 5, at 1. 65 Id. at 2. 66 Id. at 1. 67 Id. at 1–2. 68 Id. at 2. 69 See Dolgopolov Letter, supra note 5, at 3, citing to the following studies: Amber Anand & Daniel G. Weaver, The Value of the Specialist: Empirical Evidence from the CBOE, 9 J. FIN. MKTS. 100, 102– 04 (2006); Rafi Eldor et al., The Contribution of Market Makers to Liquidity and Efficiency of Options Trading in Electronic Markets, 30 J. BANKING & FIN. 2025, 2025, 2029–31 (2006); M. Nimalendran & Giovanni Petrella, Do ThinlyTraded Stocks Benefit from Specialist Intervention?, 27 J. BANKING & FIN. 1823, 1829–30, 1851–52 (2003); Marios A. Panayides, Affirmative Obligations and Market Making with Inventory, 86 PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 to the extent the Incentive Program promotes the adoption of trading obligations that enhance liquidity, it is likely to promote economic efficiency.70 The commenter states that while there may be some concerns that payments to market makers represent subsidies, this should not necessarily be viewed negatively, as studies have shown that the subsidization of liquidity can improve economic welfare and increase ‘‘the size of the pie.’’ 71 The commenter further argues that a direct subsidy in the form of regular payments from issuers/sponsors to market makers, such as the one proposed pursuant to the Incentive Program, may have an advantage over traditional indirect subsidies provided to market makers (e.g., time or information advantages, order flow allocation, etc.), which have historically been subject to abuse, insofar as the fees and payments under the Incentive Program are transparent and flow through and are monitored by the Exchange.72 The commenter further states that the specificity of the eligibility criteria for LMMs in the proposal should mitigate the concern that having just one market maker participant in the Incentive Program would be detrimental to competition.73 Similarly, this commenter recognizes that manipulation is a concern with respect to this proposal, but states that the administration and monitoring of the Incentive Program by the Exchange is a mitigating factor.74 III. Discussion and Commission Findings The Commission has carefully considered the proposed rule change, as modified by Amendment Nos. 1 and 2 thereto, and finds that the proposed rule change, as modified by Amendment J. FIN. ECON. 513, 513 (2007); and Narayan Y. Naik & Pradeep K. Yadav, Trading Costs of Public Investors with Obligatory and Voluntary MarketMaking: Evidence from Market Reforms 1, 17, 35 (Eur. Fin. Ass’n, Annual Conference Paper No. 408, 2003), available at https://ssrn.com/abstract=424982. 70 See Dolgopolov Letter, supra note 5, at 5. 71 See Dolgopolov Letter, supra note 5, at 2, citing the following studies: Kumar Venkataraman & Andrew C. Waisburd, The Value of the Designated Market Maker, 42 J. FIN. & QUANT. ANALYSIS 735 (2007); Kalman J. Cohen et al., The Impact of Designated Market Makers on Security Prices, 1 J. BANKING & FIN. 219, 245 (1977); Jennifer Huang & Jiang Wang, Market Liquidity, Asset Prices, and Welfare, 95 J. FIN. ECON. 107, 109 (2010); Wen Mao & Michael S. Pagano, Specialists as Risk Managers: The Competition Between Intermediated and NonIntermediated Markets, 35 J. BANKING & FIN. 51, 64 (2011); and Johannes A. Skjeltorp & Bernt Arne ;degaard, Why Do Listed Firms Pay for Market Making in Their Own Stock? 16, 30 (May 2012) (unpublished manuscript) (on file with author), available at https://ssrn.com/abstract=1944057). 72 Id. at 2–3. 73 Id. at 4. 74 Id. at 4–5. E:\FR\FM\12JNN1.SGM 12JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices Nos. 1 and 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 is consistent with Section 6(b)(4) of the Act,75 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,76 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.77 The Incentive 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 LMM assignments in such ETPs by offering an alternative fee structure for such LMMs. As proposed by the Exchange, to be eligible to receive quarterly LMM Payments, an LMM participating in the program will be required to comply with the Incentive Program LMM Performance Standards, 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, and subject to certain exceptions as further described above, an LMM participating in the program will be required to comply with the Market-Wide Requirement, and also with either the Time-at-the-Inside Requirement or the Size-Setting NBBO Requirement. In addition, an LMM participating in the Incentive Program must quote at least 2,500 shares of attributable, displayed liquidity within 2% of the NBB or NBO 90% of the time during Core Trading Hours. An LMM will receive an LMM Payment in an amount not to exceed 1⁄3 of the quarterly 75 15 U.S.C. 78f(b)(4). U.S.C. 78f(b)(5). 77 See 15 U.S.C. 78c(f). 76 15 VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 Optional Incentive Fee, less an Exchange administration fee of 5%, for each month the LMM meets or exceeds these heightened performance standards. Thus, the proposal is designed to incentivize LMMs participating in the Incentive Program to quote more often, and in greater quoted size, at the NBBO by conditioning the LMM Payment on whether an LMM meets or exceeds the Incentive Program LMM Performance Standards, including the Market-Wide Requirement, the Time-at-the Inside Requirement or, alternatively, the Size-Setting NBBO Requirement, and the additional requirement that an LMM must quote at least 2,500 shares of attributable, displayed liquidity within 2% of the NBB or NBO 90% of the time during Core Trading Hours. As a result, the proposal has the potential to improve the market quality of the ETPs that participate in the Incentive Program by encouraging LMMs to provide liquidity in such ETPs consistent with the Incentive Program LMM Performance Standards.78 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 bidask 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 Incentive Program, were the potential benefits of the program to occur, should facilitate a more-efficient and less-uncertain trading environment for investors.79 Furthermore, were the 78 The Exchange states that when there is an LMM assigned to a security listed on NYSE Arca, longterm investors trading on the Exchange in the secondary market likely experience enhanced market quality compared to similar securities for which there are no LMMs assigned. See Notice, supra note 4, at 21683. The Exchange further states that in the fourth quarter of 2012, there were 609 ETPs listed on NYSE Arca that traded less than 10,000 shares CADV, and of those ETPs, 567 had LMMs while 42 did not, and the average spread for the ETPs with LMMs was 0.79% and the average quote size was 3,014 shares, while the average spread for the ETPs without LMMs was 11.52% and the average quote size was 1,655 shares. Id. In addition, the Exchange states that during the same time period, there were 410 ETPs listed on NYSE Arca that traded between 10,000 shares and 100,000 shares CADV, and of those ETPs, 396 had LMMs while 14 did not, and the average spread for the ETPs with LMMs was 0.23% and the average quote size was 6,643 shares, while the average spread for ETPs without LMMs was 0.36% and the average quote size was 2,613 shares. Id. The Exchange maintains that these observations are consistent over longer time periods and that there has been a greater variance in market quality for ETPs without LMMs. Id. at 21683–4. 79 Transaction costs are generally defined as the penalty that an investor pays for transacting. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 35345 potential benefits of the Incentive 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. While the Commission believes that the Incentive Program has the potential to improve market quality of the ETPs participating in the program, the Commission is concerned about unintended consequences of the Incentive Program. For example, the Incentive Program could have the potential to distort market forces because the Incentive 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 Incentive Program. While the Commission is mindful of these concerns, the Commission believes, for the reasons described below, that certain aspects of the Incentive 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 Incentive Program and the LMM assigned to each participating ETP; (ii) the date a particular ETP begins participating or ceases participating in the Incentive Program; (iii) the date the Exchange receives written notice of an issuer’s intent to withdraw its ETP from the Incentive Program, or an LMM’s intent to withdraw from its ETP assignment(s) in the Incentive Program, and, in each case, the intended withdrawal date, if 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. E:\FR\FM\12JNN1.SGM 12JNN1 mstockstill on DSK4VPTVN1PROD with NOTICES 35346 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices provided; and (iii) the amount of the Optional Incentive Fee for each ETP. The Exchange also will include on its Web site a fair and balanced description of the Incentive 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 Incentive Program will be required to issue a press release to the public when an ETP commences or ceases participation in the Incentive 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 Incentive Program. This disclosure will help to inform investors and other market participants which ETPs are participating in the Incentive Program, which LMMs are assigned to each ETP, the amount of Optional Incentive Fee an issuer will incur as a result of participating in the Incentive Program, the maximum amount of LMM Payments an LMM could potentially receive from the Exchange under the Incentive 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 Incentive Program and to make informed investment decisions with respect to ETPs.80 Second, the Incentive 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 Incentive Program. Specifically, as proposed, ETPs that are otherwise eligible for the Incentive Program will not be eligible if they have a CADV of more than 1,000,000 shares for three consecutive months. Likewise, the Incentive 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 Incentive Program will be limited to a one-year pilot. The Commission believes that it is important to implement the Incentive Program as a pilot. Operating the Incentive Program as a pilot will allow assessment of whether the Incentive Program is in fact achieving its goal of improving the 80 The concurrent exemptive relief the Commission is issuing today from Rule 102 under Regulation M concerning the Incentive Program also contains additional disclosure requirements. See Securities Exchange Act Release No. 69707 (June 6, 2013), supra note 7. VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 market quality of ETPs by incentivizing Market Makers to take LMM assignments, prior to any proposal or determination to make the program permanent.81 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 Incentive Program has any unintended impact on the participating ETPs, securities not participating in the program, or the market or market participants generally. The Exchange has represented that during the pilot it will submit monthly reports to the Commission about market quality in respect of the Incentive Program and 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 Incentive 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 Incentive Program and listed during the pilot period (for comparative purposes, including comparable ETPs that are listed on the Exchange but not participating in the Incentive Program) such as volume (CADV and NYSE Arca average daily volume), NBBO bid/ask spread differentials, LMM participation rates, NYSE Arca market share, LMM time spent at the inside, LMM time spent within $0.03 of the inside, percent of time NYSE Arca had the best price with the best size, LMM quoted spread, LMM 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 also has represented that it will provide to the Commission and any other data and information related to the Incentive Program as may be periodically requested by the Commission in connection with the proposal. In addition, the Exchange has represented that issuers may utilize ArcaVision to analyze and replicate data on their own.82 This information will help the Commission, the Exchange, 81 The Exchange would be required to file with the Commission any proposal to extend the Incentive 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. 82 See supra note 59 and accompanying text. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 and other interested persons to evaluate whether the Incentive Program has resulted in the intended benefits it is designed to achieve, any unintended consequences resulting from the Incentive Program, and the extent to which the Incentive Program alleviates or aggravates the concerns the Commission has noted, including previously-stated Commission concerns relating to issuer payments to market makers.83 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 Incentive Program. One way for an ETP to be terminated from the Incentive Program is if it exceeds the 1,000,000 CADV threshold included within the rules.84 The Commission recognizes that the Incentive Program may not, in the oneyear pilot period, produce sufficient data (i.e., a large number of ETPs that enter and exit the Incentive 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 Incentive 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 Incentive Program within the pilot period so that the Exchange, the Commission, and other interested persons can assess the impact, if any, of the Incentive Program, including ‘‘graduation’’ of ETPs from the program. Furthermore, the pilot structure of the Incentive Program will provide information to help determine whether any provisions of the Incentive 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 Incentive 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 Incentive 83 See infra notes 86–89 and accompanying text. proposed NYSE Arca Equities Rule 8.800(e)(4). 84 See E:\FR\FM\12JNN1.SGM 12JNN1 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices Program on the ETP market and investors. The Commission has previously expressed concerns relating to payments by issuers to market makers. Financial Industry Regulatory Authority (‘‘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.85 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.86 FINRA Rule 5250 was designed to preserve ‘‘the integrity of the marketplace by ensuring that quotations accurately reflect a brokerdealer’s interest in buying or selling a security.’’ 87 Specifically, in the NASD Rule 2460 Approval Order, the Commission found that the ‘‘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 brokerdealers’ quotations to be based on the factors described above. If payments to brokerdealers 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.’’88 mstockstill on DSK4VPTVN1PROD with NOTICES 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.’’89 The Commission believes that a number of aspects of the Incentive 85 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. 86 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. 87 See id. at 37107. 88 See id. 89 See id. at 37106. VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 Program mitigate the concerns that FINRA Rule 5250 was designed to address. First, the Commission believes that the terms of the Incentive Program are generally objective, clear, and transparent. The standards for the Incentive Program are set forth in proposed NYSE Arca Equities Rule 8.800 and the Exchange’s Listing Fee Schedule and Trading Fee Schedule (further described above) 90 and describe the ETP eligibility criteria, application and assignment process, fee and payment structure, performance standards that an LMM must meet and maintain to secure an LMM Payment, withdrawal and termination standards, and LMM reallocation process. These requirements apply to all ETPs, issuers, and LMMs participating in the Incentive Program. Second, the Exchange also will provide notification on its public Web site regarding the various aspects of the Incentive Program. As discussed above, this disclosure will include: (i) the ETPs participating in the Incentive Program and the LMM assigned to each participating ETP; (ii) the date a particular ETP begins participating or ceases participating in the Incentive Program; (iii) the date the Exchange receives written notice of an issuer’s intent to withdraw its ETP from the Incentive Program, or an LMM’s intent to withdraw from its ETP assignment(s) in the Incentive Program, and, in each case, the intended withdrawal date, if provided; (iv) the amount of the Optional Incentive Fee for each ETP; and (v) a fair and balanced description of the Incentive 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 Incentive Program will be required to issue a press release when an ETP commences or ceases participation in the Incentive 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 Incentive Program. And third, ETPs participating in the Incentive 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 LMMs into the Incentive Program and will manage the payment of the LMM Payment to LMMs from the Exchange’s general revenues. An LMM would not be 90 See PO 00000 supra Section I. Frm 00109 Fmt 4703 Sfmt 4703 35347 entitled to an LMM Payment unless and until it meets or exceed the Incentive Program LMM Performance standards for an assigned ETP, as determined by the Exchange. The Exchange has represented that the Exchange will be responsible for assigning LMMs to particular ETPs, and an issuer’s preference will not be determinative. Furthermore, the Optional Incentive Fees will be paid into the Exchange’s general revenues, and the LMM Payments will be paid out of the Exchange’s general revenues. If an LMM does not meet is Incentive Program LMM Performance Standards for an ETP for a given month, the issuer will not receive any refund or credit from the Exchange. If an issuer does not pay its quarterly installment of the Optional Incentive Fee for a particular ETP to the Exchange on time, the Exchange will continue to credit the LMM for LMM Payments as long as the LMM meets is Incentive Program LMM Performance Standards. 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 91 relating to issuers paying for market making.92 The Commission believes that it is reasonable and consistent with the Act for the Exchange to limit the Incentive 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 Incentive Program to products under the 1,000,000 CADV threshold, to support the Exchange’s stated purpose to ‘‘support the provision 91 See NASD Rule 2460 Approval Order, supra note 86, and supra notes 86–89. 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 Exchange notes that the derivative and open-ended nature of many of the ETPs eligible to participate in the Incentive Program would allow for transparent intrinsic intraday pricing and, as such, the Exchange does not believe such products would lend themselves to the type of market manipulation that FINRA Rule 5250 was designed to prevent. See Notice, supra note 4, at 21688–9. 92 Until the amendment to FINRA Rule 5250 to exempt payments made pursuant to the rules of a national securities exchange from the prohibition on payments by issuers to market makers under FINRA Rule 5250 becomes effective, receipt of payments pursuant to the Incentive Program by an LMM that is a FINRA member would be in violation of FINRA Rule 5250. See supra note 85. E:\FR\FM\12JNN1.SGM 12JNN1 35348 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES of consistent liquidity in lower-volume ETPs listed on the Exchange.’’93 The Commission believes that the Optional Incentive Fees are an equitable allocation of reasonable fees. First, participation in the Incentive Program is voluntary. An entity is free to determine whether it would be economically desirable to pay the Optional Incentive 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 Incentive Program with respect to an ETP, it will have the discretion to designate the amount of the Optional Incentive Fee it will pay, between $10,000 and $40,000. The Optional Incentive Fees will be paid for by either the issuer that has an ETP participating in the Incentive Program or the sponsor associated with such issuer. Thus, the Optional Incentive Fee will be incurred and paid for by an entity that has chosen to participate in, and that may potentially benefit from, the Incentive Program.94 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 93 See Notice, supra note 4, at 21688. In addition, under the proposal an issuer would not be permitted to have more than five existing ETPs (i.e., ETPs that are listed on the Exchange prior to the pilot) participate in the Incentive Program. The Commission believes that it is reasonable and consistent with the Act for the Exchange to limit the number of existing ETPs per issuer that may participate in the Incentive Program during the pilot period, as all issuers participating in the program will be subject to this limit. Furthermore, such limit should allow for the analysis of the impact of the Fixed Incentive Program during the pilot on eligible ETPs participating and not participating in the program, as the number of those existing eligible ETPs that may participate in the program will be limited. 94 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). VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 permitted range of Optional Incentive 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 Optional Incentive 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 LMMs through the Optional Incentive Fee to improve the market quality of ETPs participating in the program. Further, as discussed above, the payment of the Optional Incentive Fee will be transparent to the marketplace, as this information will be disclosed on the Exchange’s Web site. IV. Section 11(d)(1) of the Exchange Act Section 11(d)(1) of the Exchange Act 95 generally prohibits a brokerdealer 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).96 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 the distributor to purchase or redeem the exchange-traded fund’s shares (‘‘Broker-Dealer APs).97 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 95 15 U.S.C. 78k(d)(1). 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). 97 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’’). 96 See, PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 Broker-Dealer AP, nor any natural person associated with the BrokerDealer 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’’ exchangetraded fund shares.98 The Incentive 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 incentive payments to market makers that improve the liquidity of participating issuers’ securities, and thus enhance the market quality for the participating issuers. Incentives payments will be accrued for, among other things, executing purchases and sales on the Exchange. Receipt of the incentive payments by certain broker-dealers will implicate the conditions of the SIA Exemption 99 from the new issue lending restriction in Section 11(d)(1) of the Exchange Act discussed above. The Commission’s view is that the incentive 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 or sell 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).100 This does not mean that broker-dealers cannot participate in the Incentive Program; it merely means they cannot rely on the SIA Exemption 101 while 98 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 Commoditybased 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). 99 See also note 98, supra. 100 Id. 101 Id. E:\FR\FM\12JNN1.SGM 12JNN1 Federal Register / Vol. 78, No. 113 / Wednesday, June 12, 2013 / Notices doing so. Thus, broker-dealers that participate in the Incentive Program will need to comply with Section 11(d)(1) unless there is another applicable exemption. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,102 that the proposed rule change (SR–NYSEArca2013–34), as modified by Amendment Nos. 1 and 2 thereto, be, and it hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.103 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–13886 Filed 6–11–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–69710; File No. SR–MIAX– 2013–26] Self-Regulatory Organizations; Miami International Securities Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the MIAX Fee Schedule June 6, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1, and Rule 19b–4 thereunder,2 notice is hereby given that on May 30, 2013, Miami International Securities Exchange LLC (‘‘MIAX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. mstockstill on DSK4VPTVN1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is filing a proposal to amend its Fee Schedule. The text of the proposed rule change is available on the Exchange’s Web site at https://www.miaxoptions.com/filter/ wotitle/rule_filing, at MIAX’s principal office, and at the Commission’s Public Reference Room. 102 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 103 17 VerDate Mar<15>2010 16:32 Jun 11, 2013 Jkt 229001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to waive all transaction fees in Section 1(a)(i) of the MIAX Options Fee Schedule that apply to Market Makers 3 registered on the Exchange for the period beginning June 3, 2013 and ending July 31, 2013.4 Specifically, during this period, the Exchange will waive the following transaction fees: (i) RMMs $0.23 per contract for standard options or $0.023 for Mini Options; (ii) LMMs $0.20 per contract for standard options or $0.020 for Mini Options; (iii) DLMMs and PLMMs $0.18 per contract for standard options or $0.018 for Mini Options; and (iv) DPLMMs $0.16 per contract for standard options or $0.016 for Mini Options.5 The proposed fee waiver is designed to both enhance the Exchange’s competitiveness with other option exchanges and strengthen its market quality. The Exchange believes that the proposed change would increase both 3 Market Makers may be registered as a Lead Market Maker or as a Registered Market Maker. See Exchange Rule 600(b). Market Makers registered on the Exchange for purposes of the transaction fee waiver and Section 1(a)(i) of the Fee Schedule include: (i) Registered Market Maker (‘‘RMM’’); (ii) Lead Market Maker (‘‘LMM’’); (iii) Directed Order Lead Market Maker (‘‘DLMM’’); (iv) Primary Lead Market Maker (‘‘PLMM’’); and Directed Order Primary Lead Market Maker (‘‘DPLMM’’). See MIAX Options Fee Schedule, Section 1(a)(i)—Market Maker Transaction Fees. 4 The fee waiver will only apply to Market Maker transaction fees in Section 1(a)(i) of the MIAX Options Fee Schedule. See MIAX Options Fee Schedule, Section 1(a)(i)—Market Maker Transaction Fees. The Exchange notes that the proposal will have no effect on other fees and dues that may apply to Market Makers including marketing fees, Options Regulatory Fees, market data, and membership application fees. At the end of the period, Market Maker Transaction Fees will return to the prior fee rates unless the Exchange files another 19b–4 Rule Filing to amend its fees. 5 See MIAX Options Fee Schedule, Section 1(a)(i)—Market Maker Transaction Fees. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 35349 intermarket and intramarket competition by incenting market participants and market makers on other exchanges to register as Market Makers on the Exchange. In addition, the Exchange believes that waiving transaction fees for Market Makers registered on the Exchange will promote tighter bid-ask spreads by Market Makers, and increase the volume of transactions in order to allow the Exchange to compete more effectively with other options exchanges for such transactions. The Exchange notes that, while the proposal is not based on that of another exchange, that fee waivers are often used by exchanges to increase their competitiveness.6 The proposed rule change will take effect on June 3, 2013. Technical Change In addition to the changes above, the Exchange proposes a technical change to the Fee Schedule to delete an obsolete date. Specifically, the Exchange proposes to delete the language ‘‘Effective April 17, 2013’’ from the heading in Section 1 of the Fee Schedule. The Exchange believes that including this date in the Fee Schedule in this location is unnecessary going forward. 2. Statutory Basis The Exchange believes that its proposal to amend its fee schedule is consistent with Section 6(b) of the Act 7 in general, and furthers the objectives of Section 6(b)(4) of the Act 8 in particular, in that it is an equitable allocation of reasonable fees and other charges among Exchange members. The Exchange believes that the proposed fee waiver is fair, equitable and not unreasonably discriminatory. The proposed fee waiver is reasonable because it waives transaction fees for a limited period in order to enable the Exchange to improve its overall competitiveness and strengthen its market quality for all market participants. The proposed fee waiver is fair and equitable and not unreasonably discriminatory because it will apply equally to all Market Makers. All similarly situated Market Makers are subject to the same fee waiver, and access to the Exchange is offered on 6 See e.g., Securities Exchange Act Release Nos. 66427 (February 21, 2012), 77 FR 11608 (February 27, 2012) (SR–BATS–2012–011); 65007 (August 2, 2011), 76 FR 48190 (August 8, 2011) (SR–CBOE– 2011–071); 56862 (November 29, 2007), 72 FR 68918 (December 6, 2007) (SR–CBOE–2007–135); 55833 (May 31, 2007), 72 FR 31358 (June 6, 2007) (SR–ISE–2007–28). 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(4). E:\FR\FM\12JNN1.SGM 12JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 113 (Wednesday, June 12, 2013)]
[Notices]
[Pages 35340-35349]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13886]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69706; File No. SR-NYSEArca-2013-34]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and
2 Thereto, To Implement a One-Year Pilot Program for Issuers of Certain
Exchange-Traded Products Listed on the Exchange

June 6, 2013.
On March 21, 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
implement the NYSE Arca ETP Incentive Program (``Incentive Program''),
a one-year pilot program for issuers of certain exchange-traded
products (``ETPs'') listed on the Exchange. On April 5, 2013, the
Exchange submitted Amendment No. 1 to the proposed rule change, which
replaced and superseded the proposed rule change in its entirety.\3\
The proposed rule change, as modified by Amendment No. 1, was published
for comment in the Federal Register on April 11, 2013.\4\ The
Commission received two comment letters on the proposal.\5\ On May 29,
2013, the Exchange submitted Amendment No. 2 to the proposed rule
change.\6\ This order grants approval of the proposed rule change, as
modified by Amendment Nos. 1 and 2 thereto.\7\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ SR-NYSEArca-2013-34 replaced and superseded SR-NYSEArca-
2012-37, which was withdrawn by the Exchange. See Securities
Exchange Act Release Nos. 66966 (May 11, 2012), 77 FR 29419 (May 17,
2012) and 68616 (Jan. 10, 2013), 78 FR 3482 (Jan. 16, 2013) (SR-
NYSEArca-2012-37).
\4\ See Securities Exchange Act Release No. 69335 (Apr. 5,
2013), 78 FR 21681 (``Notice'').
\5\ See Letter from John T. Hyland, Chief Investment Officer,
United States Commodity Funds LLC, dated Apr. 10, 2013 (``USCF
Letter''), and Letter from Stanislav Dolgopolov, Assistant Adjunct
Professor, UCLA School of Law, dated Apr. 26, 2013 (``Dolgopolov
Letter'').
\6\ In Amendment No. 2, the Exchange proposed to: (i) amend the
rule text to provide that an LMM in the Incentive Program will
remain obligated to satisfy the general requirements of NYSE Arca
Equities Rule 7.23, rather than the general requirements of NYSE
Arca Rule 7.23; (ii) amend the rule text to provide that the
Exchange will disclose on its Web site the date it receives written
notice of an issuer's intent to withdraw its ETP from the Incentive
Program, or an LMM's (as defined herein) intent to withdraw from its
ETP assignment(s) in the Incentive Program, and, in each case, the
intended withdrawal date, if provided; and (iii) clarify that the
Exchange's monthly public report to the Commission relating to the
Incentive Program will (a) compare, to the extent practicable, ETPs
before and after they are in the Incentive Program, and will further
provide data and analysis about the market quality of ETPs that
exceed the one million CADV (as defined herein) threshold and
``graduate,'' or are otherwise withdrawn or terminated from, the
Incentive Program, and (b) include market quality data for
comparable ETPs that are listed on the Exchange but not
participating in the Incentive Program. Amendment No. 2 provides
clarification to the proposed rule change, and because it does not
materially affect the substance of the proposed rule change,
Amendment No. 2 does not require notice and comment.
\7\ Today the Commission also is granting exemptive relief from
Rule 102 under Regulation M concerning the Incentive Program. See
Securities Exchange Act Release No. 69707 (June 6, 2013) (Order
Granting a Limited Exemption from Rule 102 of Regulation M
Concerning the NYSE Arca, Inc.'s Exchange-Traded Product Incentive
Program Pilot Pursuant to Regulation M Rule 102(e)).
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I. Description of the Proposal

As set forth in more detail in the Notice,\8\ the Exchange is
proposing to adopt new NYSE Arca Equities Rule 8.800 and to amend its
fee schedules to set forth the requirements for the Incentive Program,
which will be a one-year pilot program for issuers of certain ETPs
listed on the Exchange.\9\ The Exchange states that the Incentive
Program is designed to enhance the market quality for ETPs by
incentivizing Market Makers \10\ to take Lead Market Maker (``LMM'')
assignments in certain lower volume ETPs by offering an alternative fee
structure for such LMMs that would be funded from the Exchange's
general revenues.\11\ The Exchange states that participation in the
Incentive Program would be entirely voluntary on the part of both LMMs
and issuers, and that the costs of the Incentive Program would be
offset by charging participating issuers non-refundable ``Optional
Incentive Fees,'' which would be credited to the Exchange's general
revenues.\12\
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\8\ See Notice, supra note 4.
\9\ The Exchange currently has two Schedules of Fees and Charges
for Exchange Services; one that is for listings (``Listing Fee
Schedule'') and another that is for trade-related charges (``Trading
Fee Schedule''). To differentiate them, the Exchange also proposes
to change the name of the Listing Fee Schedule to ``Schedule of Fees
and Charges for Exchange Listing Services.''
\10\ A Market Maker is an Equity Trading Permit Holder (``ETP
Holder'') that acts as a Market Maker pursuant to NYSE Arca Equities
Rule 7. See NYSE Arca Equities Rule 1.1(v). An ETP 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).
\11\ See Notice, supra note 4, at 21682.
\12\ Id.
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A. Eligible Products, Issuer Application, and LMM Assignment

An ETP will be eligible to participate in the Incentive Program if
(i) it is listed

[[Page 35341]]

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) with respect to an
ETP that listed on the Exchange before the commencement of the
Incentive Program, the ETP has a consolidated average daily volume
(``CADV'') of one million shares or less for at least the preceding
three months and the issuer of such ETP has not suspended the issuance
or redemption of new shares; \13\ and (iv) it is compliant with
continuing listing standards, if the ETP was added to the Incentive
Program after listing on the Exchange.\14\
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\13\ The Exchange maintains a list of ETPs that have suspended
the issuance of new shares, which is available at https://etp.nyx.com/en/trading-information/us/funds-closed-creation.
\14\ See proposed NYSE Arca Equities Rule 8.800(a).
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An issuer that wishes to have an ETP participate in the Incentive
Program and pay the Exchange an Optional Incentive Fee will be required
to submit a written application in a form prescribed by the Exchange
for each ETP.\15\ 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.\16\ An issuer may not have more than five ETPs
that were listed on the Exchange prior to the pilot period participate
in the Incentive Program.\17\ However, there will be no limitation on
the number of ETPs per issuer listed during the pilot period that can
participate in the program.\18\ In order for its ETP to be eligible to
participate in the Incentive Program, an issuer must be current in all
payments due to the Exchange.\19\
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\15\ See proposed NYSE Arca Equities Rule 8.800(b)(1).
\16\ Id.
\17\ Id.
\18\ See Notice, supra note 4, at 21685.
\19\ See proposed NYSE Arca Equities Rule 8.800(b)(2).
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Proposed NYSE Arca Equities Rule 8.800(b)(3) provides that the
Exchange will communicate the ETP(s) proposed for inclusion in the
Incentive Program on a written solicitation that will be sent to all
qualified LMMs \20\ along with the Optional Incentive Fee the issuer
will pay the Exchange for each ETP. The issuer will determine the
amount of the Optional Incentive Fee for each ETP within a permitted
range that will be set forth in the Exchange's Listing Fee
Schedule.\21\ Proposed NYSE Arca Equities Rule 8.800(b)(4) provides
that after the Exchange provides the written solicitation to LMMs, no
individual associated with an LMM may contact such issuer or the
Exchange staff about that ETP until the assignment of the LMM is made,
except as otherwise permitted in the proposed rules. If more than one
qualified LMM proposes to serve as such for a particular ETP, Exchange
staff will select the LMM pursuant to the provisions set forth in the
proposed rules.\22\ The issuer of the ETP may choose to submit a letter
to the Exchange staff indicating its preference and supporting
justification for a particular LMM, and the Exchange staff may consider
such letter in performing its duty to select an LMM, but such letter
will not be determinative of the particular LMM selected by the
Exchange.\23\ Within two business days after the final LMM interview,
the Exchange staff, in its sole discretion, will select an LMM and
notify the LMM and the issuer.\24\
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\20\ The written solicitation will be included in the ``Green
Sheet,'' which is the common term for an email communication sent by
Exchange staff members to all qualified LMMs prior to an LMM
selection. The Green Sheet includes, among other things, the name,
symbol and description of the ETP(s) as well as the name of the
issuer and a link to the ETP prospectus. A qualified LMM must
complete the application for a specific ETP or group of ETPs. See
Notice, supra note 4, at 21685-6, n.15.
\21\ See proposed NYSE Arca Equities Rule 8.800(b)(3). See also
Section I(C) infra for further discussion of the Optional Incentive
Fee.
\22\ See proposed NYSE Arca Equities Rule 8.800(b)(5). An LMM
may provide material to the Exchange staff, which may include a
corporate overview of the LMM and the trading experience of its
personnel. Exchange staff will meet with representatives of each LMM
if requested by the LMM, and no more than three representatives of
each LMM may participate in the meeting, each of whom must be
employees of the LMM, and one of whom must be the individual trader
of the LMM who is proposed to trade the ETP. If the LMM is
unavailable to appear in person, a telephone interview with that LMM
would be acceptable. Meetings will normally be held at the Exchange,
unless the Exchange agrees that they may be held elsewhere. Id.
\23\ Id.
\24\ Id. Proposed NYSE Arca Equities Rule 8.800(b)(5) is modeled
in part on New York Stock Exchange Rule 103B(III)(B)(1), which
governs Designated Market Maker unit assignments for equities listed
on the NYSE. See Notice, supra note 4, at 21686, n.20.
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B. Disclosure Relating to the Incentive Program

Pursuant to proposed NYSE Arca Equities Rule 8.800(b)(6), the
Exchange will provide notification on a dedicated page on its Web site
regarding: (i) The ETPs participating in the Incentive Program; (ii)
the date a particular ETP begins participating and ceases participating
in the Incentive Program; (iii) the LMM assigned to each ETP
participating in the Incentive Program; (iv) the date the Exchange
receives written notice of an issuer's intent to withdraw its ETP from
the Incentive Program, or an LMM's intent to withdraw from its ETP
assignment(s) in the Incentive Program, and, in each case, the intended
withdrawal date, if provided; and (v) the amount of the Optional
Incentive Fee for each ETP.\25\ This page will also include a fair and
balanced description of the Incentive Program, including: (i) a
description of the Incentive 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 Incentive Program; (iii) the
potential risks that may be attendant with an ETP's participation in
the Incentive Program; (iv) the potential impact resulting from an
ETP's entry into and exit from the Incentive Program; and (v) how
interested parties can request additional information regarding the
Incentive Program and/or the ETPs participating therein.\26\
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\25\ See proposed NYSE Arca Equities Rule 8.800(b)(6). See also
Amendment No. 2, supra note 6.
\26\ See proposed NYSE Arca Equities Rule 8.800(b)(6).
---------------------------------------------------------------------------

Under proposed NYSE Arca Equities Rule 8.800(b)(7), an issuer of an
ETP that is approved to participate in the Incentive Program will be
required to issue a press release to the public when an ETP commences
or ceases participation in the Incentive 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 Incentive Program.\27\ 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

[[Page 35342]]

Exchange's Web site that describes the Incentive Program.\28\
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\27\ See proposed NYSE Arca Equities Rule 8.800(b)(7). 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 Incentive Program, which is optional, cannot be
fully understood until objective observations can be made in the
context of the Incentive 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 4, at 21686, n.21.
\28\ See proposed NYSE Arca Equities Rule 8.800(b)(7). 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 4, at 21686, n.22.
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C. Optional Incentive Fee

The Exchange proposes to amend its Listing Fee Schedule to provide
that the Optional Incentive Fee under NYSE Arca Rule 8.800 may
initially range from $10,000 to $40,000, as determined by the issuer of
an ETP.\29\ The Optional Incentive 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 Incentive Program after the beginning of a quarter.\30\ If
an LMM does not meet its performance standards (as described below) for
an ETP in any given month in such quarter, the issuer would not receive
any refund or credit from the Exchange following the end of the
quarter.\31\ If the ETP has a sponsor, the sponsor may pay the Optional
Incentive Fee to the Exchange.\32\
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\29\ See proposed Listing Fee Schedule. Optional Incentive Fees
paid by an issuer will be credited to the Exchange's general
revenues. An issuer participating in the Incentive Program will
still be required to pay applicable listing and annual fees. See
Notice, supra note 4, at 21686, n.16.
\30\ See proposed Listing Fee Schedule.
\31\ Id.
\32\ 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.
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D. Incentive Program LMM Performance Standards

Proposed NYSE Arca Equities Rule 8.800(c) describes the proposed
Incentive Program LMM performance standards (``Incentive Program LMM
Performance Standards'') that will apply to an LMM for each ETP
participating in the Incentive Program to which it is assigned. An LMM
in the Incentive Program also will remain obligated to satisfy the
general requirements of NYSE Arca Equities Rule 7.23.\33\
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\33\ See proposed NYSE Arca Equities Rule 8.800(c)(1). See also
Amendment No. 2, supra note 6.
---------------------------------------------------------------------------

Pursuant to proposed NYSE Arca Equities Rule 8.800(c)(2), an LMM
will be subject to a ``Market-Wide Requirement.'' Specifically, an LMM
will be required to maintain quotes or orders at the National Best Bid
or Offer (``NBBO'') or better (``Inside'') during the month during Core
Trading Hours in accordance with the following maximum width and
minimum depth thresholds, which are provided in proposed Commentary .01
to Rule 8.800.\34\
---------------------------------------------------------------------------

\34\ See proposed NYSE Arca Equities Rule 8.800(c)(2). Proposed
Commentary .01 to NYSE Arca Equities Rule 8.800 provides that (i)
the spread thresholds will be calculated as the time-weighted
average throughout the trading day and then averaged, by day, across
the month and (ii) the depth thresholds will be calculated as the
average of (a) the average time-weighted bid depth and (b) the
average time-weighted ask depth.

--------------------------------------------------------------------------------------------------------------------------------------------------------
Prices ($)
Daily share volume Quote type Requirement ---------------------------------------------------------------
0-4.99 5-14.99 15-49.99 50 or more
--------------------------------------------------------------------------------------------------------------------------------------------------------
0-4,999.............................. Inside.................. Width (%).............. 15.00 6.00 5.00 4.00
Depth (sh)............. 700 400 300 200
5,000-24,999......................... Inside.................. Width (%).............. 7.00 3.00 2.00 1.50
Depth (sh)............. 700 400 300 200
25,000-74,999........................ Inside.................. Width (%).............. 5.00 1.50 1.00 0.70
Depth (sh)............. 700 400 300 200
75,000-199,999....................... Inside.................. Width (%).............. 3.00 1.00 0.50 0.30
Depth (sh)............. 700 400 300 200
200,000-499,999...................... Inside.................. Width (%).............. 2.00 0.60 0.30 0.20
Depth (sh)............. 700 400 300 200
500,000 or more...................... Inside.................. Width (%).............. 1.00 0.30 0.20 0.10
Depth (sh)............. 2000 1000 500 300
--------------------------------------------------------------------------------------------------------------------------------------------------------

However, the Market-Wide Requirement will not apply to an LMM if these
thresholds are otherwise met by quotes or orders of all market
participants across all markets trading the ETP.\35\
---------------------------------------------------------------------------

\35\ Id.
---------------------------------------------------------------------------

Pursuant to proposed NYSE Arca Equities Rule 8.800(c)(3), an LMM
also will be subject to a NYSE Arca-specific requirement, which can be
satisfied in one of two ways. First, an LMM may satisfy the ``Time-at-
the-Inside Requirement'' under proposed NYSE Arca Equities Rule
8.800(c)(3)(A), pursuant to which an LMM will be required to maintain
quotes or orders on the Exchange at the NBBO or better at least 15% of
the time when quotes may be entered during Core Trading Hours each
trading day, as averaged over the course of a month.\36\ Alternatively,
an LMM may choose to satisfy the ``Size-Setting NBBO Requirement''
under proposed NYSE Arca Equities Rule 8.800(c)(3)(B), pursuant to
which an LMM will be required to maintain ``size-setting'' quotes or
orders on the Exchange, as compared to trading interest on other
markets, at the NBBO or better at least 25% of the time when quotes may
be entered during Core Trading Hours each trading day, as averaged over
the course of a month; provided, however, that the Size-Setting NBBO
Requirement will not apply to an LMM if this threshold is otherwise met
by quotes or orders of other market participants on NYSE Arca.\37\
---------------------------------------------------------------------------

\36\ Proposed Commentary .01 to NYSE Arca Equities Rule 8.800
provides that the Time-at-the-Inside Requirement will be calculated
as the average of (a) the percentage of time the LMM has a bid on
the Exchange at the National Best Bid (``NBB'') and (b) the
percentage of time the LMM has an offer on the Exchange at the
National Best Offer (``NBO'').
\37\ Proposed Commentary .01 to NYSE Arca Equities Rule 8.800
provides that: (i) The Size-Setting NBBO Requirement will be
calculated throughout the trading day and then averaged, by day,
across the month; (ii) quotes and orders of all market participants
across all markets trading the security will be considered when
calculating the Size-Setting NBBO Requirement; (iii) a quote or
order will be considered ``size-setting'' if it is at the NBB or
NBO; (iv) if multiple quotes or orders exist at the same price, the
quote or order with the largest size will be considered ``size-
setting;'' and (v) if multiple quotes or orders exist at the same
price and the same size, the quote or order with the earliest entry
time will be considered ``size-setting.''
---------------------------------------------------------------------------

Finally, under proposed NYSE Arca Equities Rule 8.800(c)(4), for at
least 90% of the time when quotes may be entered during Core Trading
Hours each trading day, as averaged over the course of a month, an LMM
will be required to maintain (A) at least 2,500 shares of attributable,
displayed posted buy liquidity on the Exchange that is priced no more
than 2% away from the NBB for the particular ETP, and (B) at least

[[Page 35343]]

2,500 shares of attributable, displayed posted offer liquidity on the
Exchange that is priced no more than 2% away from the NBO for the
particular ETP.
Proposed Commentary .01 to NYSE Arca Equities Rule 8.800 provides
that only displayed quotes and orders will be considered for purposes
of the Incentive Program LMM Performance Standards.

E. LMM Payment

Proposed NYSE Arca Equities Rule 8.800(d) provides that the
Exchange will credit an LMM for an ``LMM Payment,'' which will be
determined by the Exchange and set forth in the Trading Fee Schedule.
An LMM participating in the Incentive Program would not be entitled to
an LMM Payment unless and until it meets or exceeds the Incentive
Program LMM Performance Standards for an assigned ETP, as determined by
the Exchange.\38\ LMM Payments will be paid by the Exchange from its
general revenues.\39\
---------------------------------------------------------------------------

\38\ See Notice, supra note 4, at 21687.
\39\ Id.
---------------------------------------------------------------------------

The Exchange proposes to amend its Trading Fee Schedule to provide
that at the end of each quarter, the Exchange will credit an LMM an LMM
Payment for each month during such quarter that the LMM meets or
exceeds its Incentive Program LMM Performance Standards for an assigned
ETP. If an LMM does not meet or exceed the Incentive Program LMM
Performance Standards for an assigned ETP for a particular month, or
the ETP is withdrawn from the Incentive Program, then the LMM Payment
will be zero for such month.\40\ The amount of the LMM Payment for a
particular month will not exceed \1/3\ of the quarterly Optional
Incentive Fee, as determined by the issuer, less an Exchange
administration fee of 5%.\41\ LMMs participating in the Fixed Incentive
Program will be subject to the transaction fees and credits applicable
to ETP Holders and Market Makers for transactions in their assigned
ETPs during the quarter instead of the LMM transaction fees and
credits.\42\ If an issuer does not pay its quarterly installments to
the Exchange on time and the ETP continues to be listed, the Exchange
will continue to credit the LMM if the LMM meets its Incentive Program
LMM Performance Standards.\43\
---------------------------------------------------------------------------

\40\ See proposed Trading Fee Schedule.
\41\ Id.
\42\ Id. The Exchange currently provides LMMs with an
opportunity to receive incrementally higher transaction credits and
incur incrementally lower transaction fees (``LMM Rates'') compared
to standard liquidity maker-taker rates (``Standard Rates''). See
Notice, supra note 4, at 21682. LMMs in the Incentive Program would
be subject to the Standard Rates instead of the LMM Rates. Id. at
21687.
\43\ See proposed Trading Fee Schedule.
---------------------------------------------------------------------------

F. Withdrawal and Reallocation

Proposed NYSE Arca Equities Rule 8.800(e) describes the
circumstances for withdrawal from the Incentive Program. First, if an
ETP no longer meets continuing listing standards, suspends the creation
and/or redemption of shares, or liquidates, it will be automatically
withdrawn from the Incentive Program as of the ETP suspension date.\44\
---------------------------------------------------------------------------

\44\ See proposed NYSE Arca Equities Rule 8.800(e)(1).
---------------------------------------------------------------------------

Second, the Exchange, in its discretion, may allow an issuer to
withdraw an ETP from the Incentive Program before the end of the pilot
period if the assigned LMM is unable to meet its Incentive Program LMM
Performance Standards for any two of the three months of a quarter or
for five months during the pilot period and no other qualified ETP
Holder was able to take over the assignment.\45\
---------------------------------------------------------------------------

\45\ See proposed NYSE Arca Equities Rule 8.800(e)(2).
---------------------------------------------------------------------------

Third, an LMM may withdraw from all of its ETP assignments in the
Incentive Program, or the Exchange, in its discretion, may allow an LMM
to withdraw from a particular ETP before the end of the pilot period if
the Exchange determines that there are extraneous circumstances that
prevent the LMM from meeting its Incentive Program LMM Performance
Standards for such ETP that do not affect its other ETP assignments in
the Incentive Program.\46\ In either case, the LMM's ETP(s) will be
reallocated in accordance with proposed NYSE Arca Equities Rule
8.800(f) (described below).
---------------------------------------------------------------------------

\46\ See proposed NYSE Arca Equities Rule 8.800(e)(3).
---------------------------------------------------------------------------

Fourth, if an ETP maintains a CADV of one million shares or more
for three consecutive months, it will be automatically withdrawn from
the Incentive Program within one month thereafter.\47\ 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 Incentive Program one month thereafter.\48\
---------------------------------------------------------------------------

\47\ See proposed NYSE Arca Equities Rule 8.800(e)(4).
\48\ Id.
---------------------------------------------------------------------------

Finally, if the issuer is not current in all payments due to the
Exchange for two consecutive quarters, its ETP will be automatically
terminated from the Incentive Program.\49\
---------------------------------------------------------------------------

\49\ See proposed NYSE Arca Equities Rule 8.800(e)(5).
---------------------------------------------------------------------------

Proposed NYSE Arca Equities Rule 8.800(f) describes the LMM
reallocation process. If the LMM for a particular ETP does not meet or
exceed its Incentive Program LMM Performance Standards for any two of
the three months of a quarter or for five months during the pilot
period, or chooses to withdraw from the Incentive Program, and at least
one other qualified Market Maker has agreed to become the assigned LMM
under the Incentive Program, then the ETP will be reallocated and
another LMM will be solicited and assigned in accordance with proposed
NYSE Arca Equities Rule 8.800(b).\50\ The reallocation process will be
completed no sooner than the end of the current quarter and no later
than the end of the following quarter.\51\
---------------------------------------------------------------------------

\50\ See proposed NYSE Arca Equities Rule 8.800(f).
\51\ Id.
---------------------------------------------------------------------------

G. Implementation of Pilot

The Incentive 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.\52\ During the pilot period, the Exchange will assess
the Incentive Program and may expand the criteria for ETPs that are
eligible to participate, for example, to permit issuers to include more
than five ETPs that were listed on the Exchange before the pilot period
commenced.\53\ At the end of the pilot period, the Exchange will
determine whether to continue or discontinue the Incentive Program or
make it permanent.\54\
---------------------------------------------------------------------------

\52\ See Notice, supra note 4, at 21688.
\53\ 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.
\54\ The Commission notes that any proposed continuance of the
Program or proposal to make the Program permanent would require a
rule filing with the Commission pursuant to Section 19(b) of the
Exchange Act and Rule 19b-4 thereunder.
---------------------------------------------------------------------------

During the Incentive Program, the Exchange will provide the
Commission with certain market quality reports each month, which will
also be posted on the Exchange's Web site.\55\ Such reports will
include the Exchange's analysis regarding the Incentive Program and
whether it is achieving its goals, as well as market quality data such
as (for all ETPs listed as of the date of implementation of the
Incentive Program and listed during the pilot period for comparative
purposes, including comparable ETPs that are listed on the Exchange but
not participating in the Incentive Program):

[[Page 35344]]

volume (CADV and NYSE Arca average daily volume); NBBO bid/ask spread
differentials; LMM participation rates; NYSE Arca market share; LMM
time spent at the inside; LMM time spent within $0.03 of the inside;
percent of time NYSE Arca had the best price with the best size; LMM
quoted spread; LMM quoted depth; and Rule 605 statistics (one-month
delay).\56\ These reports will also compare, to the extent practicable,
ETPs before and after they are in the Incentive Program, and will
further provide data and analysis about the market quality of ETPs that
exceed the one million CADV threshold and ``graduate,'' or are
otherwise withdrawn or terminated from, the Incentive Program.\57\ In
connection with the proposal, the Exchange will provide other data and
information related to the Incentive Program as may be periodically
requested by the Commission.\58\ In addition, the Exchange states that
issuers may utilize ArcaVision to analyze and replicate data on their
own.\59\
---------------------------------------------------------------------------

\55\ See Notice, supra note 4, at 21688.
\56\ Id. See also Amendment No. 2, supra note 6.
\57\ See Amendment No. 2, supra note 6.
\58\ See Notice, supra note 4, at 21688.
\59\ 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 LMM and other Market Makers
in each ETP via the ``ArcaVision Market Maker Summary'' reporting
mechanism. Id.
---------------------------------------------------------------------------

H. Surveillance

The Exchange represents that its surveillance procedures will be
adequate to properly monitor the trading of ETPs participating in the
Incentive Program on the Exchange during all trading sessions and to
detect and deter violations of Exchange rules and applicable federal
securities laws.\60\ The Exchange states that trading of the ETPs
through the Exchange will be subject to FINRA's surveillance procedures
for derivative products,\61\ 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.\62\
---------------------------------------------------------------------------

\60\ See Notice, supra note 4, at 21690.
\61\ 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 21689, n.29
\62\ Id. at 21690.
---------------------------------------------------------------------------

II. Summary of Comment Letters

The Commission received two comment letters in support of the
proposed rule change.\63\ One commenter states that it supports
regulatory changes that result in more efficient markets for issuers of
ETPs and thus supports the Incentive Program.\64\ This commenter
encourages programs that make it possible for all firms to attempt to
list new and innovative securities in the marketplace and have an
opportunity to receive adequate support from the market making
community, as the commenter believes such developments directly benefit
new entrants, existing small competitors, and investors.\65\ This
commenter emphasizes that the program is being implemented as a pilot
and thus will be fairly easy for either the Exchange or the Commission
to alter or terminate with little or no negative consequences to the
marketplace.\66\ Further, the commenter states its observation that the
current market model does not encourage broker/dealers to assume the
additional responsibilities of being an LMM and that this proposal
should encourage more market makers to become LMMs.\67\ The commenter
suggests that the success of the program should be measured by the
increase in the number of firms willing to act as an LMM under the
proposal, rather than how tight spreads are in ETPs subject to the
pilot.\68\
---------------------------------------------------------------------------

\63\ See USCF Letter and Dolgopolov Letter, supra note 5.
\64\ See USCF Letter, supra note 5, at 1.
\65\ Id. at 2.
\66\ Id. at 1.
\67\ Id. at 1-2.
\68\ Id. at 2.
---------------------------------------------------------------------------

Another commenter points out that several academic studies have
found that the imposition of market making obligations in exchange for
certain privileges tends to enhance market quality, resulting in
improved economic efficiency rather than mere wealth transfers.\69\
This commenter states that, to the extent the Incentive Program
promotes the adoption of trading obligations that enhance liquidity, it
is likely to promote economic efficiency.\70\ The commenter states that
while there may be some concerns that payments to market makers
represent subsidies, this should not necessarily be viewed negatively,
as studies have shown that the subsidization of liquidity can improve
economic welfare and increase ``the size of the pie.'' \71\ The
commenter further argues that a direct subsidy in the form of regular
payments from issuers/sponsors to market makers, such as the one
proposed pursuant to the Incentive Program, may have an advantage over
traditional indirect subsidies provided to market makers (e.g., time or
information advantages, order flow allocation, etc.), which have
historically been subject to abuse, insofar as the fees and payments
under the Incentive Program are transparent and flow through and are
monitored by the Exchange.\72\ The commenter further states that the
specificity of the eligibility criteria for LMMs in the proposal should
mitigate the concern that having just one market maker participant in
the Incentive Program would be detrimental to competition.\73\
Similarly, this commenter recognizes that manipulation is a concern
with respect to this proposal, but states that the administration and
monitoring of the Incentive Program by the Exchange is a mitigating
factor.\74\
---------------------------------------------------------------------------

\69\ See Dolgopolov Letter, supra note 5, at 3, citing to the
following studies: Amber Anand & Daniel G. Weaver, The Value of the
Specialist: Empirical Evidence from the CBOE, 9 J. FIN. MKTS. 100,
102-04 (2006); Rafi Eldor et al., The Contribution of Market Makers
to Liquidity and Efficiency of Options Trading in Electronic
Markets, 30 J. BANKING & FIN. 2025, 2025, 2029-31 (2006); M.
Nimalendran & Giovanni Petrella, Do Thinly-Traded Stocks Benefit
from Specialist Intervention?, 27 J. BANKING & FIN. 1823, 1829-30,
1851-52 (2003); Marios A. Panayides, Affirmative Obligations and
Market Making with Inventory, 86 J. FIN. ECON. 513, 513 (2007); and
Narayan Y. Naik & Pradeep K. Yadav, Trading Costs of Public
Investors with Obligatory and Voluntary Market-Making: Evidence from
Market Reforms 1, 17, 35 (Eur. Fin. Ass'n, Annual Conference Paper
No. 408, 2003), available at https://ssrn.com/abstract=424982.
\70\ See Dolgopolov Letter, supra note 5, at 5.
\71\ See Dolgopolov Letter, supra note 5, at 2, citing the
following studies: Kumar Venkataraman & Andrew C. Waisburd, The
Value of the Designated Market Maker, 42 J. FIN. & QUANT. ANALYSIS
735 (2007); Kalman J. Cohen et al., The Impact of Designated Market
Makers on Security Prices, 1 J. BANKING & FIN. 219, 245 (1977);
Jennifer Huang & Jiang Wang, Market Liquidity, Asset Prices, and
Welfare, 95 J. FIN. ECON. 107, 109 (2010); Wen Mao & Michael S.
Pagano, Specialists as Risk Managers: The Competition Between
Intermediated and Non-Intermediated Markets, 35 J. BANKING & FIN.
51, 64 (2011); and Johannes A. Skjeltorp & Bernt Arne
[Oslash]degaard, Why Do Listed Firms Pay for Market Making in Their
Own Stock? 16, 30 (May 2012) (unpublished manuscript) (on file with
author), available at https://ssrn.com/abstract=1944057).
\72\ Id. at 2-3.
\73\ Id. at 4.
\74\ Id. at 4-5.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

The Commission has carefully considered the proposed rule change,
as modified by Amendment Nos. 1 and 2 thereto, and finds that the
proposed rule change, as modified by Amendment

[[Page 35345]]

Nos. 1 and 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 is consistent with Section 6(b)(4)
of the Act,\75\ 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,\76\ 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.\77\
---------------------------------------------------------------------------

\75\ 15 U.S.C. 78f(b)(4).
\76\ 15 U.S.C. 78f(b)(5).
\77\ See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

The Incentive 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 LMM assignments in such ETPs by offering an alternative fee
structure for such LMMs. As proposed by the Exchange, to be eligible to
receive quarterly LMM Payments, an LMM participating in the program
will be required to comply with the Incentive Program LMM Performance
Standards, 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, and
subject to certain exceptions as further described above, an LMM
participating in the program will be required to comply with the
Market-Wide Requirement, and also with either the Time-at-the-Inside
Requirement or the Size-Setting NBBO Requirement. In addition, an LMM
participating in the Incentive Program must quote at least 2,500 shares
of attributable, displayed liquidity within 2% of the NBB or NBO 90% of
the time during Core Trading Hours. An LMM will receive an LMM Payment
in an amount not to exceed \1/3\ of the quarterly Optional Incentive
Fee, less an Exchange administration fee of 5%, for each month the LMM
meets or exceeds these heightened performance standards. Thus, the
proposal is designed to incentivize LMMs participating in the Incentive
Program to quote more often, and in greater quoted size, at the NBBO by
conditioning the LMM Payment on whether an LMM meets or exceeds the
Incentive Program LMM Performance Standards, including the Market-Wide
Requirement, the Time-at-the Inside Requirement or, alternatively, the
Size-Setting NBBO Requirement, and the additional requirement that an
LMM must quote at least 2,500 shares of attributable, displayed
liquidity within 2% of the NBB or NBO 90% of the time during Core
Trading Hours. As a result, the proposal has the potential to improve
the market quality of the ETPs that participate in the Incentive
Program by encouraging LMMs to provide liquidity in such ETPs
consistent with the Incentive Program LMM Performance Standards.\78\
This potential improved market quality, were it to occur, could benefit
investors in the form of enhanced liquidity, narrowed spreads, and
reduced transaction costs.
---------------------------------------------------------------------------

\78\ The Exchange states that when there is an LMM assigned to a
security listed on NYSE Arca, long-term investors trading on the
Exchange in the secondary market likely experience enhanced market
quality compared to similar securities for which there are no LMMs
assigned. See Notice, supra note 4, at 21683. The Exchange further
states that in the fourth quarter of 2012, there were 609 ETPs
listed on NYSE Arca that traded less than 10,000 shares CADV, and of
those ETPs, 567 had LMMs while 42 did not, and the average spread
for the ETPs with LMMs was 0.79% and the average quote size was
3,014 shares, while the average spread for the ETPs without LMMs was
11.52% and the average quote size was 1,655 shares. Id. In addition,
the Exchange states that during the same time period, there were 410
ETPs listed on NYSE Arca that traded between 10,000 shares and
100,000 shares CADV, and of those ETPs, 396 had LMMs while 14 did
not, and the average spread for the ETPs with LMMs was 0.23% and the
average quote size was 6,643 shares, while the average spread for
ETPs without LMMs was 0.36% and the average quote size was 2,613
shares. Id. The Exchange maintains that these observations are
consistent over longer time periods and that there has been a
greater variance in market quality for ETPs without LMMs. Id. at
21683-4.
---------------------------------------------------------------------------

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 Incentive Program, were the potential
benefits of the program to occur, should facilitate a more-efficient
and less-uncertain trading environment for investors.\79\ Furthermore,
were the potential benefits of the Incentive 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.
---------------------------------------------------------------------------

\79\ 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.
---------------------------------------------------------------------------

While the Commission believes that the Incentive Program has the
potential to improve market quality of the ETPs participating in the
program, the Commission is concerned about unintended consequences of
the Incentive Program. For example, the Incentive Program could have
the potential to distort market forces because the Incentive 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 Incentive Program. While the Commission is mindful
of these concerns, the Commission believes, for the reasons described
below, that certain aspects of the Incentive 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 Incentive Program and the LMM assigned to
each participating ETP; (ii) the date a particular ETP begins
participating or ceases participating in the Incentive Program; (iii)
the date the Exchange receives written notice of an issuer's intent to
withdraw its ETP from the Incentive Program, or an LMM's intent to
withdraw from its ETP assignment(s) in the Incentive Program, and, in
each case, the intended withdrawal date, if

[[Page 35346]]

provided; and (iii) the amount of the Optional Incentive Fee for each
ETP. The Exchange also will include on its Web site a fair and balanced
description of the Incentive 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 Incentive Program will be required to
issue a press release to the public when an ETP commences or ceases
participation in the Incentive 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 Incentive Program. This disclosure
will help to inform investors and other market participants which ETPs
are participating in the Incentive Program, which LMMs are assigned to
each ETP, the amount of Optional Incentive Fee an issuer will incur as
a result of participating in the Incentive Program, the maximum amount
of LMM Payments an LMM could potentially receive from the Exchange
under the Incentive 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 Incentive
Program and to make informed investment decisions with respect to
ETPs.\80\
---------------------------------------------------------------------------

\80\ The concurrent exemptive relief the Commission is issuing
today from Rule 102 under Regulation M concerning the Incentive
Program also contains additional disclosure requirements. See
Securities Exchange Act Release No. 69707 (June 6, 2013), supra note
7.
---------------------------------------------------------------------------

Second, the Incentive 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 Incentive Program. Specifically,
as proposed, ETPs that are otherwise eligible for the Incentive Program
will not be eligible if they have a CADV of more than 1,000,000 shares
for three consecutive months. Likewise, the Incentive 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 Incentive Program will be
limited to a one-year pilot. The Commission believes that it is
important to implement the Incentive Program as a pilot. Operating the
Incentive Program as a pilot will allow assessment of whether the
Incentive Program is in fact achieving its goal of improving the market
quality of ETPs by incentivizing Market Makers to take LMM assignments,
prior to any proposal or determination to make the program
permanent.\81\ 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 Incentive 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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\81\ The Exchange would be required to file with the Commission
any proposal to extend the Incentive 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 Incentive Program and 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 Incentive
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 Incentive Program and listed during the pilot period (for
comparative purposes, including comparable ETPs that are listed on the
Exchange but not participating in the Incentive Program) such as volume
(CADV and NYSE Arca average daily volume), NBBO bid/ask spread
differentials, LMM participation rates, NYSE Arca market share, LMM
time spent at the inside, LMM time spent within $0.03 of the inside,
percent of time NYSE Arca had the best price with the best size, LMM
quoted spread, LMM 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 also has represented that it
will provide to the Commission and any other data and information
related to the Incentive Program as may be periodically requested by
the Commission in connection with the proposal. In addition, the
Exchange has represented that issuers may utilize ArcaVision to analyze
and replicate data on their own.\82\ This information will help the
Commission, the Exchange, and other interested persons to evaluate
whether the Incentive Program has resulted in the intended benefits it
is designed to achieve, any unintended consequences resulting from the
Incentive Program, and the extent to which the Incentive Program
alleviates or aggravates the concerns the Commission has noted,
including previously-stated Commission concerns relating to issuer
payments to market makers.\83\
---------------------------------------------------------------------------

\82\ See supra note 59 and accompanying text.
\83\ See infra notes 86-89 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 Incentive Program. One
way for an ETP to be terminated from the Incentive Program is if it
exceeds the 1,000,000 CADV threshold included within the rules.\84\ The
Commission recognizes that the Incentive Program may not, in the one-
year pilot period, produce sufficient data (i.e., a large number of
ETPs that enter and exit the Incentive 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 Incentive 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
Incentive Program within the pilot period so that the Exchange, the
Commission, and other interested persons can assess the impact, if any,
of the Incentive Program, including ``graduation'' of ETPs from the
program.
---------------------------------------------------------------------------

\84\ See proposed NYSE Arca Equities Rule 8.800(e)(4).
---------------------------------------------------------------------------

Furthermore, the pilot structure of the Incentive Program will
provide information to help determine whether any provisions of the
Incentive 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 Incentive 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 Incentive

[[Page 35347]]

Program on the ETP market and investors.
The Commission has previously expressed concerns relating to
payments by issuers to market makers. Financial Industry Regulatory
Authority (``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.\85\
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.\86\ 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.'' \87\ Specifically, in the NASD Rule
2460 Approval Order, the Commission found that the

``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.''\88\
---------------------------------------------------------------------------

\85\ 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.
\86\ 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.
\87\ See id. at 37107.
\88\ 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.''\89\
---------------------------------------------------------------------------

\89\ See id. at 37106.
---------------------------------------------------------------------------

The Commission believes that a number of aspects of the Incentive
Program mitigate the concerns that FINRA Rule 5250 was designed to
address. First, the Commission believes that the terms of the Incentive
Program are generally objective, clear, and transparent. The standards
for the Incentive Program are set forth in proposed NYSE Arca Equities
Rule 8.800 and the Exchange's Listing Fee Schedule and Trading Fee
Schedule (further described above) \90\ and describe the ETP
eligibility criteria, application and assignment process, fee and
payment structure, performance standards that an LMM must meet and
maintain to secure an LMM Payment, withdrawal and termination
standards, and LMM reallocation process. These requirements apply to
all ETPs, issuers, and LMMs participating in the Incentive Program.
---------------------------------------------------------------------------

\90\ See supra Section I.
---------------------------------------------------------------------------

Second, the Exchange also will provide notification on its public
Web site regarding the various aspects of the Incentive Program. As
discussed above, this disclosure will include: (i) the ETPs
participating in the Incentive Program and the LMM assigned to each
participating ETP; (ii) the date a particular ETP begins participating
or ceases participating in the Incentive Program; (iii) the date the
Exchange receives written notice of an issuer's intent to withdraw its
ETP from the Incentive Program, or an LMM's intent to withdraw from its
ETP assignment(s) in the Incentive Program, and, in each case, the
intended withdrawal date, if provided; (iv) the amount of the Optional
Incentive Fee for each ETP; and (v) a fair and balanced description of
the Incentive 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 Incentive Program
will be required to issue a press release when an ETP commences or
ceases participation in the Incentive 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 Incentive Program.
And third, ETPs participating in the Incentive 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 LMMs into the Incentive Program and will manage the
payment of the LMM Payment to LMMs from the Exchange's general
revenues. An LMM would not be entitled to an LMM Payment unless and
until it meets or exceed the Incentive Program LMM Performance
standards for an assigned ETP, as determined by the Exchange. The
Exchange has represented that the Exchange will be responsible for
assigning LMMs to particular ETPs, and an issuer's preference will not
be determinative. Furthermore, the Optional Incentive Fees will be paid
into the Exchange's general revenues, and the LMM Payments will be paid
out of the Exchange's general revenues. If an LMM does not meet is
Incentive Program LMM Performance Standards for an ETP for a given
month, the issuer will not receive any refund or credit from the
Exchange. If an issuer does not pay its quarterly installment of the
Optional Incentive Fee for a particular ETP to the Exchange on time,
the Exchange will continue to credit the LMM for LMM Payments as long
as the LMM meets is Incentive Program LMM Performance Standards. 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 \91\ relating to issuers paying
for market making.\92\
---------------------------------------------------------------------------

\91\ See NASD Rule 2460 Approval Order, supra note 86, and supra
notes 86-89. 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 Exchange notes that the derivative and
open-ended nature of many of the ETPs eligible to participate in the
Incentive Program would allow for transparent intrinsic intraday
pricing and, as such, the Exchange does not believe such products
would lend themselves to the type of market manipulation that FINRA
Rule 5250 was designed to prevent. See Notice, supra note 4, at
21688-9.
\92\ Until the amendment to FINRA Rule 5250 to exempt payments
made pursuant to the rules of a national securities exchange from
the prohibition on payments by issuers to market makers under FINRA
Rule 5250 becomes effective, receipt of payments pursuant to the
Incentive Program by an LMM that is a FINRA member would be in
violation of FINRA Rule 5250. See supra note 85.
---------------------------------------------------------------------------

The Commission believes that it is reasonable and consistent with
the Act for the Exchange to limit the Incentive 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 Incentive Program
to products under the 1,000,000 CADV threshold, to support the
Exchange's stated purpose to ``support the provision

[[Page 35348]]

of consistent liquidity in lower-volume ETPs listed on the
Exchange.''\93\
---------------------------------------------------------------------------

\93\ See Notice, supra note 4, at 21688. In addition, under the
proposal an issuer would not be permitted to have more than five
existing ETPs (i.e., ETPs that are listed on the Exchange prior to
the pilot) participate in the Incentive Program. The Commission
believes that it is reasonable and consistent with the Act for the
Exchange to limit the number of existing ETPs per issuer that may
participate in the Incentive Program during the pilot period, as all
issuers participating in the program will be subject to this limit.
Furthermore, such limit should allow for the analysis of the impact
of the Fixed Incentive Program during the pilot on eligible ETPs
participating and not participating in the program, as the number of
those existing eligible ETPs that may participate in the program
will be limited.
---------------------------------------------------------------------------

The Commission believes that the Optional Incentive Fees are an
equitable allocation of reasonable fees. First, participation in the
Incentive Program is voluntary. An entity is free to determine whether
it would be economically desirable to pay the Optional Incentive 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 Incentive Program with respect to an ETP, it will
have the discretion to designate the amount of the Optional Incentive
Fee it will pay, between $10,000 and $40,000. The Optional Incentive
Fees will be paid for by either the issuer that has an ETP
participating in the Incentive Program or the sponsor associated with
such issuer. Thus, the Optional Incentive Fee will be incurred and paid
for by an entity that has chosen to participate in, and that may
potentially benefit from, the Incentive Program.\94\ 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 Optional Incentive Fees will be the same for any issuer
wishing to participate in the program.
---------------------------------------------------------------------------

\94\ 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).
---------------------------------------------------------------------------

The Commission also believes that allowing the issuer some
discretion when determining the amount of the Optional Incentive 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 LMMs through the Optional Incentive Fee to improve the
market quality of ETPs participating in the program. Further, as
discussed above, the payment of the Optional Incentive Fee will be
transparent to the marketplace, as this information will be disclosed
on the Exchange's Web site.

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

Section 11(d)(1) of the Exchange Act \95\ 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).\96\
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\95\ 15 U.S.C. 78k(d)(1).
\96\ 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 the
distributor to purchase or redeem the exchange-traded fund's shares
(``Broker-Dealer APs).\97\ 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.\98\
---------------------------------------------------------------------------

\97\ 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'').
\98\ 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 Incentive 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 incentive payments to market makers that
improve the liquidity of participating issuers' securities, and thus
enhance the market quality for the participating issuers. Incentives
payments will be accrued for, among other things, executing purchases
and sales on the Exchange. Receipt of the incentive payments by certain
broker-dealers will implicate the conditions of the SIA Exemption \99\
from the new issue lending restriction in Section 11(d)(1) of the
Exchange Act discussed above. The Commission's view is that the
incentive 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 or sell 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).\100\ This does not mean that broker-dealers cannot
participate in the Incentive Program; it merely means they cannot rely
on the SIA Exemption \101\ while

[[Page 35349]]

doing so. Thus, broker-dealers that participate in the Incentive
Program will need to comply with Section 11(d)(1) unless there is
another applicable exemption.
---------------------------------------------------------------------------

\99\ See also note 98, supra.
\100\ Id.
\101\ Id.
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V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\102\ that the proposed rule change (SR-NYSEArca-2013-34), as
modified by Amendment Nos. 1 and 2 thereto, be, and it hereby is,
approved.
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\102\ 15 U.S.C. 78s(b)(2).
\103\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\103\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13886 Filed 6-11-13; 8:45 am]
BILLING CODE 8011-01-P

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