Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change To Adopt NYSE Arca Equities Rule 8.900, Which Permits the Listing and Trading of Managed Portfolio Shares, and To List and Trade Shares of the ActiveShares Large-Cap Fund, ActiveShares Mid-Cap Fund, and ActiveShares Multi-Cap Fund Pursuant to That Rule, 64436-64444 [2014-25714]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 209 (Wednesday, October 29, 2014)]
[Notices]
[Pages 64436-64444]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-25714]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73424; File No. SR-NYSEArca-2014-10]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving a Proposed Rule Change To Adopt NYSE Arca Equities Rule 
8.900, Which Permits the Listing and Trading of Managed Portfolio 
Shares, and To List and Trade Shares of the ActiveShares Large-Cap 
Fund, ActiveShares Mid-Cap Fund, and ActiveShares Multi-Cap Fund 
Pursuant to That Rule

October 24, 2014.
    On February 7, 2014, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange 
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
adopt new NYSE Arca Equities Rule 8.900, which would govern the listing 
and trading of Managed Portfolio Shares, and to list and trade shares 
of the ActiveShares Large-Cap Fund, ActiveShares Mid-Cap Fund, and 
ActiveShares Multi-Cap Fund (each a ``Fund'' and, collectively, 
``Funds'') under proposed NYSE Arca Equities Rule 8.900.\3\ The 
proposed rule change was published for comment in the Federal Register 
on February 26, 2014.\4\ The Commission received one comment letter on 
the proposed rule change during the initial comment period.\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that Precidian ETFs Trust, which would 
be the issuer of the Funds, filed an Application for an Order under 
Section 6(c) of the 1940 Act for exemptions from various provisions 
of the 1940 Act and rules thereunder (File No. 812-14116), dated 
July 18, 2013 (``Exemptive Application''). The Commission published 
notice of this application (``Notice of Application for Exemptive 
Relief'') on October 21, 2014. See Investment Company Act Release 
No. 31300 (Oct. 21, 2014) (Precidian ETFs Trust, et al.; Notice of 
Application).
    \4\ See Securities Exchange Act Release No. 71588 (Feb. 20, 
2014), 79 FR 10848 (``Notice''), available at https://www.sec.gov/rules/sro/nysearca/2014/34-71588.pdf.
    \5\ See Letter from Gary L. Gastineau, President, ETF 
Consultants.com, Inc., to Elizabeth M. Murphy, Secretary, Commission 
(Mar. 18, 2014) (``Gastineau Letter''). All comments on this 
proposal (see also notes 8 and 11, infra) are available at https://www.sec.gov/comments/sr-nysearca-2014-10/nysearca201410.shtml.
---------------------------------------------------------------------------

    On April 7, 2014, pursuant to Section 19(b)(2) of the Exchange 
Act,\6\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\7\ The Commission received two additional 
comment letters on the proposed rule change, including a letter from 
the Exchange in support of its proposal.\8\ On May 27, 2014, the 
Commission instituted proceedings under Section 19(b)(2)(B) of the 
Exchange Act \9\ to determine whether to approve or disapprove the 
proposed rule change.\10\ The Commission

[[Page 64437]]

received a second letter from one of the commenters.\11\ On August 22, 
2014, the Commission designated a longer period for Commission action 
on the proposed rule change.\12\ The Commission subsequently received 
an additional comment letter regarding the proposed rule change.\13\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 71895, 79 FR 20285 
(Apr. 11, 2014). The Commission designated a longer period within 
which to take action on the proposed rule change and designated May 
27, 2014, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \8\ See Letter from Dennis J. DeCore, Former Co-Head U.S. Index 
Arbitrage (1997-2007), Nomura Securities, to Elizabeth M. Murphy, 
Secretary, Commission (Apr. 8, 2014) (``DeCore Letter''); Letter 
from Martha Redding, Chief Counsel and Assistant Corporate 
Secretary, NYSE Euronext, to Secretary, Commission (May 14, 2014) 
(``Response Letter'').
    \9\ 15 U.S.C. 78s(b)(2)(B).
    \10\ See Securities Exchange Act Release No. 72255, 79 FR 31362 
(June 2, 2014). Specifically, the Commission instituted proceedings 
to allow for additional analysis of the proposed rule change's 
consistency with Section 6(b)(5) of the Exchange Act, which 
requires, among other things, that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' See id., 79 FR at 31368 (text accompanying n.86).
    \11\ See Letter from Gary L. Gastineau, President, ETF 
Consultants.com, Inc., to Elizabeth M. Murphy, Secretary, Commission 
(June 23, 2014) (``Second Gastineau Letter'').
    \12\ See Securities Exchange Act Release No. 72901, 79 FR 51380 
(Aug. 28, 2014) (designating October 24, 2014 as the date by which 
the Commission must either approve or disapprove the proposed rule 
change).
    \13\ See Letter from Reginald M. Browne, Senior Managing 
Director--ETF Group, Cantor Fitzgerald & Co, to Mary Jo White, 
Chair, Commission (Oct. 20, 2014) (``Browne Letter'').
---------------------------------------------------------------------------

    This Order disapproves the proposed rule change.

I. Description of the Proposal

    The Exchange proposes: (1) To adopt new NYSE Arca Equities Rule 
8.900 to permit the listing and trading, or trading pursuant to 
unlisted trading privileges (``UTP''), of Managed Portfolio Shares, 
which are securities issued by an actively managed open-end investment 
management company; and (2) to list and trade shares (``Shares'') of 
the Funds under proposed NYSE Arca Equities Rule 8.900.\14\ The 
discussion below summarizes the Exchange's proposal, details of which 
are described in the Notice.\15\
---------------------------------------------------------------------------

    \14\ The Exchange also proposes to amend NYSE Arca Equities Rule 
7.34(a)(4)(A) (Trading Sessions) to include Managed Portfolio Shares 
in the trading halt provision for shares traded pursuant to UTP 
during the Exchange's Opening Session.
    \15\ See Notice, supra note 4. Additional information regarding 
the Precidian ETFs Trust and the Shares, including investment 
strategies, risks, creation and redemption procedures, fees, 
portfolio holdings disclosure policies, distributions, and taxes is 
available in the registration statement filed by the Precidian ETFs 
Trust on January 22, 2014, on Form N-1A under the Securities Act of 
1933 and under the Investment Company Act of 1940 (``1940 Act'') 
relating to the Funds (File Nos. 333-171987 and 811-22524) 
(``Registration Statement'').
---------------------------------------------------------------------------

A. Proposed Listing Rules

    The Exchange's proposal defines the term ``Managed Portfolio 
Share'' as a security that (a) is issued by a registered investment 
company (``Investment Company'') organized as an open-end management 
investment company or similar entity that invests in a portfolio of 
securities selected by the Investment Company's investment adviser 
consistent with the Investment Company's investment objectives and 
policies; (b) is issued in any number of shares for a cash amount equal 
to the next determined net asset value (``NAV''); (c) may be redeemed 
for cash by any Retail Investor (as defined below) in any size less 
than a Redemption Unit (as defined below) for a cash amount equal to 
the next determined NAV; and (d) when aggregated in a number of shares 
equal to a Redemption Unit or multiples thereof, may be redeemed by or 
through an Authorized Participant,\16\ with payment to be made, through 
a blind trust established for the Authorized Participant's benefit, in 
the form of securities, cash, or both with a value equal to the next 
determined NAV.
---------------------------------------------------------------------------

    \16\ Certain large market participants, typically broker-
dealers, can become ``Authorized Participants'' with respect to the 
Funds. Each Authorized Participant would enter into a contractual 
relationship with a Fund or Funds, allowing it to engage in 
redemptions of Shares directly with the issuer.
---------------------------------------------------------------------------

    While funds issuing Managed Portfolio Shares would be actively 
managed and, to that extent, would be similar to Managed Fund Shares 
(which are actively managed funds listed and traded under NYSE Arca 
Equities Rule 8.600), Managed Portfolio Shares differ from Managed Fund 
Shares in the following significant respects.
     In contrast to Managed Fund Shares, for which a 
``Disclosed Portfolio'' is required to be disseminated at least once 
daily,\17\ the portfolio for an issue of Managed Portfolio Shares would 
be disclosed once quarterly in accordance with disclosure requirements 
otherwise applicable to open-end investment companies registered under 
the 1940 Act.\18\
---------------------------------------------------------------------------

    \17\ NYSE Arca Equities Rule 8.600(c)(2) defines the term 
``Disclosed Portfolio'' as the ``identities and quantities of the 
securities and other assets held by the Investment Company that will 
form the basis for the Investment Company's calculation of net asset 
value at the end of the business day.'' NYSE Arca Equities Rule 
8.600(d)(2)(B)(i) requires that the Disclosed Portfolio be 
disseminated at least once daily and that it be made available to 
all market participants at the same time.
    \18\ A mutual fund is required to file with the Commission its 
complete portfolio schedules for the second and fourth fiscal 
quarters on Form N-SAR under the 1940 Act, and to file its complete 
portfolio schedules for the first and third fiscal quarters on Form 
N-Q under the 1940 Act, within 60 days of the end of the quarter. 
Form N-Q requires funds to file the same schedules of investments 
that are required in annual and semi-annual reports to shareholders. 
These forms are available to the public on the Commission's Web site 
at https://www.sec.gov/.
---------------------------------------------------------------------------

     In connection with the redemption of shares in Redemption 
Unit \19\ size, the in-kind delivery of any portfolio securities would 
generally be effected through a blind trust for the benefit of the 
redeeming Authorized Participant, and the blind trust would liquidate 
the portfolio securities pursuant to standing instructions from the 
Authorized Participant without disclosing the identity of those 
securities to the Authorized Participant.
---------------------------------------------------------------------------

    \19\ A ``Redemption Unit'' is a specified number of Managed 
Portfolio Shares used for determining whether a retail investor may 
redeem for cash. According to the Notice, a Redemption Unit is 
currently 50,000 Shares.
---------------------------------------------------------------------------

     Investors, including ``Retail Investors,'' \20\ would be 
able to purchase shares either (a) in the secondary markets (e.g., the 
Exchange) at market prices or (b) for cash directly from a Fund in any 
amount on any day a fund determines its NAV, as described in more 
detail below.
---------------------------------------------------------------------------

    \20\ Under the proposal, a ``Retail Investor'' is defined as (i) 
a natural person; (ii) a trust established exclusively for the 
benefit of a natural person or a group of related family members; or 
(iii) a tax deferred retirement plan where investments are selected 
by a natural person purchasing for its own account.
---------------------------------------------------------------------------

     As with traditional open-end investment companies, Retail 
Investors would be able to redeem shares for cash directly from a fund 
on any day and in any size less than a Redemption Unit at the fund's 
NAV.\21\
---------------------------------------------------------------------------

    \21\ With respect to the three Funds that are the subject of the 
proposal, the Exchange has represented that fees for creations and 
redemptions by Retail Investors would not exceed two percent, in 
accordance with the requirements of Rule 22c-2 under the 1940 Act.
---------------------------------------------------------------------------

    For each series of Managed Portfolio Shares, an estimated value, 
defined in the proposed rules as the ``Portfolio Indicative Value'' 
(``PIV''), that reflects an estimated intraday value of a fund's 
portfolio, based on the last market price or last sale price, would be 
disseminated. The PIV would be based upon all of a Fund's holdings as 
of the close of the prior business day and would be widely disseminated 
by one or more major market data vendors at least every 15 seconds 
during the Exchange's Core Trading Session (normally, 9:30 a.m. to 4:00 
p.m., Eastern Time).
    The Exchange's proposal provides that the Exchange would file 
separate proposals under Section 19(b) of the Exchange Act before 
listing and trading any additional series of Managed Portfolio Shares.

B. Description of the Funds

    The portfolio for each Fund would consist primarily of stocks in 
the Russell 3000 Index (which consists of stocks included in the 
Russell 1000 Index and the Russell 2000 Index) and shares issued by 
other exchange-traded funds (``ETFs) that invest primarily in shares of 
issuers in the Russell 3000 Index. The

[[Page 64438]]

ActiveShares Large Cap Fund would invest primarily in securities 
included in the Russell 1000 Index and in ETFs that primarily invest in 
stocks in the Russell 1000 Index. The ActiveShares Mid-Cap Fund would 
invest primarily in securities that are included in the Russell 2000 
Index and in ETFs that primarily invest in stocks in the Russell 2000 
Index. And the ActiveShares Multi-Cap Fund would invest primarily in 
securities included in the Russell 3000 Index and in ETFs that 
primarily invest in stocks in the Russell 3000 Index. All exchange-
listed equity securities in which the Funds would invest would be 
listed and traded on a U.S. national securities exchange.
    Each Fund would target an overall net equity market exposure of 
between 70% and 130% of the Fund's assets. Each Fund would purchase 
securities that its portfolio managers believed to be undervalued and 
would sell short securities that the portfolio managers believed to be 
overvalued. Under normal market conditions,\22\ each Fund's net long 
equity market exposure would not exceed 130%, and its net short equity 
market exposure would not exceed 30%, but the portfolio managers might 
at times exceed these percentages.
---------------------------------------------------------------------------

    \22\ The terms ``normally'' and ``under normal market 
conditions'' would include, but not be limited to, the absence of 
extreme volatility or trading halts in the equity markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
events such as systems failure, natural or man-made disaster, act of 
God, armed conflict, act of terrorism, riot or labor disruption, or 
any similar intervening circumstance.
---------------------------------------------------------------------------

    Other Investments. While each Fund, under normal market conditions, 
would invest primarily in stocks included in the Russell 3000 Index and 
ETFs, as described above, each Fund would be able to invest its 
remaining assets in repurchase agreements and reverse repurchase 
agreements, high-quality money market instruments, and the securities 
of other investment companies to the extent allowed by law.

II. Summary of the Comments Received

    As noted above, the Commission received two letters from the same 
commenter opposing the proposed rule change,\23\ two letters from 
commenters supporting the proposal, and a letter from the Exchange 
responding to the opposing commenter's objections. Comments on the 
proposal raised two broad issues--(1) the effectiveness of arbitrage in 
the absence of daily portfolio disclosure, and (2) the benefits and 
drawbacks of the Funds' unique creation and redemption processes--as 
well as a number of other issues that are narrower in scope.
---------------------------------------------------------------------------

    \23\ This commenter notes that he has a retained economic 
interest in a product that may be competitive with Managed Portfolio 
Shares and states that his views on the Exchange's filing ``may be 
considered subject to a conflict of interest.'' Gastineau Letter, 
supra note 5, at 1, n.1. The Exchange asserts that the concerns of 
the opposing commenter are driven by competitive motives and that 
these concerns should not affect the Commission's decision to 
approve or disapprove the proposed rule change. See Response Letter, 
supra note 8, at 5. Instead, according to the Exchange, different 
proposals to list and trade actively managed EFTs without daily 
portfolio disclosure should be assessed on their individual merits 
and risks. See id. The opposing commenter asserts that the 
Commission should not ignore his comments just because they are 
raised by a competitor. See Second Gastineau Letter, supra note 11, 
at 7. The opposing commenter argues that the Commission should 
consider legitimate issues raised by any credible source, and he 
asserts that his comments are made in the public interest and, to 
the best of his ability, are not influenced by any conflict. See id.
---------------------------------------------------------------------------

A. The Effectiveness of Arbitrage in the Absence of Daily Portfolio 
Disclosure

    The opposing commenter predicts that, compared to most existing 
ETFs, the Shares would probably trade with significantly wider bid-ask 
spreads, with more variable premiums and discounts, or with both, 
because of what the opposing commenter characterizes as the 
unreliability of the Funds' proposed method for ensuring secondary 
market trading efficiency.\24\ The opposing commenter states that the 
Funds' market makers would have only indirect, and likely imperfect, 
information about Fund holdings.\25\ As a result, according to the 
opposing commenter, effectively arbitraging the Funds would be 
significantly more difficult than the arbitrage for most existing 
foreign ETFs.\26\
---------------------------------------------------------------------------

    \24\ See Gastineau Letter, supra note 5, at 6.
    \25\ See id. at 8.
    \26\ See id.
---------------------------------------------------------------------------

    The opposing commenter argues that there is no support for the 
Exchange's contention that existing ETFs holding portfolios of foreign 
securities, such as index-based ETFs holding Asian stocks, have 
demonstrated efficient pricing characteristics even though they do not 
provide opportunities for riskless arbitrage transactions during much 
of the trading day.\27\ The opposing commenter also cites a draft 
academic working paper for the propositions that market trading 
efficiency varies significantly by type and size of ETF; that funds 
with high share trading volumes, liquid underlying holdings, and 
efficient arbitrage mechanisms trade with relatively tight bid-ask 
spreads and more stable premiums and discounts; and that funds lacking 
these characteristics generally trade with wider spreads and more 
variable premiums and discounts.\28\
---------------------------------------------------------------------------

    \27\ See id.
    \28\ See id. (citing Antti Petajisto, Inefficiencies in the 
Pricing of Exchange-Traded Funds (Working Paper Sept. 20, 2013 
(``Petajisto Study'')).
---------------------------------------------------------------------------

    Another commenter predicts that trading spreads in Managed 
Portfolio Shares would not be as ``tight'' as trading spreads in the 
SPY or QQQ (where futures, options, and equity portfolios can be used 
as a pure hedge), but that a frequent update of the intraday indicative 
value would allow market maker spreads to be reasonable.\29\ A third 
commenter, who is a market maker in ETFs, states that, in his 
professional opinion and after significant analysis, ``given a clearly 
defined investment objective within a known universe of securities, 
efficient markets can and will be made in ETFs utilizing Precidian's 
Blind Trust Structure.'' \30\
---------------------------------------------------------------------------

    \29\ See DeCore Letter, supra note 8, at 1.
    \30\ See Browne Letter, supra note 13, at 2.
---------------------------------------------------------------------------

    The Exchange responds to the opposing commenter that, as set forth 
in the Notice, market makers have indicated that the available 
information regarding the Shares would be sufficient for arbitrage and 
hedging purposes.\31\ Additionally, the Exchange states that, based on 
discussions with market makers, it expects that market makers would 
agree to act as lead market makers (``LMMs'') in the Shares and 
believes that no market maker would accept an LMM assignment if it were 
not entirely comfortable in its ability to hedge its positions.\32\ The 
Exchange argues that the opposing commenter offers no direct support 
for his doubts regarding efficient secondary market trading, and the 
Exchange asserts that these LMMs are uniquely suited to prospectively 
assess the effectiveness of arbitrage in the shares.\33\
---------------------------------------------------------------------------

    \31\ See Response Letter, supra note 8, at 2.
    \32\ See id.
    \33\ See id.
---------------------------------------------------------------------------

    Regarding the Exchange's assertion that market makers will be able 
to make efficient and liquid markets priced near the PIV as long as an 
accurate PIV is disseminated every 15 seconds and market makers have 
knowledge of a fund's means of achieving its investment objective, the 
opposing commenter states that, for a number of reasons, the 
dissemination of a PIV by the Funds is likely to prove ineffective in 
ensuring alignment of secondary market prices for the Shares with the 
values of the underlying portfolios.\34\ The opposing commenter asserts 
that, during periods of rapid market movement, the use of last-sale 
prices to calculate a PIV, coupled with the

[[Page 64439]]

dissemination of the PIV only every 15 seconds, would mean that the PIV 
would be a lagging indicator of actual portfolio values.\35\ 
Additionally, the opposing commenter asserts that the PIV may reflect 
clearly erroneous values for securities that have not yet opened for 
trading on a particular business day or that are subject to an intraday 
interruption in trading.\36\ The opposing commenter also criticizes the 
Exchange's representation that the adviser and calculation agent would 
use ``commercially reasonable efforts'' to calculate the PIV, arguing 
that this is a substantially lower standard of care than that applying 
to NAV calculations for ETFs and mutual funds.\37\ The opposing 
commenter further asserts that the proposal does not provide that any 
entity would stand behind a Fund's PIV to ensure timeliness and 
accuracy.\38\
---------------------------------------------------------------------------

    \34\ See Gastineau Letter, supra note 5, at 2-3.
    \35\ See id. at 10.
    \36\ See id.
    \37\ See id. at 10-11.
    \38\ See id. at 11.
---------------------------------------------------------------------------

    The opposing commenter predicts that frequent PIV errors would 
cause ``erroneous share trades'' to be executed.\39\ The opposing 
commenter states that the proposal does not address whether PIV errors 
and related erroneous trades would be detected by the Exchange, whether 
such trades would be cancelled, or whether the Exchange would apply a 
materiality standard for cancellations.\40\ The opposing commenter 
argues that, as a condition of approval, the Exchange should be 
required to monitor the timeliness and accuracy of PIV dissemination 
and to implement procedures to address trades when an erroneous PIV has 
been disseminated.\41\
---------------------------------------------------------------------------

    \39\ See id. at 13.
    \40\ See id.
    \41\ See id.
---------------------------------------------------------------------------

    The Exchange agrees with the opposing commenter that an accurate 
PIV would be essential for trading in the Shares, but asserts that the 
opposing commenter offers no support for the assertion that the PIV 
would be unreliable.\42\ The Exchange reiterates that market makers 
have indicated that, after the first few days of trading, there would 
be sufficient data to run a statistical analysis that would lead to 
differences between the Share price of the ETF and the PIV being 
tightened substantially.\43\ The Exchange states that it has no reason 
to believe that the PIV, which would be calculated using methodology 
substantially similar to that used in the calculation of all other ETF 
intraday indicative values, would be inherently unreliable.\44\ The 
Exchange asserts that market participants would accept the PIV as a 
reliable, indicative real-time value because (a) the PIV would be 
calculated and disseminated based on a Fund's actual portfolio 
holdings; (b) the securities in which the Funds plan to invest are 
generally highly liquid and actively traded and therefore generally 
have accurate real-time pricing available; and (c) market participants 
would have a daily opportunity to evaluate whether the PIV at or near 
the close of trading was indeed predictive of the actual NAV.\45\
---------------------------------------------------------------------------

    \42\ See Response Letter, supra note 8, at 2.
    \43\ See id.
    \44\ See id.
    \45\ See id.
---------------------------------------------------------------------------

    The Exchange states that, because it has no reason to believe that 
the PIVs would be inherently unreliable, it does not propose to 
institute any additional monitoring programs.\46\ Instead, the Exchange 
states that it would rely on its existing surveillance systems to 
monitor trading in the Shares and that these procedures are adequate to 
properly deter and detect violations of Exchange rules and federal 
securities laws applicable to trading on the Exchange.\47\ The Exchange 
also states that its existing rule applicable to trade cancellations 
(NYSE Area Equities Rule 7.10) neither addresses trade cancellations in 
the event erroneous PIVs are disseminated nor provides the Exchange 
with the discretion to cancel trades.\48\
---------------------------------------------------------------------------

    \46\ See id.
    \47\ See id. at 3.
    \48\ See id.
---------------------------------------------------------------------------

    In his second comment letter,\49\ which addresses the Exchange's 
Response Letter,\50\ the opposing commenter states that he does not 
question the veracity of LMMs who have discussed with the Exchange 
their ability to make efficient and liquid markets in the Shares, but 
that he questions whether the important caveat--that accurate PIVs are 
available--would reliably be met.\51\ He offers the following reasons 
why dissemination of PIVs at 15-second intervals throughout the 
Exchange's Core Trading Session would not provide a reliable and 
sufficient basis for ensuring that market trading prices of Shares 
maintain a close correspondence to each Share's underlying value: (a) 
PIVs may not be calculated in the same manner as NAV; (b) PIVs would be 
based on consolidated last sale information and may reflect clearly 
erroneous values for securities that have not opened for trading on a 
particular business day or that are subject to an intraday interruption 
in trading; (c) PIVs would be calculated based on a ``commercially 
reasonable'' standard of care, not the higher standards that apply to a 
Fund's daily NAV calculations; (d) there would be no time or scope for 
checking calculated PIV values before they are released in real time 
1,560 times each trading day; and (e) the calculation of PIVs would 
require the coordinated actions of multiple parties, none of which 
would guarantee the accuracy of disseminated PIVs or assume liability 
for damages resulting from PIV errors.\52\
---------------------------------------------------------------------------

    \49\ See Second Gastineau Letter, supra note 11.
    \50\ See Response Letter, supra note 8.
    \51\ See Second Gastineau Letter, supra note 11, at 3.
    \52\ See id.
---------------------------------------------------------------------------

    The opposing commenter asserts that disseminated PIVs for ETFs with 
transparent portfolios have essentially no relevance to secondary 
market trading efficiency and limited overall utility for 
investors.\53\ In contrast, according to the opposing commenter, the 
officially disseminated PIVs would be the foundation supporting market 
trading of the Shares, because Fund holdings would not be disclosed, 
and market makers in the Shares would not be able to calculate their 
own independent estimates of intraday Fund values or to verify the 
accuracy of the Fund-disseminated PIVs.\54\ The opposing commenter 
states that he is unaware of any studies that demonstrate the 
reliability of the intraday values disseminated for existing ETFs based 
on substantially the same calculation methodology and standards as 
proposed for the Shares.\55\ He recommends that, if the Exchange is 
unwilling to undertake a surveillance program to detect erroneous PIVs 
and to establish procedures for cancelling trades based on erroneous 
trades, the Commission should condition any approval of the proposed 
rule change on a demonstration of the prospective reliability of Fund 
PIVs through a comprehensive study of the historical accuracy of the 
disseminated intraday values of existing ETFs with investment profiles 
similar to the Funds.\56\
---------------------------------------------------------------------------

    \53\ See id.
    \54\ See id. at 4-5.
    \55\ See id. at 5.
    \56\ See id.
---------------------------------------------------------------------------

    The opposing commenter also questions whether the terms ``efficient 
and liquid markets'' and ``priced near the PIV'' (used by the cited 
LMMs) are properly defined or are suitable standards for open-end funds 
issuing redeemable securities.\57\ The opposing commenter asserts that 
the Petajisto Study \58\ demonstrates that the trading

[[Page 64440]]

efficiency of existing ETFs varies across a broad range and that many 
existing ETFs trade with wide bid-ask spreads and highly variable 
premiums/discounts,\59\ and he posits that some of the LMMs supporting 
trading in those ETFs would nonetheless represent that they trade 
``efficiently'' and ``near'' underlying value.\60\
---------------------------------------------------------------------------

    \57\ See id. at 3.
    \58\ See supra note 28.
    \59\ See Second Gastineau Letter, supra note 11, at 3.
    \60\ See id.
---------------------------------------------------------------------------

    The opposing commenter recommends that the Commission ask the 
Exchange to quantify the range of expected bid-ask spreads and 
premiums/discounts at which LMMs have indicated they expect the Shares 
to trade and to compare these expectations to accurate measures of 
benchmark index ETF trading performance.\61\ Additionally, the opposing 
commenter argues that the Exchange's statement that it ``expects that a 
market maker will act as [LMM] in the Shares and believes no market 
maker would accept [an LMM] assignment if they were not entirely 
comfortable in their ability to hedge their positions'' does not 
support the Exchange's assertion that the Shares can be expected to 
trade at consistently tight bid-ask spreads and stable premiums/
discounts.\62\ He asserts that: (1) Every closed-end fund listed on the 
Exchange also has an LMM, including the many closed-end funds that 
routinely trade at double-digit discounts or premiums to NAV; and 
therefore (2) the mere presence of a market maker willing to serve as 
LMM is not evidence that a particular fund would trade with bid-ask 
spreads and premiums/discounts consistent with the marketplace's 
expectations for how ETFs should trade or the legal standard applicable 
to open-end investment companies issuing redeemable securities.\63\
---------------------------------------------------------------------------

    \61\ See id.
    \62\ See id. at 4.
    \63\ See id.
---------------------------------------------------------------------------

B. Creation and Redemption Process

1. Redemptions by Authorized Participants
    The opposing commenter raises a number of objections to the Funds' 
proposed use of a blind trust to effect redemption transactions by 
Authorized Participants. He predicts that the proposed redemption 
arrangements would introduce additional costs and uncertainties for 
Authorized Participants for the following reasons:
     The Funds' custodian would have a monopoly position as the 
sole eligible provider of trustee services for the blind trust;
     the Funds' adviser, rather than the Authorized 
Participant, would negotiate the fees paid to the trustee;
     in contrast to existing ETFs, no Authorized Participant 
would have the potential ability to use its market knowledge and market 
position to enhance arbitrage profits (or offset arbitrage costs) by 
managing sales of the distributed securities to minimize market impact 
or to realize prices above the market close; and
     the Funds' custodian, who acts for the Authorized 
Participant in the sale of distributed securities, would have no 
apparent incentive to sell distributed securities with low market 
impact or at prices above the close and would experience little or no 
downside from doing the opposite.\64\
---------------------------------------------------------------------------

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

    The opposing commenter also asserts that redeeming Authorized 
Participants would be exposed to potential costs and risks associated 
with not being able to control disposition of significantly more 
concentrated redemption proceeds, and the opposing commenter argues 
that these extra costs and risks associated with the blind trust 
arrangement would be passed through to shareholders transacting in the 
secondary market, reflected as wider bid-ask spreads, more volatile 
premiums and discounts for the Shares, or both.\65\
---------------------------------------------------------------------------

    \65\ See id.
---------------------------------------------------------------------------

    In addition, the opposing commenter argues that the Commission 
should not grant the issuer's pending request for exemptive relief 
under the 1940 Act to maintain early Order Cut-Off Times for Fund 
redemptions, which are intended to facilitate the timely sale of 
distributed securities by the blind trusts that receive the proceeds of 
Authorized Participant redemptions and to facilitate the efficient 
processing of redemptions by retail investors through the Retail 
Redemption Facility.\66\
---------------------------------------------------------------------------

    \66\ See id. at 16.
---------------------------------------------------------------------------

    In response, the Exchange argues that the opposing commenter's 
arguments regarding cost considerations are irrelevant under the 
Exchange Act \67\ and that limiting broker-dealer processing fees on 
direct purchases and redemptions of Shares would require Commission 
rulemaking.\68\ The Exchange also argues that the opposing commenter's 
arguments regarding early Order Cut-Off Times for redemption is not 
relevant under the Exchange Act.\69\
---------------------------------------------------------------------------

    \67\ See Response Letter, supra note 8, at 4-5.
    \68\ See id. at 4.
    \69\ See id. at 4-5.
---------------------------------------------------------------------------

    The opposing commenter argues, in response, that mandatory early 
Order Cut-Off Times for direct purchases and redemptions of Shares, 
while raising issues under the 1940 Act, also raise Exchange Act issues 
due to the potential impact on secondary market trading. Specifically, 
the opposing commenter asks: (1) If Authorized Participants cannot 
enter orders to purchase and redeem Shares after a designated cut-off 
time, how would this affect market trading later in the session; and 
(2) if market makers cannot transact with the Fund to offload long and 
short positions in Shares accumulated after the cut off time, how could 
the Funds' proposed arbitrage mechanism function effectively? \70\
---------------------------------------------------------------------------

    \70\ See Second Gastineau Letter, supra note 11, at 2.
---------------------------------------------------------------------------

    In connection with the unique redemption features of the Funds, the 
opposing commenter further asserts that there is a ``significant risk'' 
that the Internal Revenue Service (``IRS'') would deny the purported 
tax benefits of the Funds' distinctive in-kind redemption program.\71\ 
Therefore, the opposing commenter recommends that approval of the 
proposal be conditioned on the issuer obtaining a favorable IRS 
determination of the tax treatment through a Private Letter Ruling.\72\
---------------------------------------------------------------------------

    \71\ See Gastineau Letter, supra note 5, at 5.
    \72\ See id.; Second Gastineau Letter, supra note 11, at 2.
---------------------------------------------------------------------------

    In response, the Exchange argues that the opposing commenter's 
arguments regarding the tax treatment of in-kind distributions through 
the blind trust are not relevant under the Exchange Act.\73\
---------------------------------------------------------------------------

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

    The opposing commenter's second letter restates his belief that the 
tax treatment of the Funds' in-kind redemptions is relevant and again 
urges the Commission to condition any approval of the proposed rule 
change on the issuer receiving a Private Letter Ruling from the IRS 
affirming the claimed tax treatment of the Funds' in-kind 
redemptions.\74\
---------------------------------------------------------------------------

    \74\ See Gastineau Letter, supra note 5, at 5. More generally, 
the opposing commenter asserts that none of the arguments he made 
are irrelevant because Section 6(b)(5) of the Exchange Act states, 
in relevant part, that the ``rules of the exchange must be designed 
. . . to promote just and equitable principles of trade, . . . to 
remove impediments to and perfect the mechanism of a free and open 
market . . . and, in general, to protect investors and the public 
interest; and are not designed to permit unfair discrimination'' 
among market participants. See Second Gastineau Letter, supra note 
11, at 2 (omissions in original).
---------------------------------------------------------------------------

2. The Retail Redemption Facility
    The opposing commenter posits that a principal purpose of including 
direct Share purchases and the Retail Redemption Facility in the 
proposal is to provide comfort to the Commission and market 
participants that investors

[[Page 64441]]

would be able to transact with the Fund at or near NAV whenever 
secondary market trading prices of shares vary significantly from 
NAV.\75\ The opposing commenter argues that these provisions, as 
proposed, are inadequate for this purpose because: (a) The Retail 
Redemption Facility would be available only to a limited set of 
shareholders and would be restricted to redemptions of less than a 
Redemption Unit of shares; (b) the expected early Order Cut-Off Time 
for direct share purchases and the Retail Redemption Facility means 
that an investor's ability to directly purchase or redeem shares for 
cash would exist for only a portion of each business day; (c) investors 
who directly purchase and redeem shares would be subject to transaction 
fees imposed by the Fund of up to 2% and may also be subject to broker-
dealer processing fees; (d) self-directed investors may not have 
adequate information about the available liquidity options to make 
intelligent choices about how best to buy and sell shares; (e) broker-
dealers may not have adequate information to ensure that their 
customers consistently receive best execution on transactions in 
shares, given the two distinct liquidity pathways; and (f) broker-
dealers may not have or may not develop the systems capabilities 
necessary to support customer transactions in Funds offering both 
secondary market trading in shares and direct share purchases and 
redemptions.\76\
---------------------------------------------------------------------------

    \75\ See Gastineau Letter, supra note 5, at 17.
    \76\ See id. at 17-18.
---------------------------------------------------------------------------

    The opposing commenter asserts that the Exchange's statements that 
``investors may choose to purchase Shares directly from a Fund if they 
want to assure that they would not purchase Shares at a premium'' and 
that ``Retail Investors may decide to redeem their Shares for cash if 
they want to make sure they receive the NAV and do not want to risk 
selling their Shares in the secondary market at a discount'' are valid 
only to the extent that a Fund's direct purchase and redemption options 
apply to a particular investor, are available at the particular time of 
day when the investor seeks to buy or sell Shares, are not negated by 
disproportionate fees, and are backed by investor information and 
broker-dealer systems adequate to support informed decision-making and 
effective execution of direct transactions in Shares.\77\ The opposing 
commenter expresses concern that, because of the challenges to broker-
dealer trade management and order processing systems introduced by the 
Funds' unique dual-liquidity features, broker-dealers (if left 
unregulated) would charge significantly higher fees on direct purchases 
and redemptions than the commissions they charge on comparably sized 
secondary market trades in Shares.\78\ He argues that, if broker-dealer 
fees on direct transactions in Shares are too high, then shareholders 
would, in a practical sense, lose access to the Funds' intended 
mechanism for ensuring continued access to liquidity at or near NAV 
during periods when market trading prices of Shares vary significantly 
from NAV.\79\ To the extent that the Commission values the Funds' 
direct purchase and redemption facilities, he recommends that the 
Commission place appropriate limits on associated broker-dealer fees 
and Fund Transactions Fees.\80\ The opposing commenter also repeats his 
views that the Funds' proposed direct purchase and redemptions options 
should apply equally to all investors and should be available 
throughout each business day's Regular Trading Session, arguing that 
disparate redemption rights for different groups of shareholders are 
inherently discriminatory and inconsistent with the Requirements of 
Section 6(b)(5) of the Exchange Act.\81\
---------------------------------------------------------------------------

    \77\ See Second Gastineau Letter, supra note 11, at 6.
    \78\ See id.
    \79\ See id.
    \80\ See id.
    \81\ See id.
---------------------------------------------------------------------------

    The opposing commenter recommends that the Funds should be required 
to extend eligibility for the Retail Redemption Facility to all 
shareholders and that the Order Cut-Off Times for direct purchases of 
shares and redemptions under the Retail Redemption Facility be 
established as of the close of the Exchange's regular trading 
session.\82\ The opposing commenter recommends that the Exchange be 
required to limit trading in shares to broker-dealers that have 
represented to the Exchange that they have systems in place (a) to 
accommodate direct purchases and redemptions of Shares on terms no less 
favorable than secondary market transactions and (b) to ensure best 
execution of transactions in shares, considering both secondary market 
trading and direct purchase and redemption options.\83\ The opposing 
commenter also recommends that the broker-dealers trading shares on the 
Exchange should not be permitted to charge their customers processing 
fees on direct purchases and redemptions of shares that exceed what 
they charge the same customers for secondary market trades.\84\ 
Further, the opposing commenter recommends that the Funds should not be 
permitted to charge transaction fees on direct purchases and 
redemptions of shares that exceed the associated Fund expenses 
incurred, taking into account the size of a specific transaction.\85\
---------------------------------------------------------------------------

    \82\ See Gastineau Letter, supra note 5, at 20.
    \83\ See id.
    \84\ See id.
    \85\ See id. at 20-21.
---------------------------------------------------------------------------

    In response, the Exchange does not address the individual 
objections raised by the opposing commenter, but instead asserts that 
the process proposed in the Notice is consistent with the applicable 
provisions of the Exchange Act.\86\
---------------------------------------------------------------------------

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

C. Other Issues

1. Disclosures
    The opposing commenter alleges that the prospectus contains a 
number of material misstatements and omissions relating to in-kind 
redemptions and direct purchases and redemptions.\87\ In response, the 
Exchange argues that the opposing commenter's arguments regarding 
prospectus disclosures are irrelevant under the Exchange Act.\88\ The 
opposing commenter, in his second comment letter, argues that adequacy 
of Fund disclosures is critically important to evaluation of the 
proposal under both the 1940 Act and the Exchange Act because 
efficient, informed, and non-discriminatory trading in the Shares 
requires market participants to have access to timely and accurate 
information regarding the Funds, including risks and special 
considerations in buying and selling Shares.\89\
---------------------------------------------------------------------------

    \87\ See Gastineau Letter, supra note 5, at 27-28.
    \88\ See Response Letter, supra note 8, at 4-5.
    \89\ See Second Gastineau Letter, supra note 11, at 3.
---------------------------------------------------------------------------

    With respect to improved disclosures and availability of 
information, the opposing commenter states that, given the importance 
of the PIV to the decision-making process of current and prospective 
Fund investors, all Fund investors should have ongoing access to 
current PIV values.\90\ The opposing commenter suggests that each 
Fund's current PIV be provided at no charge on a public Web site and 
made available to the public no later than it is made available to any 
other market participant.\91\ The opposing commenter also suggests that 
the following be published on the Funds' Web site: Real-time PIVs and 
historical PIV information; statistics regarding closing-price premiums 
and discounts, statistics

[[Page 64442]]

regarding intraday estimated premiums and discounts; statistics 
regarding bid-ask spreads; statistics regarding long or short equity 
market exposure and the amount of investment leverage employed; and 
statistics regarding transaction fees applicable to direct purchases of 
shares, redemptions through the Retail Redemption Facility, and 
Redemption Unit redemptions by Authorized Participants.\92\
---------------------------------------------------------------------------

    \90\ See Gastineau Letter, supra note 5, at 25.
    \91\ See id.
    \92\ See id. at 26-27.
---------------------------------------------------------------------------

    Further, the opposing commenter asserts that, given the fundamental 
differences in how the Shares may be bought or sold, compared to other 
ETFs, it is not appropriate for the Funds to be advertised or marketed 
as ETFs.\93\ Therefore, the opposing commenter recommends that the 
Commission take appropriate steps to ensure that the Exchange, broker-
dealers, and market data providers do not describe the Funds as 
ETFs.\94\
---------------------------------------------------------------------------

    \93\ See id. at 28.
    \94\ See id.
---------------------------------------------------------------------------

    In response, the Exchange states that such real-time Web site 
disclosure of an indicative value is not required of other ETFs.\95\ 
The Exchange states that the PIV is designed to provide guidance 
regarding variances between the prior day's closing prices and intraday 
changes in the value of the underlying portfolio.\96\ The pricing of 
the Shares themselves would be disseminated in real time through the 
Consolidated Quotation System, according to the Exchange.\97\
---------------------------------------------------------------------------

    \95\ See Response Letter, supra note 8, at 4.
    \96\ See id.
    \97\ See id.
---------------------------------------------------------------------------

    Responding to the Exchange's assertion that the Funds should not be 
required to provide investors with free public access to real-time PIVs 
and other Fund trading information because these requirements do not 
apply to existing ETFs, the opposing commenter asserts that the Funds 
would differ from all existing ETFs in three respects for which the 
suggested requirements for additional PIV and other Fund trading 
information disclosures are highly relevant: (a) The Funds would offer 
shareholders two distinct pathways for buying and selling Shares (i.e., 
direct transactions and secondary market trades) and therefore should 
be obligated to give investors sufficient information about Share 
trading conditions to help them determine how best to buy and sell 
Shares; (b) the arbitrage mechanism intended to support efficient 
secondary market trading in Shares is untested and is likely to be less 
reliable than the mechanism supporting efficient trading in existing 
ETFs, meaning that investors in the Funds should appropriately pay more 
attention to Share trading costs and must have access to enhanced 
trading information to make that possible; and (c) the arbitrage 
mechanism underlying trading in Shares is uniquely reliant upon PIVs, 
with the result that a level playing field among market participants 
can only be achieved if all Fund investors have equal access to this 
critical Fund data.\98\
---------------------------------------------------------------------------

    \98\ See Second Gastineau Letter, supra note 11, at 7.
---------------------------------------------------------------------------

2. Proposed Limits on Fund Holdings
    The opposing commenter asserts that the Funds should: (a) Be 
required to limit their equity investments to U.S.-exchange-listed 
stocks with market caps of $5 billion or greater (consistent with the 
general understanding of large- and medium-cap stocks, a universe of 
about 700 stocks currently); (b) not be permitted to invest in illiquid 
assets or debt instruments of non-U.S. issuers; and (c) not be 
permitted to employ investment leverage or hold short positions.\99\
---------------------------------------------------------------------------

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

    In response, the Exchange argues that the opposing commenter's 
recommendation to curtail the permitted investments of the Funds is not 
relevant under the Exchange Act.\100\
---------------------------------------------------------------------------

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

    In his second letter, the opposing commenter argues that the nature 
of the Funds' holdings is highly relevant because the reliability of a 
Fund's PIVs would depend on the availability, timeliness, and accuracy 
of intraday valuations for the Fund's underlying holdings, which in 
turn would vary significantly by holdings type.\101\ He asserts that, 
if intraday valuation information for a Fund's holdings does not 
support the dissemination of timely and accurate PIVs throughout the 
Regular Trading Session, the Fund cannot be expected to trade 
efficiently.\102\
---------------------------------------------------------------------------

    \101\ See Second Gastineau Letter, supra note 11, at 3.
    \102\ See Second Gastineau Letter, supra note 11, at 3.
---------------------------------------------------------------------------

3. Trading Hours
    The opposing commenter notes that the Exchange would permit trading 
in the Shares between 4:00 a.m. and 8:00 p.m., but that the PIV would 
only be disseminated during the Core Trading Session of 9:30 a.m. to 
4:00 p.m.\103\ The opposing commenter asserts that the proposal does 
not adequately address the significant risk that the prices of shares 
bought or sold in the Opening Session (4:00 a.m. to 9:30 a.m.) and Late 
Trading Session (4:00 p.m. to 8:00 p.m.) would vary widely from 
underlying portfolio values because an updated PIVs would not be 
available.\104\ Therefore, the opposing commenter suggests that trading 
in shares should be limited to the Exchange's Core Trading 
Session.\105\
---------------------------------------------------------------------------

    \103\ See Gastineau Letter, supra note 5, at 24.
    \104\ See id.
    \105\ See id.
---------------------------------------------------------------------------

    In response, the Exchange states that: (a) Its surveillance 
procedures are operative during all trading sessions and are adequate 
to monitor trading in the Shares; (b) that it has no reason to discount 
the assertions of market makers regarding their ability to make 
efficient markets during all trading sessions; and (c) it would ensure 
that the information bulletin required by the Exchange's listing 
standards would adequately address the special characteristics and 
risks associated with trading in the Shares.\106\
---------------------------------------------------------------------------

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

    In response, the opposing commenter questions: (a) How a market 
maker would have any idea whether Shares were trading at a premium or a 
discount during the Opening and Late Trading Sessions, if PIVs are not 
being disseminated; and (b) how a market maker would have a basis to 
construct hedge positions against Share inventory accumulated during 
these sessions.\107\ He asserts again that the Shares should not trade 
during periods when neither the contents nor any estimates of current 
values of Fund holdings are known in the marketplace.\108\
---------------------------------------------------------------------------

    \107\ See Second Gastineau Letter, supra note 11, at 7.
    \108\ See id.
---------------------------------------------------------------------------

4. Potential Informational Advantages for Certain Market Participants
    The opposing commenter argues that the lack of portfolio 
transparency would favor market makers and other professional traders 
over other market participants, such as investors, and the opposing 
commenter concludes that this disparate treatment is contrary to the 
principle that all participants should be on an equal footing with 
respect to knowledge of a fund's holdings.\109\ Notwithstanding the 
public dissemination of the PIV, the opposing commenter argues that 
market makers and other professional traders would have a significant 
indirect informational advantage over other participants because of 
their ability to glean information about a Fund's holdings through 
sophisticated data analysis of changes in the PIV.\110\ In particular, 
the

[[Page 64443]]

opposing commenter asserts that market makers and professional traders 
could uncover a Fund's holdings and trading activity and front-run the 
Fund.\111\ The opposing commenter asserts that, prior to approval, the 
proposal should be amended to include: (1) A discussion of the steps to 
be taken to minimize reverse-engineering risk; (2) a discussion of how 
the Funds propose to resolve the conflict between providing market 
makers with adequate information to support efficient Share trading and 
protecting against reverse engineering; and (3) representations that 
the Funds would adequately disclose reverse-engineering risk and the 
conflicts the Funds face in seeking to provide for efficient market 
trading and protection against reverse engineering.\112\
---------------------------------------------------------------------------

    \109\ See Gastineau Letter, supra note 5, at 14-15.
    \110\ See id. at 14.
    \111\ See id. at 15.
    \112\ See id.
---------------------------------------------------------------------------

    The Exchange states that the following information would be 
publicly available to market professionals and retail investors alike: 
a PIV, disseminated every 15 seconds; an NAV, disseminated daily after 
the close; and the national best bid and offer and last trade for the 
Shares, disseminated in real-time through the Consolidated Quotation 
System and the Consolidated Tape.\113\ The Exchange also states that, 
as with other ETFs, any independent view that market participants might 
have about the composition of the fund holdings and the value of those 
holdings would be included in the prices at which those participants 
would be willing to trade the product.\114\
---------------------------------------------------------------------------

    \113\ See Response Letter, supra note 8, at 3.
    \114\ See id.
---------------------------------------------------------------------------

    The opposing commenter counters that all investors would not have 
equal access to Share trading information unless, as he recommends, the 
Commission conditions approval of the proposal on the Funds providing 
free access to PIVs on a public Web site and PIVs being available to 
the general public as soon as they are available to any party.\115\ 
Otherwise, the opposing commenter argues, market makers would be able 
to generate an informational advantage regarding a Fund's holdings 
through sophisticated time-series analysis of intraday changes in the 
Fund's PIVs.\116\ He asserts that the dissemination of market 
information in a manner that facilitates unfair discrimination among 
market participants is inconsistent with equitable principles of trade 
and, therefore, with the requirements of Section 6(b)(5) of the 
Exchange Act.\117\
---------------------------------------------------------------------------

    \115\ See Second Gastineau Letter, supra note 11, at 6.
    \116\ See id.
    \117\ See id.
---------------------------------------------------------------------------

5. Potential Benefits
    One commenter supports the proposed rule change, asserting that 
investors would have access for the first time to many different types 
of active management strategies.\118\ This commenter also asserts that 
Managed Portfolio Shares would have the benefit of intraday trading and 
of creation and redemption at closing NAV and that they would, unlike 
other ETFs, offer the additional advantage of allowing investors to 
create or redeem directly for cash in amounts less than a creation 
unit.\119\ Another commenter states that the Funds would permit 
investors to ``avail themselves of the alpha-generating capabilities of 
professional managers and potentially greater returns, while enjoying 
greater access and information than a mutual fund can provide.'' \120\ 
This commenter also notes that money managers, too, would enjoy 
benefits in the form of ``lower infrastructure costs, greater 
efficiency and the associated flexibility to make portfolio changes, 
and the ability to maintain portfolio confidentiality while avoiding 
professional front running.'' \121\
---------------------------------------------------------------------------

    \118\ See DeCore Letter, supra note 8, at 1.
    \119\ See id. at 1-2.
    \120\ See Browne Letter, supra note 13, at 1.
    \121\ See Browne Letter, supra note 13, at 2.
---------------------------------------------------------------------------

    The Exchange asserts that, assuming investor protection concerns 
are adequately addressed, investors and the marketplace can only 
benefit from listing and trading of a variety of products with 
different structures, positing that competitive forces would ultimately 
decide the success or failure of such initiatives.\122\
---------------------------------------------------------------------------

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

III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission shall 
approve a proposed rule change of a self-regulatory organization if the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to that organization.\123\ The 
Commission shall disapprove a proposed rule change if it does not make 
such a finding.\124\ Commission Rule of Practice 700(d)(3) provides 
that, when the Commission has instituted proceedings to determine 
whether to approve or disapprove a rule filing, the Commission shall 
makes its determination on the basis of the record, which ``shall 
consist of the proposed rule change filed on Form 19b-4 by the self-
regulatory organization, including all attachments and exhibits 
thereto, and all written materials received from any interested parties 
on the proposed rule change, including the self-regulatory organization 
that filed the proposed rule change . . . as well as any written 
materials that reflect communications between the Commission and any 
interested parties.'' \125\
---------------------------------------------------------------------------

    \123\ 15 U.S.C 78s(b)(2)(C)(i).
    \124\ 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR 201.700(b)(3).
    \125\ 17 CFR 201.700(d)(3). The description of a proposed rule 
change, its purpose and operation, its effect, and a legal analysis 
of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative 
Commission finding. See id. Any failure of a self-regulatory 
organization to provide the information solicited by Form 19b-4 may 
result in the Commission not having a sufficient basis to make an 
affirmative finding that a proposed rule change is consistent with 
the Exchange Act and the rules and regulations issued thereunder 
that are applicable to the self-regulatory organization. Id.
---------------------------------------------------------------------------

    After careful consideration, the Commission does not find that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange. In particular, the Commission does not 
find that the proposed rule change is consistent with Section 6(b)(5) 
of the Exchange Act, which requires that the rules of a national 
securities exchange be designed, among other things, to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
to protect investors and the public interest.\126\
---------------------------------------------------------------------------

    \126\ 15 U.S.C. 78f(b)(5). In disapproving the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Before an ETF can list and trade on a national securities exchange, 
the ETF must have exemptive relief under the 1940 Act, and a national 
securities exchange must have effective rules in place to list and 
trade the ETF.\127\ As noted above, the Precidian ETFs Trust has filed 
an Exemptive Application under the 1940 Act.\128\ As stated in the

[[Page 64444]]

Notice of an Application for Exemptive Relief, however, ``the 
Commission preliminarily believes that [Precidian's] proposed ETFs do 
not meet the standard for exemptive relief under section 6(c) of the 
[1940] Act,'' \129\ and accordingly, ``absent a request for a hearing 
that is granted by the Commission, the Commission intends to deny 
[Precidian's] request for an exemption under section 6(c) of the [1940] 
Act as not necessary or appropriate in the public interest and as not 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the [1940] Act.'' \130\
---------------------------------------------------------------------------

    \127\ Neither an ETF that has obtained 1940 Act exemptive relief 
but does not fall within Commission-approved exchange listing 
standards, nor an ETF that falls within Commission-approved listing 
standards but has been denied 1940 Act exemptive relief, can legally 
be listed and traded on a national securities exchange.
    \128\ See note 3, supra. The Precidian ETFs Trust submitted an 
application for an order under section 6(c) of the 1940 Act for an 
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the 
1940 Act and rule 22c-1 under the 1940 Act; under sections 6(c) and 
17(b) of the 1940 Act for an exemption from sections 17(a)(1) and 
17(a)(2) of the 1940 Act; and under section 12(d)(1)(J) of the 1940 
Act for an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of 
the 1940 Act.
    \129\ Notice of Application for Exemptive Relief, supra note 3, 
at 3.
    \130\ Id. at 29.
---------------------------------------------------------------------------

    The purpose of the Exchange's proposed rule change is to allow the 
listing and trading of the proposed Funds and future Funds of the same 
type. The Commission does not believe that approving this proposed rule 
change would be consistent with the requirement under the Exchange Act 
that an exchange's rules be consistent with the protection of investors 
and the public interest, because the Commission has stated its 
intention to deny the Funds exemptive relief under the 1940 Act and 
because denying this exemptive relief would mean that the Funds could 
not legally operate.\131\
---------------------------------------------------------------------------

    \131\ The Commission's determinations under Section 6(c) of the 
1940 Act with respect to the Funds are preliminary and could change 
if a hearing were requested, the Commission were to grant the 
request, and persuasive new information were presented. Under 
Section 19(b)(2) of the Exchange Act, however, the last date on 
which the Commission can take final action to approve or disapprove 
the Exchange's proposed rule change is no later than 240 days after 
notice of the proposed rule change was published in the Federal 
Register. As a result, the Commission must either approve or 
disapprove the proposed rule change by October 24, 2014, and it must 
do so on the basis of the facts as they currently exist, 
irrespective of any information that might be presented to or 
considered by the Commission at a later date in the context of its 
final determination under Section 6(c) of the 1940 Act.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find that 
the proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with Section 6(b)(5) 
of the Exchange Act.\132\
---------------------------------------------------------------------------

    \132\ Having found for the reasons explained above that the 
Exchange's proposed rule change is not consistent with the 
requirements of the Exchange Act, the Commission does not believe it 
is necessary to address each of the particular objections raised by 
the commenter who opposes the proposed rule change.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that the proposed rule change (SR-NYSEArca-2014-10) be, 
and it hereby is, disapproved.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25714 Filed 10-28-14; 8:45 am]
BILLING CODE 8011-01-P