Self-Regulatory Organizations; BATS Exchange, Inc.; Order Disapproving a Proposed Rule Change To Adopt Rule 14.11(k) to List Managed Portfolio Shares and to List and Trade Shares of Certain Funds of the Spruce ETF Trust, 68323-68327 [2014-26947]
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Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Notices
subparagraph (f)(2) of Rule 19b–4 9
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 10 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
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Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2014–131 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2014–131. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (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
9 17
CFR 240.19b–4(f)(2).
U.S.C. 78s(b)(2)(B).
10 15
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Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
offices of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–
NYSEArca–2014–131, and should be
submitted on or before December 5,
2014.
proposed rule change was published for
comment in the Federal Register on
August 13, 2014.4 The Commission
received one comment letter on the
proposal.5 On September 24, 2014,
pursuant to Section 19(b)(2) of the
Exchange Act,6 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.7
This Order disapproves the proposed
rule change.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Kevin M. O’Neill,
Deputy Secretary.
The Exchange proposes to: (1) Add
new BATS Rule 14.11(k) which would
permit the listing of Managed Portfolio
Shares; and (2) list and trade shares
(‘‘Shares’’) of the following funds (each
a ‘‘Fund’’ and, collectively, the
‘‘Funds’’) under the proposed rule:
Large Cap Fund, Large Cap Value Fund,
Large Cap Growth Fund, Large/Mid Cap
Fund, Large/Mid Cap Value Fund,
Large/Mid Cap Growth Fund, Large Cap
Long-Short Fund, Large Cap Value
Long-Short Fund, Large Cap Growth
Long-Short Fund, Large/Mid Cap LongShort Fund, and Large/Mid Cap Value
Long-Short Fund, Large/Mid Cap
Growth Long-Short Fund, and Large Cap
Growth Active Insights Fund. The
discussion below summarizes the
Exchange’s proposal, details of which
are described in the Notice.8
[FR Doc. 2014–26945 Filed 11–13–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73559; File No. SR–BATS–
2014–018)
Self-Regulatory Organizations; BATS
Exchange, Inc.; Order Disapproving a
Proposed Rule Change To Adopt Rule
14.11(k) to List Managed Portfolio
Shares and to List and Trade Shares of
Certain Funds of the Spruce ETF Trust
November 7, 2014
On August 4, 2014, BATS Exchange,
Inc. (‘‘Exchange’’ or ‘‘BATS’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to adopt new
BATS Rule 14.11(k), which would
permit the Exchange to list Managed
Portfolio Shares, which are shares of
actively managed exchange-traded
funds (‘‘ETFs’’) for which the portfolio
is disclosed quarterly, and to list and
trade shares of certain funds of the
Spruce ETF Trust (‘‘Trust’’) 3 under
proposed BATS Rule 14.11(k). The
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The Commission notes that the Trust, which
would be the issuer of the funds, filed an
Application for an Order under Section 6(c) of the
Investment Company Act of 1940 (‘‘1940 Act’’) and
rules thereunder (File No. 812–13953), dated
September 1, 2011 (‘‘Exemptive Application’’). The
Commission published notice of this application
(‘‘Notice of an Application for Exemptive Relief’’)
on October 21, 2014. See Investment Company Act
Release No. 31301 (Oct. 21, 2014), 79 FR 63964
(Oct. 27, 2014).
1 15
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I. Description of the Proposal
A. Proposed Listing Rules
The Exchange’s proposal would
define the term ‘‘Managed Portfolio
Share’’ as a security that (a) is issued by
an investment company (‘‘Investment
Company’’) organized as an open-end
management investment company or
similar entity, that invests in a portfolio
of securities selected by the Investment
Company’s investment adviser
consistent with the Investment
Company’s investment objectives and
policies; (b) is issued in a
predetermined Creation Unit 9 size in
4 See Securities Exchange Act Release No. 72787
(Aug. 7, 2014), 79 FR 47488 (‘‘Notice’’).
5 See Letter from Gary L. Gastineau, President,
ETF Consultants.com, Inc., to Elizabeth M. Murphy,
Secretary, Commission, dated Aug. 30, 2014
(‘‘Comment Letter’’).
6 15 U.S.C. 78s(b)(2).
7 See Securities Exchange Act Release No. 73199,
79 FR 58844 (September 30, 2014). The
Commission designated November 11, 2014 as the
date by which it should approve, disapprove, or
institute proceedings to determine whether to
disapprove the proposed rule change.
8 See Notice, supra note 4.
9 Under the proposal, a ‘‘Creation Unit’’ is a
specified minimum number of Managed Portfolio
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exchange for a cash amount equal to the
next determined Net Asset Value
(‘‘NAV’’),10 (c) pursuant to the ‘‘Small
Allotment Redemption Option,’’ may be
redeemed for cash by any Beneficial
Owner 11 in any size less than a
Redemption Unit 12 for a cash amount
equal to the next determined NAV for at
least 15 calendar days, in the event that
for 10 consecutive Business Days, or
such shorter period as determined by
the issuer, the midpoint of the national
best bid and offer at the time of the
calculation of the NAV (the ‘‘Bid/Ask
Price’’),13 for the security has a discount
of 5% or greater from the NAV; and (d)
when aggregated in a number of shares
equal to a Redemption Unit, or
multiples thereof, may be redeemed at
an Authorized Participant’s 14 request,
which each Authorized Participant
would be paid through a blind trust
established for its benefit a portfolio of
securities and/or cash with a value
equal to the next determined NAV.
Funds issuing Managed Portfolio
Shares would be actively-managed, and
in that respect would be similar to
Managed Fund Shares, which are
actively-managed funds listed and
traded under BATS Rule 14.11(i).
Managed Portfolio Shares, however,
would differ from Managed Fund Shares
in the following important respects.
First, in contrast to Managed Fund
Shares, for which a ‘‘Disclosed
Portfolio’’ is required to be disseminated
at least once daily,15 the portfolio for an
Shares that an Authorized Participant may purchase
from the issuer for the current net asset value.
10 Depending on the context, the term ‘‘NAV’’
may refer to the NAV per Share, the NAV per
Creation Unit, or the NAV of a fund.
11 Under the proposal, a ‘‘Beneficial Owner’’ is
defined as: (1) A natural person; (2) a trust
established for the benefit of a natural person or a
group of related family members; or (3) a tax
deferred retirement plan where investments are
selected by a natural person purchasing for its own
account.
12 Under the proposal, a ‘‘Redemption Unit’’ is a
specified number of Managed Portfolio Shares that
an Authorized Participant may sell to the issuer for
the current NAV and which is also used for
determining whether a Beneficial Owner may
redeem for cash. See infra note 14.
13 The records relating to Bid/Ask Prices would
be retained by the Funds and its service providers.
14 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.
15 BATS Rule 14.11(i)(3)(B) defines the term
‘‘Disclosed Portfolio’’ as the identities and
quantities of the securities and other assets held by
the Investment Company that will form the basis for
the Investment Company’s calculation of NAV at
the end of the business day. BATS Rule
14.11(i)(4)(B)(ii)(a) requires that the Disclosed
Portfolio be disseminated at least once daily and
that it be made available to all market participants
at the same time.
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issue of Managed Portfolio Shares
would be disclosed at least quarterly in
accordance with normal disclosure
requirements otherwise applicable to
open-end investment companies
registered under the 1940 Act.16 Second,
creations of Managed Portfolio Shares
would generally be effected through a
delivery of only cash, whereas creations
of Managed Fund Shares are generally
effected through an in-kind delivery of
securities and cash. Third, in
connection with the redemption of
shares in Redemption Unit size, the inkind delivery of any portfolio securities
would generally be effected through a
blind trust for the benefit of the
redeeming Authorized Participant, and
the blind trust would liquidate the
portfolio securities pursuant to
instructions from the Authorized
Participant without disclosing the
identity of those securities to the
Authorized Participant. Fourth,
pursuant to the Small Allotment
Redemption Option, Beneficial Owners
would be able to redeem shares for cash
directly from a fund in any size less
than a Redemption Unit at the fund’s
NAV in limited circumstances.
For each series of Managed Portfolio
Shares, an estimated value, defined in
the proposed rule as the ‘‘Intraday
Indicative Value’’ (‘‘IIV’’), that reflects
an estimated intraday value of a fund’s
portfolio would be disseminated. The
IIV would be based upon all of a fund’s
holdings as of the close of the prior
business day and would be widely
disseminated by one or more major
market data vendors at least every 15
seconds during the Exchange’s Regular
Trading Hours (normally, 9:30 a.m. to
4:00 p.m., Eastern Time).
The Exchange’s proposal provides
that the Exchange would file separate
proposals under Section 19(b) of the
Exchange Act before listing and trading
any series of Managed Portfolio Shares.
B. Description of the Funds
BlackRock Fund Advisors would be
the investment adviser (‘‘Adviser’’) to
the Funds.17 State Street Bank and Trust
Company would be the administrator,
custodian, and transfer agent for the
16 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 is required to file its
complete portfolio schedules for the first and third
fiscal quarters on Form N–Q under the 1940 Act,
within 60 days of the end of the quarter. Form N–
Q requires funds to file the same schedules of
investments that are required in annual and semiannual reports to shareholders. These forms are
available to the public on the Commission’s Web
site at www.sec.gov.
17 BlackRock Fund Advisors is an indirect wholly
owned subsidiary of BlackRock, Inc.
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Trust (‘‘Custodian’’ or ‘‘Transfer
Agent’’). BlackRock Investments, LLC
(‘‘Distributor’’) would serve as the
distributor for the Trust.
Under normal circumstances,18 each
Fund would invest at least 80% of its
net assets in a portfolio of long positions
(or engage in borrowings for the purpose
of establishing short positions for the
Long-Short Funds) in U.S. equity
securities.19 The Funds may in some
instances also invest in non-U.S. equity
securities with similar market
capitalization, liquidity, and risk-return
profiles to the U.S. equity securities
eligible for investment. Each Fund
would hold equity securities of at least
13 non-affiliated issuers, primarily from
the 1,200 largest U.S. stocks by market
capitalization as determined by The
Frank Russell Company annually.
Generally, the Large/Mid Cap Funds
would select securities from a universe
of approximately the 1,200 largest
equity securities traded on U.S.
exchanges and the Large Cap Funds
would select securities from a universe
of approximately the 1,000 largest
equity securities traded on U.S.
exchanges.
A Fund may, to a limited extent
(under normal circumstances, less than
20% of the Fund’s net assets), engage in
transactions in futures contracts,
forward contracts, options, and swaps.20
A Fund may also invest a portion of its
assets in high-quality money market
instruments.
II. Summary of the Comment Letter
The Commission received one letter
opposing the proposed rule change,
which raises several concerns.21 First,
18 The term ‘‘under normal circumstances’’
includes, but is not limited to, the absence of
adverse market, economic, political, or other
conditions, including extreme volatility or trading
halts in the equity markets or the financial markets
generally; operational issues causing dissemination
of inaccurate market information; or force majeure
type events such as systems failure, natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot, or labor disruption, or any similar
intervening circumstance.
19 Equity securities would include common stock,
preferred stock, securities convertible into common
stock and securities or other instruments whose
price is linked to the value of common stock, which
includes, but is not limited to, shares of other
investment companies.
20 Derivatives would include the following:
treasury futures, equity index futures, currency
futures, currency forwards, interest rate swaps,
credit default swaps, total return swaps, equity
index options, and single stock equity options. The
derivatives, excluding currency forwards, would be
exchange traded and/or centrally cleared. Each
Fund’s use of derivatives may be used to enhance
leverage, but such leverage would never exceed 1/
3 of a Fund’s total assets.
21 See supra note 5. The commenter notes that he
has a retained economic interest in a product that
may be competitive with Managed Portfolio Shares,
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the commenter asserts that there is a
‘‘significant risk’’ that the Internal
Revenue Service (‘‘IRS’’) would deny
the purported tax benefits of the Funds’
distinctive in-kind redemption
program.22 Therefore, the commenter
recommends that approval of the
proposal be conditioned on the issuer
obtaining a favorable IRS determination
of the tax treatment through a Private
Letter Ruling.23
In addition, the commenter predicts
that, compared to most existing ETFs,
the Shares would probably trade with
significantly wider bid-ask spreads,
with more variable premiums and
discounts, or with both, because of what
the commenter characterizes as the
unreliability of the Funds’ proposed
method for ensuring secondary market
trading efficiency. The commenter states
that the Funds’ market makers would
have only indirect, and likely imperfect,
information about Fund holdings.24 The
commenter argues that effectively
arbitraging the Funds would be
significantly more difficult than the
arbitrage for most existing foreign
ETFs.25 The commenter also argues that
there is no support for the Exchange’s
contention that existing ETFs holding
portfolios of foreign securities, such as
index-based ETFs holding Asian stocks,
have demonstrated efficient pricing
characteristics even though, because
foreign stocks do not trade during the
same hours as U.S. ETFs, the ETFs
holding foreign stocks do not provide
opportunities for riskless arbitrage
transactions during much of the trading
day.26 The commenter also cites a draft
academic working paper 27 for the
propositions that market trading
efficiency varies significantly by type
and size of ETF; that funds with high
share trading volumes, liquid
underlying holdings, and efficient
arbitrage mechanisms trade with
relatively tight bid-ask spreads and
more stable premiums and discounts;
and that funds lacking these
characteristics generally traded with
wider spreads and more variable
premiums and discounts.28
and states that his views on the Exchange’s filing
‘‘may be considered subject to a conflict of
interest.’’ Comment Letter, supra note 5, at 1, n.1.
He states that his comments are made in the public
interest and to the best of his ability are not
influenced by any conflict. See id.
22 See id. at 4.
23 See id.
24 See id. at 7.
25 See id.
26 See id. at 9.
27 ‘‘Inefficiencies in the Pricing of ExchangeTraded Funds,’’ Antti Petajisto, September 20, 2013,
available at https://www.petajisto.net/.
28 See Comment Letter, supra note 5, at 8.
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The commenter also states its view
that, for a number of reasons, the
dissemination of an IIV by the Funds
would likely prove ineffective in
ensuring alignment of secondary market
prices for the Shares with the values of
the underlying portfolios. The
commenter asserts that, during periods
of rapid market movement, the use of
last-sale prices to calculate an IIV,
coupled with the dissemination of the
IIV only every 15 seconds, would mean
that the IIV would be a lagging indicator
of actual portfolio values.29
Additionally, the commenter asserts
that the IIV may reflect clearly
erroneous values for securities that have
not yet opened for trading on a
particular business day or that are
subject to an intraday interruption in
trading.30 The commenter also states
that no one would stand behind a
Fund’s IIV to ensure timeliness and
accuracy.31 The commenter predicts
that, without a reliable IIV, the Shares
cannot and would not trade acceptably
in the secondary market.32
The commenter predicts that frequent
IIV errors would in turn cause
‘‘erroneous share trades’’ to be
executed.33 The commenter states that
the proposal does not address the
treatment of erroneous share trades
resulting from a faulty IIV—namely,
whether IIV errors and related erroneous
trades would be detected by the
Exchange, whether such trades would
be cancelled, and whether the Exchange
would apply a materiality standard for
cancellations.34 The commenter argues
that, as a condition of approval, the
Exchange should be required to monitor
the timeliness and accuracy of IIV
dissemination and to implement
procedures to address trades when an
erroneous IIV has been disseminated.35
The commenter also predicts that the
following elements of the proposed
redemption arrangements would
introduce additional costs and
uncertainties for Authorized
Participants:
• The Custodian would have a
monopoly position as the sole eligible
provider of trustee services for the blind
trust;
• The Adviser, rather than the
Authorized Participant, would negotiate
the fees paid to the trustee;
• In contrast to existing ETFs, no
Authorized Participant would have the
id. at 11.
id.
38 See id. at 13.
39 See id. at 13–14.
40 See id. The commenter discusses certain factors
determining a fund’s susceptibility to reverse
engineering using intraday valuations disseminated
at 15 second intervals. See id. at 14.
id. at 9.
30 See id. at 9–10.
31 See id. at 10.
32 See id.
33 See id. at 12.
34 See id.
35 See id.
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potential ability to use its market
knowledge and market position to
enhance arbitrage profits (or offset
arbitrage costs) by managing sales of the
distributed securities to minimize
market impact or to realize prices above
the market close; and
• The Custodian, who stands in for
the Authorized Participant in the sale of
distributed securities, would have no
apparent incentive to sell distributed
securities with low market impact or at
prices above the close and would
experience little or no downside from
doing the opposite.36
The commenter also asserts that
redeeming Authorized Participants
would be exposed to potential costs and
risks associated with not being able to
control disposition of significantly more
concentrated redemption proceeds, and
the commenter argues that these extra
costs and risks associated with the blind
trust arrangement would be passed
through to shareholders transacting in
the secondary market, reflected as wider
bid-ask spreads, more volatile premiums
and discounts for the Shares, or both.37
The commenter posits that the lack of
portfolio transparency would favor
market makers and other professional
traders over other market participants,
such as investors.38 Notwithstanding
the public dissemination of the IIV, the
commenter argues that market makers
and other professional traders would
have a significant indirect information
advantage over other participants
because of their ability to glean
information about a Fund’s holdings
through sophisticated data analysis of
changes in the IIV.39 In particular, the
commenter asserts that IIV disclosures
might enable market makers and
professional traders to uncover a Fund’s
holdings and trading activity, rendering
the Fund susceptible to the dilutive
effects of front running.40 The
commenter asserts that, prior to
approval, the proposal should be
amended to include: (1) A discussion of
the steps to be taken to minimize
reverse engineering risk; (2) a discussion
of how the Funds propose to resolve the
conflict between providing market
makers with adequate information to
support efficient Share trading and
protecting against reverse engineering;
and (3) representations that the Funds
would adequately disclose reverseengineering risk and the conflicts the
36 See
29 See
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37 See
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Funds face in seeking to provide for
efficient market trading and protection
against reverse engineering.41
The commenter argues that the
Commission should not grant the
issuer’s pending request for exemptive
relief under the 1940 Act to maintain
early Order Cut-Off Times for Fund
redemptions, which are intended to
facilitate the timely sale of distributed
securities by the blind trusts that receive
the proceeds of Authorized Participant
redemptions and the efficient
processing of redemptions by retail
investors through the Small Allotment
Redemption Option.42 The commenter
questions how the early Order Cut-Off
Times would impact secondary market
trading and the Funds’ proposed
arbitrage mechanism.43
The commenter posits that a principal
purpose of including the Small
Allotment Redemption Option in the
proposal is to provide comfort to the
Commission and market participants
that investors would be able to redeem
Shares with the Fund at or near NAV
whenever secondary market trading
prices are at a significant discount to
NAV.44 The commenter argues that
these provisions, as proposed, are
inadequate for this purpose because: (1)
Shares could trade at persistently wide
discounts to NAV and still rarely, if
ever, cause the Small Allotment
Redemption Option to be invoked due
to the triggering events thresholds; (2)
the Small Allotment Redemption
Option would be available only to a
limited set of shareholders and would
be restricted to redemptions of less than
a Redemption Unit; (3) the expected
early Order Cut-Off Time for
redemptions under the Small Allotment
Redemption Option means that an
investor’s ability to directly redeem
Shares for cash would exist for only a
portion of each business day; and (4)
investors who redeem Shares would be
subject to transaction fees imposed by
the Fund of up to 2% and may also be
subject to broker-dealer processing
fees.45 The commenter recommends that
the Commission impose the following
conditions for approval: (1)
Modification of the triggering events; 46
(2) extension of eligibility for the Small
Allotment Redemption Option to all
shareholders and establishment (and
disclosure) of a reasonable upper limit
on the value of Shares that are eligible;
(3) establishing the close of the
Exchange’s Regular Trading Hours as
the Order Cut-off Time for redemptions
under the Small Allotment Redemption
Option; and (4) establishment of a cap
on transaction fees that the Funds may
charge on direct redemptions of
Shares.47
The commenter believes that the
Funds would be permitted to hold
investments that are not well-suited to
the continuous dissemination of timely
and accurate IIVs throughout the trading
day.48 The commenter asserts that the
Funds should: (1) Be required to limit
their non-cash investments to U.S.exchange-listed stocks with market caps
of $5 billion or greater (consistent with
the general understanding of large- and
medium-cap stocks; a universe of about
700 stocks currently); (2) not be
permitted to invest in illiquid assets;
and (3) not be permitted to employ
investment leverage or hold short
positions.49
The commenter notes that the
Exchange would permit trading in the
Shares between 8:00 a.m. and 5:00 p.m.,
but that the IIV would only be
disseminated during the Exchange’s
Regular Trading Hours, which are
between 9:30 a.m. and 4:00 p.m. The
commenter asserts that the proposal
does not adequately address the
significant risk that the prices of Shares
bought or sold in the Pre-Opening
Session (8:00 a.m. to 9:30 a.m.) and
After Hours Session (4:00 p.m. to 5:00
p.m.) would vary widely from
underlying portfolio values because an
updated IIVs would not be available.50
Therefore, the commenter suggests that
trading in Shares should be limited to
the Exchange’s Regular Trading
Hours.51
The commenter states that, given the
importance of the IIV to the decisionmaking process of current and
prospective Fund investors, all Fund
investors should have ongoing access to
current IIV values.52 The commenter
suggests that each Fund’s current IIV be
provided at no charge on a public Web
site and made available to the public no
later than it is made available to any
other market participant.53 The
commenter also suggests that the
following information be published on
the Funds’ Web site: real time IIVs and
historical IIV information; statistics
regarding closing price premiums and
discounts; statistics regarding intraday
47 See
id. at 20.
id.
49 See id. at 21.
50 See id.
51 See id.
52 See id.
53 See id. at 21–22.
41 See
id. at 14.
42 See id. at 15.
43 See id.
44 See id. at 15–16.
45 See id. at 16.
46 See id. at 17.
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48 See
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Sfmt 4703
estimated premiums and discounts;
statistics regarding bid-ask spreads;
statistics regarding long or short equity
market exposure and the amount of
investment leverage employed; and
statistics regarding transaction fees
applicable to purchases of Shares,
redemptions through the Small
Allotment Redemption Option and
Redemption Unit redemptions by
Authorized Participants.54
III. Discussion and Commission
Findings
Under Section 19(b)(2)(C) of the
Exchange Act, the Commission shall
approve a proposed rule change of a
self-regulatory organization if the
Commission finds that the proposed
rule change is consistent with the
requirements of the Exchange Act and
the rules and regulations thereunder
that are applicable to that
organization.55 The Commission shall
disapprove a proposed rule change if it
does not make such a finding.56
After careful consideration, the
Commission does not find that the
proposed rule change is consistent with
the requirements of the Exchange Act
and the rules and regulations
thereunder applicable to a national
securities exchange. In particular, the
Commission does not find that the
proposed rule change is consistent with
Section 6(b)(5) of the Exchange Act,
which requires that the rules of a
national securities exchange be
designed, among other things, to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and to
protect investors and the public
interest.57
Before an ETF can list and trade on a
national securities exchange, the ETF
must have exemptive relief under the
1940 Act, and a national securities
exchange must have effective rules in
place to list and trade the ETF.58 As
noted above, the Trust has filed an
Exemptive Application under the 1940
54 See
id. at 22–23.
U.S.C. 78s(b)(2)(C)(i).
56 15 U.S.C. 78s(b)(2)(C)(ii).
57 15 U.S.C. 78f(b)(5). In disapproving the
proposed rule change, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
58 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.
55 15
E:\FR\FM\14NON1.SGM
14NON1
Federal Register / Vol. 79, No. 220 / Friday, November 14, 2014 / Notices
Act.59 As stated in the Notice of an
Application for Exemptive Relief,
however, ‘‘the Commission
preliminarily believes that [the Trust’s]
proposed ETFs do not meet the standard
for exemptive relief under section 6(c)
of the [1940] Act,’’ 60 and accordingly,
‘‘absent a request for a hearing that is
granted by the Commission, the
Commission intends to deny [the
Trust’s] request for an exemption under
section 6(c) of the [1940] Act as not
necessary or appropriate in the public
interest and as not consistent with the
protection of investors and the purposes
fairly intended by the policy and
provisions of the [1940] Act.’’ 61
The purpose of the Exchange’s
proposed rule change is to allow the
listing and trading of the proposed
Funds and future funds of the same
type. The Commission does not believe
that approving this proposed rule
change would be consistent with the
requirement under the Exchange Act
that an exchange’s rules be consistent
with the protection of investors and the
public interest, because the Commission
has stated its intention to deny the
Trust’s request for exemptive relief
under the 1940 Act and because
denying this exemptive relief would
mean that the Funds could not legally
operate.62
IV. Conclusion
mstockstill on DSK4VPTVN1PROD with NOTICES
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,
59 See note 3 and accompanying text, supra. The
Trust, the Advisor, and the Distributor submitted an
application for an order under section 6(c) of the
1940 Act for an exemption from sections 2(a)(32),
5(a)(1), 22(d) and 22(e) of the 1940 Act and rule
22c–1 under the 1940 Act; under sections 6(c) and
17(b) of the 1940 Act for an exemption from
sections 17(a)(1) and 17(a)(2) of the 1940 Act; and
under section 12(d)(1)(J) of the 1940 Act for an
exemption from sections 12(d)(1)(A) and 12(d)(1)(B)
of the 1940 Act.
60 Notice of Application for Exemptive Relief,
supra note 3, at 3.
61 Id. at 31.
62 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 Commission must
approve, disapprove, or institute proceedings to
disapprove this proposed rule change by November
11, 2014, and it must do so on the basis of the facts
as they currently exist, irrespective of any
information that might be presented to or
considered by the Commission at a later date in the
context of its final determination under Section 6(c)
of the 1940 Act.
VerDate Sep<11>2014
17:37 Nov 13, 2014
Jkt 235001
with Section 6(b)(5) of the Exchange
Act.63
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,
that the proposed rule change (SR–
BATS–2014–018) be, and it hereby is,
disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.64
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–26947 Filed 11–13–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–73564; File No. SR–EDGA–
2014–26]
Self-Regulatory Organizations; EDGA
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Related to Fees for Use
of EDGA Exchange, Inc.
November 7, 2014.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
31, 2014, EDGA Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the Exchange. The Exchange has
designated the proposed rule change as
one establishing or changing a member
due, fee, or other charge imposed by the
Exchange under Section 19(b)(3)(A)(ii)
of the Act 3 and Rule 19–4(f)(2)
thereunder,4 which renders the
proposed rule change effective upon
filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
amend the fee schedule applicable to
63 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.
64 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
PO 00000
Frm 00119
Fmt 4703
Sfmt 4703
68327
Members 5 and non-members of the
Exchange pursuant to EDGA Rules
15.1(a) and (c). Changes to the fee
schedule pursuant to this proposal are
effective upon filing.
The text of the proposed rule change
is available at the Exchange’s Web site
at https://www.directedge.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
Fee Schedule to decrease the fee for
orders yielding Flag K, which routes to
PSX using ROUC or ROUE routing
strategies. In securities priced at or
above $1.00, the Exchange currently
assesses a fee of $0.0026 per share for
Members’ orders that yield Flag K. The
Exchange proposes to amend its Fee
Schedule to decrease this fee to $0.0024
per share from $0.0026 per share. The
proposed change represents a pass
through of the rate that Direct Edge ECN
LLC (d/b/a DE Route) (‘‘DE Route’’), the
Exchange’s affiliated routing brokerdealer, is charged for routing orders to
PSX when it does not qualify for a
volume tiered reduced fee. The
proposed change is in response to PSX’s
November 2014 fee change where PSX
decreased the fee to remove liquidity via
routable order types it charges its
customers, from a fee of $0.0026 per
share to a fee of $0.0024 per share.6
5 The term ‘‘Member’’ is defined as ‘‘any
registered broker or dealer, or any person associated
with a registered broker or dealer, that has been
admitted to membership in the Exchange. A
Member will have the status of a ‘‘member’’ of the
Exchange as that term is defined in Section 3(a)(3)
of the Act.’’ See Exchange Rule 1.5(n).
6 See PSX, Equity Trader Alert 2014–95, Updates
to PSX and BX Pricing for November 2014, dated
October 27, 2014, available at https://
E:\FR\FM\14NON1.SGM
Continued
14NON1
]]>Agencies
[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Notices]
[Pages 68323-68327]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26947]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73559; File No. SR-BATS-2014-018)
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Disapproving a Proposed Rule Change To Adopt Rule 14.11(k) to List
Managed Portfolio Shares and to List and Trade Shares of Certain Funds
of the Spruce ETF Trust
November 7, 2014
On August 4, 2014, BATS Exchange, Inc. (``Exchange'' or ``BATS'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to adopt new BATS Rule 14.11(k), which would permit the Exchange
to list Managed Portfolio Shares, which are shares of actively managed
exchange-traded funds (``ETFs'') for which the portfolio is disclosed
quarterly, and to list and trade shares of certain funds of the Spruce
ETF Trust (``Trust'') \3\ under proposed BATS Rule 14.11(k). The
proposed rule change was published for comment in the Federal Register
on August 13, 2014.\4\ The Commission received one comment letter on
the proposal.\5\ On September 24, 2014, pursuant to Section 19(b)(2) of
the Exchange Act,\6\ the Commission designated a longer period within
which to approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change.\7\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Commission notes that the Trust, which would be the
issuer of the funds, filed an Application for an Order under Section
6(c) of the Investment Company Act of 1940 (``1940 Act'') and rules
thereunder (File No. 812-13953), dated September 1, 2011
(``Exemptive Application''). The Commission published notice of this
application (``Notice of an Application for Exemptive Relief'') on
October 21, 2014. See Investment Company Act Release No. 31301 (Oct.
21, 2014), 79 FR 63964 (Oct. 27, 2014).
\4\ See Securities Exchange Act Release No. 72787 (Aug. 7,
2014), 79 FR 47488 (``Notice'').
\5\ See Letter from Gary L. Gastineau, President, ETF
Consultants.com, Inc., to Elizabeth M. Murphy, Secretary,
Commission, dated Aug. 30, 2014 (``Comment Letter'').
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 73199, 79 FR 58844
(September 30, 2014). The Commission designated November 11, 2014 as
the date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change.
---------------------------------------------------------------------------
This Order disapproves the proposed rule change.
I. Description of the Proposal
The Exchange proposes to: (1) Add new BATS Rule 14.11(k) which
would permit the listing of Managed Portfolio Shares; and (2) list and
trade shares (``Shares'') of the following funds (each a ``Fund'' and,
collectively, the ``Funds'') under the proposed rule: Large Cap Fund,
Large Cap Value Fund, Large Cap Growth Fund, Large/Mid Cap Fund, Large/
Mid Cap Value Fund, Large/Mid Cap Growth Fund, Large Cap Long-Short
Fund, Large Cap Value Long-Short Fund, Large Cap Growth Long-Short
Fund, Large/Mid Cap Long-Short Fund, and Large/Mid Cap Value Long-Short
Fund, Large/Mid Cap Growth Long-Short Fund, and Large Cap Growth Active
Insights Fund. The discussion below summarizes the Exchange's proposal,
details of which are described in the Notice.\8\
---------------------------------------------------------------------------
\8\ See Notice, supra note 4.
---------------------------------------------------------------------------
A. Proposed Listing Rules
The Exchange's proposal would define the term ``Managed Portfolio
Share'' as a security that (a) is issued by an investment company
(``Investment Company'') organized as an open-end management investment
company or similar entity, that invests in a portfolio of securities
selected by the Investment Company's investment adviser consistent with
the Investment Company's investment objectives and policies; (b) is
issued in a predetermined Creation Unit \9\ size in
[[Page 68324]]
exchange for a cash amount equal to the next determined Net Asset Value
(``NAV''),\10\ (c) pursuant to the ``Small Allotment Redemption
Option,'' may be redeemed for cash by any Beneficial Owner \11\ in any
size less than a Redemption Unit \12\ for a cash amount equal to the
next determined NAV for at least 15 calendar days, in the event that
for 10 consecutive Business Days, or such shorter period as determined
by the issuer, the midpoint of the national best bid and offer at the
time of the calculation of the NAV (the ``Bid/Ask Price''),\13\ for the
security has a discount of 5% or greater from the NAV; and (d) when
aggregated in a number of shares equal to a Redemption Unit, or
multiples thereof, may be redeemed at an Authorized Participant's \14\
request, which each Authorized Participant would be paid through a
blind trust established for its benefit a portfolio of securities and/
or cash with a value equal to the next determined NAV.
---------------------------------------------------------------------------
\9\ Under the proposal, a ``Creation Unit'' is a specified
minimum number of Managed Portfolio Shares that an Authorized
Participant may purchase from the issuer for the current net asset
value.
\10\ Depending on the context, the term ``NAV'' may refer to the
NAV per Share, the NAV per Creation Unit, or the NAV of a fund.
\11\ Under the proposal, a ``Beneficial Owner'' is defined as:
(1) A natural person; (2) a trust established for the benefit of a
natural person or a group of related family members; or (3) a tax
deferred retirement plan where investments are selected by a natural
person purchasing for its own account.
\12\ Under the proposal, a ``Redemption Unit'' is a specified
number of Managed Portfolio Shares that an Authorized Participant
may sell to the issuer for the current NAV and which is also used
for determining whether a Beneficial Owner may redeem for cash. See
infra note 14.
\13\ The records relating to Bid/Ask Prices would be retained by
the Funds and its service providers.
\14\ 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.
---------------------------------------------------------------------------
Funds issuing Managed Portfolio Shares would be actively-managed,
and in that respect would be similar to Managed Fund Shares, which are
actively-managed funds listed and traded under BATS Rule 14.11(i).
Managed Portfolio Shares, however, would differ from Managed Fund
Shares in the following important respects. First, in contrast to
Managed Fund Shares, for which a ``Disclosed Portfolio'' is required to
be disseminated at least once daily,\15\ the portfolio for an issue of
Managed Portfolio Shares would be disclosed at least quarterly in
accordance with normal disclosure requirements otherwise applicable to
open-end investment companies registered under the 1940 Act.\16\
Second, creations of Managed Portfolio Shares would generally be
effected through a delivery of only cash, whereas creations of Managed
Fund Shares are generally effected through an in-kind delivery of
securities and cash. Third, in connection with the redemption of shares
in Redemption Unit size, the 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 instructions from
the Authorized Participant without disclosing the identity of those
securities to the Authorized Participant. Fourth, pursuant to the Small
Allotment Redemption Option, Beneficial Owners would be able to redeem
shares for cash directly from a fund in any size less than a Redemption
Unit at the fund's NAV in limited circumstances.
---------------------------------------------------------------------------
\15\ BATS Rule 14.11(i)(3)(B) defines the term ``Disclosed
Portfolio'' as the identities and quantities of the securities and
other assets held by the Investment Company that will form the basis
for the Investment Company's calculation of NAV at the end of the
business day. BATS Rule 14.11(i)(4)(B)(ii)(a) requires that the
Disclosed Portfolio be disseminated at least once daily and that it
be made available to all market participants at the same time.
\16\ 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 is required to file
its complete portfolio schedules for the first and third fiscal
quarters on Form N-Q under the 1940 Act, within 60 days of the end
of the quarter. Form N-Q requires funds to file the same schedules
of investments that are required in annual and semi-annual reports
to shareholders. These forms are available to the public on the
Commission's Web site at www.sec.gov.
---------------------------------------------------------------------------
For each series of Managed Portfolio Shares, an estimated value,
defined in the proposed rule as the ``Intraday Indicative Value''
(``IIV''), that reflects an estimated intraday value of a fund's
portfolio would be disseminated. The IIV would be based upon all of a
fund's holdings as of the close of the prior business day and would be
widely disseminated by one or more major market data vendors at least
every 15 seconds during the Exchange's Regular Trading Hours (normally,
9:30 a.m. to 4:00 p.m., Eastern Time).
The Exchange's proposal provides that the Exchange would file
separate proposals under Section 19(b) of the Exchange Act before
listing and trading any series of Managed Portfolio Shares.
B. Description of the Funds
BlackRock Fund Advisors would be the investment adviser
(``Adviser'') to the Funds.\17\ State Street Bank and Trust Company
would be the administrator, custodian, and transfer agent for the Trust
(``Custodian'' or ``Transfer Agent''). BlackRock Investments, LLC
(``Distributor'') would serve as the distributor for the Trust.
---------------------------------------------------------------------------
\17\ BlackRock Fund Advisors is an indirect wholly owned
subsidiary of BlackRock, Inc.
---------------------------------------------------------------------------
Under normal circumstances,\18\ each Fund would invest at least 80%
of its net assets in a portfolio of long positions (or engage in
borrowings for the purpose of establishing short positions for the
Long-Short Funds) in U.S. equity securities.\19\ The Funds may in some
instances also invest in non-U.S. equity securities with similar market
capitalization, liquidity, and risk-return profiles to the U.S. equity
securities eligible for investment. Each Fund would hold equity
securities of at least 13 non-affiliated issuers, primarily from the
1,200 largest U.S. stocks by market capitalization as determined by The
Frank Russell Company annually. Generally, the Large/Mid Cap Funds
would select securities from a universe of approximately the 1,200
largest equity securities traded on U.S. exchanges and the Large Cap
Funds would select securities from a universe of approximately the
1,000 largest equity securities traded on U.S. exchanges.
---------------------------------------------------------------------------
\18\ The term ``under normal circumstances'' includes, but is
not limited to, the absence of adverse market, economic, political,
or other conditions, including extreme volatility or trading halts
in the equity markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot, or labor disruption, or any similar intervening
circumstance.
\19\ Equity securities would include common stock, preferred
stock, securities convertible into common stock and securities or
other instruments whose price is linked to the value of common
stock, which includes, but is not limited to, shares of other
investment companies.
---------------------------------------------------------------------------
A Fund may, to a limited extent (under normal circumstances, less
than 20% of the Fund's net assets), engage in transactions in futures
contracts, forward contracts, options, and swaps.\20\ A Fund may also
invest a portion of its assets in high-quality money market
instruments.
---------------------------------------------------------------------------
\20\ Derivatives would include the following: treasury futures,
equity index futures, currency futures, currency forwards, interest
rate swaps, credit default swaps, total return swaps, equity index
options, and single stock equity options. The derivatives, excluding
currency forwards, would be exchange traded and/or centrally
cleared. Each Fund's use of derivatives may be used to enhance
leverage, but such leverage would never exceed 1/3 of a Fund's total
assets.
---------------------------------------------------------------------------
II. Summary of the Comment Letter
The Commission received one letter opposing the proposed rule
change, which raises several concerns.\21\ First,
[[Page 68325]]
the commenter asserts that there is a ``significant risk'' that the
Internal Revenue Service (``IRS'') would deny the purported tax
benefits of the Funds' distinctive in-kind redemption program.\22\
Therefore, the commenter recommends that approval of the proposal be
conditioned on the issuer obtaining a favorable IRS determination of
the tax treatment through a Private Letter Ruling.\23\
---------------------------------------------------------------------------
\21\ See supra note 5. The 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.'' Comment Letter, supra note 5, at 1, n.1. He states that
his comments are made in the public interest and to the best of his
ability are not influenced by any conflict. See id.
\22\ See id. at 4.
\23\ See id.
---------------------------------------------------------------------------
In addition, the commenter predicts that, compared to most existing
ETFs, the Shares would probably trade with significantly wider bid-ask
spreads, with more variable premiums and discounts, or with both,
because of what the commenter characterizes as the unreliability of the
Funds' proposed method for ensuring secondary market trading
efficiency. The commenter states that the Funds' market makers would
have only indirect, and likely imperfect, information about Fund
holdings.\24\ The commenter argues that effectively arbitraging the
Funds would be significantly more difficult than the arbitrage for most
existing foreign ETFs.\25\ The commenter also argues that there is no
support for the Exchange's contention that existing ETFs holding
portfolios of foreign securities, such as index-based ETFs holding
Asian stocks, have demonstrated efficient pricing characteristics even
though, because foreign stocks do not trade during the same hours as
U.S. ETFs, the ETFs holding foreign stocks do not provide opportunities
for riskless arbitrage transactions during much of the trading day.\26\
The commenter also cites a draft academic working paper \27\ for the
propositions that market trading efficiency varies significantly by
type and size of ETF; that funds with high share trading volumes,
liquid underlying holdings, and efficient arbitrage mechanisms trade
with relatively tight bid-ask spreads and more stable premiums and
discounts; and that funds lacking these characteristics generally
traded with wider spreads and more variable premiums and discounts.\28\
---------------------------------------------------------------------------
\24\ See id. at 7.
\25\ See id.
\26\ See id. at 9.
\27\ ``Inefficiencies in the Pricing of Exchange-Traded Funds,''
Antti Petajisto, September 20, 2013, available at https://www.petajisto.net/.
\28\ See Comment Letter, supra note 5, at 8.
---------------------------------------------------------------------------
The commenter also states its view that, for a number of reasons,
the dissemination of an IIV by the Funds would likely prove ineffective
in ensuring alignment of secondary market prices for the Shares with
the values of the underlying portfolios. The commenter asserts that,
during periods of rapid market movement, the use of last-sale prices to
calculate an IIV, coupled with the dissemination of the IIV only every
15 seconds, would mean that the IIV would be a lagging indicator of
actual portfolio values.\29\ Additionally, the commenter asserts that
the IIV may reflect clearly erroneous values for securities that have
not yet opened for trading on a particular business day or that are
subject to an intraday interruption in trading.\30\ The commenter also
states that no one would stand behind a Fund's IIV to ensure timeliness
and accuracy.\31\ The commenter predicts that, without a reliable IIV,
the Shares cannot and would not trade acceptably in the secondary
market.\32\
---------------------------------------------------------------------------
\29\ See id. at 9.
\30\ See id. at 9-10.
\31\ See id. at 10.
\32\ See id.
---------------------------------------------------------------------------
The commenter predicts that frequent IIV errors would in turn cause
``erroneous share trades'' to be executed.\33\ The commenter states
that the proposal does not address the treatment of erroneous share
trades resulting from a faulty IIV--namely, whether IIV errors and
related erroneous trades would be detected by the Exchange, whether
such trades would be cancelled, and whether the Exchange would apply a
materiality standard for cancellations.\34\ The commenter argues that,
as a condition of approval, the Exchange should be required to monitor
the timeliness and accuracy of IIV dissemination and to implement
procedures to address trades when an erroneous IIV has been
disseminated.\35\
---------------------------------------------------------------------------
\33\ See id. at 12.
\34\ See id.
\35\ See id.
---------------------------------------------------------------------------
The commenter also predicts that the following elements of the
proposed redemption arrangements would introduce additional costs and
uncertainties for Authorized Participants:
The Custodian would have a monopoly position as the sole
eligible provider of trustee services for the blind trust;
The Adviser, rather than the Authorized Participant, would
negotiate the fees paid to the trustee;
In contrast to existing ETFs, no Authorized Participant
would have the potential ability to use its market knowledge and market
position to enhance arbitrage profits (or offset arbitrage costs) by
managing sales of the distributed securities to minimize market impact
or to realize prices above the market close; and
The Custodian, who stands in for the Authorized
Participant in the sale of distributed securities, would have no
apparent incentive to sell distributed securities with low market
impact or at prices above the close and would experience little or no
downside from doing the opposite.\36\
---------------------------------------------------------------------------
\36\ See id. at 11.
---------------------------------------------------------------------------
The commenter also asserts that redeeming Authorized Participants
would be exposed to potential costs and risks associated with not being
able to control disposition of significantly more concentrated
redemption proceeds, and the commenter argues that these extra costs
and risks associated with the blind trust arrangement would be passed
through to shareholders transacting in the secondary market, reflected
as wider bid-ask spreads, more volatile premiums and discounts for the
Shares, or both.\37\
---------------------------------------------------------------------------
\37\ See id.
---------------------------------------------------------------------------
The commenter posits that the lack of portfolio transparency would
favor market makers and other professional traders over other market
participants, such as investors.\38\ Notwithstanding the public
dissemination of the IIV, the commenter argues that market makers and
other professional traders would have a significant indirect
information advantage over other participants because of their ability
to glean information about a Fund's holdings through sophisticated data
analysis of changes in the IIV.\39\ In particular, the commenter
asserts that IIV disclosures might enable market makers and
professional traders to uncover a Fund's holdings and trading activity,
rendering the Fund susceptible to the dilutive effects of front
running.\40\ The commenter asserts that, prior to approval, the
proposal should be amended to include: (1) A discussion of the steps to
be taken to minimize reverse engineering risk; (2) a discussion of how
the Funds propose to resolve the conflict between providing market
makers with adequate information to support efficient Share trading and
protecting against reverse engineering; and (3) representations that
the Funds would adequately disclose reverse-engineering risk and the
conflicts the
[[Page 68326]]
Funds face in seeking to provide for efficient market trading and
protection against reverse engineering.\41\
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\38\ See id. at 13.
\39\ See id. at 13-14.
\40\ See id. The commenter discusses certain factors determining
a fund's susceptibility to reverse engineering using intraday
valuations disseminated at 15 second intervals. See id. at 14.
\41\ See id. at 14.
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The commenter argues that the Commission should not grant the
issuer's pending request for exemptive relief under the 1940 Act to
maintain early Order Cut-Off Times for Fund redemptions, which are
intended to facilitate the timely sale of distributed securities by the
blind trusts that receive the proceeds of Authorized Participant
redemptions and the efficient processing of redemptions by retail
investors through the Small Allotment Redemption Option.\42\ The
commenter questions how the early Order Cut-Off Times would impact
secondary market trading and the Funds' proposed arbitrage
mechanism.\43\
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\42\ See id. at 15.
\43\ See id.
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The commenter posits that a principal purpose of including the
Small Allotment Redemption Option in the proposal is to provide comfort
to the Commission and market participants that investors would be able
to redeem Shares with the Fund at or near NAV whenever secondary market
trading prices are at a significant discount to NAV.\44\ The commenter
argues that these provisions, as proposed, are inadequate for this
purpose because: (1) Shares could trade at persistently wide discounts
to NAV and still rarely, if ever, cause the Small Allotment Redemption
Option to be invoked due to the triggering events thresholds; (2) the
Small Allotment Redemption Option would be available only to a limited
set of shareholders and would be restricted to redemptions of less than
a Redemption Unit; (3) the expected early Order Cut-Off Time for
redemptions under the Small Allotment Redemption Option means that an
investor's ability to directly redeem Shares for cash would exist for
only a portion of each business day; and (4) investors who redeem
Shares would be subject to transaction fees imposed by the Fund of up
to 2% and may also be subject to broker-dealer processing fees.\45\ The
commenter recommends that the Commission impose the following
conditions for approval: (1) Modification of the triggering events;
\46\ (2) extension of eligibility for the Small Allotment Redemption
Option to all shareholders and establishment (and disclosure) of a
reasonable upper limit on the value of Shares that are eligible; (3)
establishing the close of the Exchange's Regular Trading Hours as the
Order Cut-off Time for redemptions under the Small Allotment Redemption
Option; and (4) establishment of a cap on transaction fees that the
Funds may charge on direct redemptions of Shares.\47\
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\44\ See id. at 15-16.
\45\ See id. at 16.
\46\ See id. at 17.
\47\ See id. at 20.
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The commenter believes that the Funds would be permitted to hold
investments that are not well-suited to the continuous dissemination of
timely and accurate IIVs throughout the trading day.\48\ The commenter
asserts that the Funds should: (1) Be required to limit their non-cash
investments to U.S.-exchange-listed stocks with market caps of $5
billion or greater (consistent with the general understanding of large-
and medium-cap stocks; a universe of about 700 stocks currently); (2)
not be permitted to invest in illiquid assets; and (3) not be permitted
to employ investment leverage or hold short positions.\49\
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\48\ See id.
\49\ See id. at 21.
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The commenter notes that the Exchange would permit trading in the
Shares between 8:00 a.m. and 5:00 p.m., but that the IIV would only be
disseminated during the Exchange's Regular Trading Hours, which are
between 9:30 a.m. and 4:00 p.m. The commenter asserts that the proposal
does not adequately address the significant risk that the prices of
Shares bought or sold in the Pre-Opening Session (8:00 a.m. to 9:30
a.m.) and After Hours Session (4:00 p.m. to 5:00 p.m.) would vary
widely from underlying portfolio values because an updated IIVs would
not be available.\50\ Therefore, the commenter suggests that trading in
Shares should be limited to the Exchange's Regular Trading Hours.\51\
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\50\ See id.
\51\ See id.
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The commenter states that, given the importance of the IIV to the
decision-making process of current and prospective Fund investors, all
Fund investors should have ongoing access to current IIV values.\52\
The commenter suggests that each Fund's current IIV be provided at no
charge on a public Web site and made available to the public no later
than it is made available to any other market participant.\53\ The
commenter also suggests that the following information be published on
the Funds' Web site: real time IIVs and historical IIV information;
statistics regarding closing price premiums and discounts; statistics
regarding intraday estimated premiums and discounts; statistics
regarding bid-ask spreads; statistics regarding long or short equity
market exposure and the amount of investment leverage employed; and
statistics regarding transaction fees applicable to purchases of
Shares, redemptions through the Small Allotment Redemption Option and
Redemption Unit redemptions by Authorized Participants.\54\
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\52\ See id.
\53\ See id. at 21-22.
\54\ See id. at 22-23.
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III. Discussion and Commission Findings
Under Section 19(b)(2)(C) of the Exchange Act, the Commission shall
approve a proposed rule change of a self-regulatory organization if the
Commission finds that the proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder that are applicable to that organization.\55\ The Commission
shall disapprove a proposed rule change if it does not make such a
finding.\56\
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\55\ 15 U.S.C. 78s(b)(2)(C)(i).
\56\ 15 U.S.C. 78s(b)(2)(C)(ii).
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After careful consideration, the Commission does not find that the
proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange. In particular, the Commission does not
find that the proposed rule change is consistent with Section 6(b)(5)
of the Exchange Act, which requires that the rules of a national
securities exchange be designed, among other things, to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
to protect investors and the public interest.\57\
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\57\ 15 U.S.C. 78f(b)(5). In disapproving the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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Before an ETF can list and trade on a national securities exchange,
the ETF must have exemptive relief under the 1940 Act, and a national
securities exchange must have effective rules in place to list and
trade the ETF.\58\ As noted above, the Trust has filed an Exemptive
Application under the 1940
[[Page 68327]]
Act.\59\ As stated in the Notice of an Application for Exemptive
Relief, however, ``the Commission preliminarily believes that [the
Trust's] proposed ETFs do not meet the standard for exemptive relief
under section 6(c) of the [1940] Act,'' \60\ and accordingly, ``absent
a request for a hearing that is granted by the Commission, the
Commission intends to deny [the Trust's] request for an exemption under
section 6(c) of the [1940] Act as not necessary or appropriate in the
public interest and as not consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
[1940] Act.'' \61\
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\58\ 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.
\59\ See note 3 and accompanying text, supra. The Trust, the
Advisor, and the Distributor submitted an application for an order
under section 6(c) of the 1940 Act for an exemption from sections
2(a)(32), 5(a)(1), 22(d) and 22(e) of the 1940 Act and rule 22c-1
under the 1940 Act; under sections 6(c) and 17(b) of the 1940 Act
for an exemption from sections 17(a)(1) and 17(a)(2) of the 1940
Act; and under section 12(d)(1)(J) of the 1940 Act for an exemption
from sections 12(d)(1)(A) and 12(d)(1)(B) of the 1940 Act.
\60\ Notice of Application for Exemptive Relief, supra note 3,
at 3.
\61\ Id. at 31.
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The purpose of the Exchange's proposed rule change is to allow the
listing and trading of the proposed Funds and future funds of the same
type. The Commission does not believe that approving this proposed rule
change would be consistent with the requirement under the Exchange Act
that an exchange's rules be consistent with the protection of investors
and the public interest, because the Commission has stated its
intention to deny the Trust's request for exemptive relief under the
1940 Act and because denying this exemptive relief would mean that the
Funds could not legally operate.\62\
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\62\ 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 Commission must
approve, disapprove, or institute proceedings to disapprove this
proposed rule change by November 11, 2014, and it must do so on the
basis of the facts as they currently exist, irrespective of any
information that might be presented to or considered by the
Commission at a later date in the context of its final determination
under Section 6(c) of the 1940 Act.
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IV. Conclusion
For the reasons set forth above, the Commission does not find that
the proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange, and in particular, with Section 6(b)(5)
of the Exchange Act.\63\
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\63\ 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.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that the proposed rule change (SR-BATS-2014-018) be, and
it hereby is, disapproved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\64\
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\64\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26947 Filed 11-13-14; 8:45 am]
BILLING CODE 8011-01-P
