Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Adopt New NYSE Arca Rule 8.900-E and To List and Trade Shares of the Royce Pennsylvania ETF; Royce Premier ETF; and Royce Total Return ETF Under Proposed NYSE Arca Rule 8.900-E, 19371-19376 [2018-09265]
Download as PDF
<![CDATA[
Federal Register / Vol. 83, No. 85 / Wednesday, May 2, 2018 / Notices
daltland on DSKBBV9HB2PROD with NOTICES
Commission staff estimates that the 10
currently-registered NRSROs would
each spend an average of approximately
100 hours per year reviewing and
updating benchmarks for various types
of securities for purposes of comparing
representations, warranties, and
enforcement mechanisms, resulting in
an annual industry-wide reporting
burden of 1,000 hours (10 respondents
× 100 hours/respondent). On a deal-bydeal basis, Commission staff estimates
that it would take each NRSRO an
average of approximately: (i) One hour
to review each ABS transaction to
review the relevant disclosures prepared
by an issuer, which an NRSRO would
review as part of the rating process, and
convert those disclosures into a format
suitable for inclusion in any report to be
issued by an NRSRO, and (ii) 10 hours
per ABS transaction to compare the
terms of the current deal to those of
similar securities. When the
Commission adopted Rule 17g–7, it
estimated the average annual number of
ABS offerings to be 2,067 and the
average number of credit ratings per
issuance of ABS to be four, resulting in
8,268 annual responses.2 Commission
staff believes that these estimates
continue to be valid and, accordingly,
estimates that the total industry-wide
annual reporting burden of complying
with the disclosure requirements under
Rule 17g–7 is 90,948 hours (8,268
responses × 11 hours/response). As a
result, Commission staff estimates a
total aggregate burden of 91,948 hours
per year for complying with the rule
(1,000 hours for reviewing and updating
benchmarks + 90,948 hours for
complying with disclosure
requirements).
Compliance with Rule 17g–7 is
mandatory. Responses to the
information collection will not be kept
confidential and there is no mandatory
retention period for the collection of
information.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
under the PRA unless it displays a
currently valid OMB control number.
The public may view background
documentation for this information
collection at the following website:
www.reginfo.gov. Comments should be
of NRSROs for purposes of the PRA. See Proposed
Rules for Nationally Recognized Statistical Rating
Organizations, Release No. 34–64514 (May 18,
2011), 76 FR 33420, 33499 (Jun. 8, 2011) (stating
that ‘‘while the Commission expects several more
credit rating agencies may become registered as
NRSROs over the next few years, the Commission
preliminarily believes that the actual number of
NRSROs should be used for purposes of the PRA.’’).
2 See Rule 17g–7 Adopting Release, 76 FR at 4508.
VerDate Sep<11>2014
22:14 May 01, 2018
Jkt 244001
directed to: (i) Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503,
or by sending an email to: Shagufta_
Ahmed@omb.eop.gov; and (ii) Pamela
Dyson, Director/Chief Information
Officer, Securities and Exchange
Commission, c/o Remi Pavlik-Simon,
100 F Street NE Washington, DC 20549,
or by sending an email to: PRA_
Mailbox@sec.gov. Comments must be
submitted to OMB within 30 days of
this notice.
Dated: April 26, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–09271 Filed 5–1–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83120; File No. SR–
NYSEArca–2018–04]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To Adopt New NYSE Arca
Rule 8.900–E and To List and Trade
Shares of the Royce Pennsylvania
ETF; Royce Premier ETF; and Royce
Total Return ETF Under Proposed
NYSE Arca Rule 8.900–E
April 26, 2018.
On January 8, 2018, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to: (1) Adopt
NYSE Arca Rule 8.900–E (Managed
Portfolio Shares); and (2) list and trade
shares (‘‘Shares’’) of the Royce
Pennsylvania ETF, Royce Premier ETF,
and Royce Total Return ETF under
proposed NYSE Arca Rule 8.900–E. The
proposed rule change was published for
comment in the Federal Register on
January 26, 2018.3 On March 7, 2018,
pursuant to Section 19(b)(2) of the
Exchange Act,4 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 82549
(January 19, 2018), 83 FR 3846 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
2 17
PO 00000
Frm 00161
Fmt 4703
Sfmt 4703
19371
whether to disapprove the proposed
rule change.5 The Commission has
received five comments on the proposed
rule change.6 This order institutes
proceedings under Section 19(b)(2)(B) of
the Exchange Act 7 to determine
whether to approve or disapprove the
proposed rule change.
I. Summary of the Exchange’s
Description of the Proposed Rule
Change 8
The Exchange proposes to adopt new
NYSE Arca Rule 8.900–E, which would
govern the listing and trading of
Managed Portfolio Shares.9 The
Exchange also proposes to list and trade
the Shares of the Royce Pennsylvania
ETF, Royce Premier ETF, and Royce
Total Return ETF under proposed NYSE
Arca Rule 8.900–E (each the ‘‘Fund,’’
and collectively the ‘‘Funds’’).
A. Description of the Funds
The portfolio for each Fund will
consist of long and/or short positions in
U.S.-listed securities and shares issued
5 See Securities Exchange Act Release No. 82824,
83 FR 10934 (March 13, 2018). The Commission
designated April 26, 2018, as the date by which the
Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
6 See letters from: (1) Terence W. Norman,
Founder, Blue Tractor Group, LLC, dated February
6, 2018 (‘‘Blue Tractor Letter I’’); (2) Simon P.
Goulet, Co-Founder, Blue Tractor Group, LLC,
dated February 13, 2018 (‘‘Blue Tractor Letter II’’);
(3) Todd J. Broms, Chief Executive Officer, Broms
& Company LLC, dated February 16, 2018 (‘‘Broms
Letter’’); (4) Kevin S. Haeberle, Associate Professor
of Law, William & Mary Law School, dated
February 16, 2018 (‘‘Haeberle Letter’’); and (5) Gary
L. Gastineau, President, ETF Consultants.com, Inc.,
dated March 6, 2018 (‘‘Gastineau Letter’’). The
comment letters are available at https://
www.sec.gov/comments/sr-nysearca-2018-04/
nysearca201804.htm.
7 15 U.S.C. 78s(b)(2)(B).
8 For a complete description of the Exchange’s
proposal, including a description of the Precidian
ETF Trust II (‘‘Trust’’), see the Notice, supra note
3.
9 Proposed NYSE Arca Rule 8.900–E(c)(1) defines
the term ‘‘Managed Portfolio Share’’ as a security
that (a) represents an interest in 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 a specified aggregate minimum number
of shares equal to a Creation Unit (as defined in
proposed Rule 8.900–E(c)(3)), or multiples thereof,
in return for a designated portfolio of securities
(and/or an amount of cash) with a value equal to
the next determined net asset value (‘‘NAV’’); and
(c) when aggregated in the same specified aggregate
number of shares equal to a Redemption Unit (as
defined in proposed Rule 8.900–E(c)(4)), or
multiples thereof, may be redeemed at the request
of an authorized participant, which authorized
participant will be paid through a confidential
account established for its benefit (‘‘Confidential
Account’’) a portfolio of securities and/or cash with
a value equal to the next determined NAV.
E:\FR\FM\02MYN1.SGM
02MYN1
19372
Federal Register / Vol. 83, No. 85 / Wednesday, May 2, 2018 / Notices
by other U.S.-listed exchange-traded
funds (‘‘ETFs’’).10 All exchange-listed
equity securities in which the Funds
will invest will be listed and traded on
U.S. national securities exchanges.
1. Royce Pennsylvania ETF
Under normal market conditions,11
the Royce Pennsylvania ETF will invest
at least 65% of its assets in U.S.
exchange-listed equity securities of
small-cap companies with market
capitalizations up to $3 billion that
Royce & Associates, LP (‘‘Royce’’), the
Fund’s investment sub-adviser, believes
are trading below the sub-adviser’s
estimate of their current worth. The
Fund may invest in U.S. exchange-listed
ETFs. The Fund may sell securities to,
among other things, secure gains, limit
losses, re-deploy assets into what Royce
deems to be more promising
opportunities, and/or manage cash
levels in the Fund’s portfolio.
2. Royce Premier ETF
Under normal market conditions, the
Royce Premier ETF will invest at least
80% of its net assets in a limited
number of U.S. exchange-listed equity
securities of primarily small-cap
companies with market capitalizations
from $1 billion to $3 billion at the time
of investment. The Fund may invest in
U.S. exchange-listed ETFs. The Fund
may sell securities to, among other
things, secure gains, limit losses, redeploy assets into what Royce deems to
be more promising opportunities, and/
or manage cash levels in the Fund’s
portfolio.
daltland on DSKBBV9HB2PROD with NOTICES
3. Royce Total Return ETF
Under normal market conditions, the
Royce Total Return ETF will invest at
least 65% of its assets in dividendpaying U.S.-listed securities of smallcap companies with market
capitalizations up to $3 billion that
Royce believes are trading below its
estimate of their current worth. The
10 The Exchange represents that, for purposes of
the filing, ETFs include Investment Company Units
(as described in NYSE Arca Rule 5.2–E(j)(3));
Portfolio Depository Receipts (as described in NYSE
Arca Rule 8.100–E); and Managed Fund Shares (as
described in NYSE Arca Rule 8.600–E). The ETFs
in which the Funds will invest all will be listed and
traded on U.S. national securities exchanges. While
the Funds may invest in inverse ETFs, the Funds
will not invest in leveraged (e.g., 2X, –2X, 3X, or
–3X) ETFs.
11 Proposed Rule 8.900–E(c)(6) defines the term
‘‘normal market conditions’’ as including, but not
limited to, the absence of trading halts in the
applicable financial markets generally; operational
issues (e.g., systems failure) causing dissemination
of inaccurate market information; or force majeure
type events such as natural or manmade disaster,
act of God, armed conflict, act of terrorism, riot or
labor disruption or any similar intervening
circumstance.
VerDate Sep<11>2014
22:14 May 01, 2018
Jkt 244001
Fund may invest in U.S. exchange-listed
ETFs. The Fund may sell securities to,
among other things, secure gains, limit
losses, re-deploy assets into what Royce
deems to be more promising
opportunities, and/or manage cash
levels in the Fund’s portfolio.
4. Other Investments
While each Fund, under normal
market conditions, will invest primarily
in U.S.-listed equity securities, as
described above, each Fund may invest
its remaining assets in other securities
and financial instruments as follows: (i)
U.S. exchange-listed warrants, rights,
and options (limited to 5% of total
assets); (ii) cash or cash equivalents; 12
and (iii) the securities of other
investment companies.
5. Investment Restrictions
The Funds will not invest in futures,
forwards, or swaps. Further, each
Fund’s investments will be consistent
with its investment objective and will
not be used to enhance leverage. While
the Funds may invest in inverse ETFs,
they will not invest in leveraged (e.g.,
2X, –2X, 3X or –3X) ETFs. Finally, the
equity securities (other than nonexchange-listed investment company
securities) and options in which the
Funds invest will be listed on a U.S.
national securities exchange.
B. Key Features of Managed Portfolio
Shares
According to the Exchange, while
Investment Companies issuing Managed
Portfolio Shares would be activelymanaged, and in that respect would be
similar to those issuing Managed Fund
Shares,13 Managed Portfolio Shares
would differ from Managed Fund Shares
in the following respects:
• First, issues of Managed Fund
Shares are required to disseminate their
‘‘Disclosed Portfolio’’ at least once
12 The Exchange states that, for purposes of the
filing, cash equivalents include short-term
instruments (instruments with maturities of less
than 3 months) of the following types: (i) U.S.
Government securities, including bills, notes, and
bonds differing as to maturity and rates of interest,
which are either issued or guaranteed by the U.S.
Treasury or by U.S. Government agencies or
instrumentalities; (ii) certificates of deposit issued
against funds deposited in a bank or savings and
loan association; (iii) bankers’ acceptances, which
are short-term credit instruments used to finance
commercial transactions; (iv) repurchase
agreements and reverse repurchase agreements; (v)
bank time deposits, which are monies kept on
deposit with banks or savings and loan associations
for a stated period of time at a fixed rate of interest;
(vi) commercial paper, which are short-term
unsecured promissory notes; and (vii) money
market funds.
13 Managed Fund Shares are shares of activelymanaged Investment Companies listed and traded
under NYSE Arca Rule 8.600–E.
PO 00000
Frm 00162
Fmt 4703
Sfmt 4703
daily.14 By contrast, the portfolio for an
issue of Managed Portfolio Shares
would be disclosed only quarterly.
• Second, in connection with the
creation of shares in ‘‘Creation Unit’’
size or the redemption of shares in
‘‘Redemption Unit’’ size, the delivery or
receipt of any portfolio securities in
kind would be effected through an agent
(‘‘AP Representative’’) in a Confidential
Account established for the benefit of
the creating or redeeming authorized
participant without disclosing the
identity of the securities to the
authorized participant.
• Third, for each series of Managed
Portfolio Shares, a Verified Intraday
Indicative Value (‘‘VIIV’’) would be
disseminated by the Reporting
Authority (as defined in proposed NYSE
Arca Rule 8.900–E(c)(5)) and/or by one
or more major market-data vendors
every second during the Exchange’s
Core Trading Session (normally, 9:30
a.m. to 4:00 p.m., Eastern Time
(‘‘E.T.’’)).15 The Exchange states that the
dissemination of the VIIV will allow
investors to determine the estimated
intra-day value of the underlying
portfolio of a series of Managed
Portfolio Shares and will provide a close
estimate of that value throughout the
trading day.16
C. Arbitrage of Managed Portfolio
Shares
The Exchange asserts that market
makers will be able to make efficient
and liquid markets in the Shares priced
near the VIIV as long as the VIIV is
disseminated every second and market
makers employ market making
techniques such as ‘‘statistical
arbitrage,’’ including correlation
hedging, beta hedging, and dispersion
trading, which the Exchange represents
is currently used throughout the
14 NYSE Arca Rule 8.600–E(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 NAV at
the end of the business day. NYSE Arca Rule 8.600–
E(d)(2)(B)(i) requires that, for Managed Fund
Shares, the Disclosed Portfolio will be disseminated
at least once daily and will be made available to all
market participants at the same time.
15 Proposed NYSE Arca Rule 8.900–E(c)(2)
defines the VIIV as the estimated indicative value
of a Managed Portfolio Share based on all of the
holdings of a series of Managed Portfolio Shares as
of the close of business on the prior business day,
and, for corporate actions, based on the applicable
holdings as of the opening of business on the
current business day, priced and disseminated in
one second intervals during the Core Trading
Session.
16 According to the Exchange, the VIIV should not
be viewed as a ‘‘real-time’’ update of the NAV per
Share of each Fund, because the VIIV may not be
calculated in the same manner as the NAV, which
will be computed once a day.
E:\FR\FM\02MYN1.SGM
02MYN1
Federal Register / Vol. 83, No. 85 / Wednesday, May 2, 2018 / Notices
daltland on DSKBBV9HB2PROD with NOTICES
financial services industry, to make
efficient markets in exchange-traded
products.17 According to the Exchange,
if an authorized participant believes that
the Shares are trading at a price that is
higher than the value of the underlying
portfolio—for example, if the market
price for the Shares is higher than the
VIIV—then the authorized participant
may sell the Shares short and purchase
securities that the authorized
participant believes will track the
movements of the Shares. When the
spread narrows, the authorized
participant would execute offsetting
orders or enter an order with its AP
Representative to create Shares.
According to the Exchange, the
authorized participant’s purchase of the
portfolio securities into its Confidential
Account, combined with the sale of the
Shares, may create downward pressure
on the price of the Shares and/or
upward pressure on the price of the
portfolio securities, bringing the market
price of the Shares and the value of a
Fund’s portfolio securities closer
together.
Similarly, according to the Exchange,
an authorized participant could buy the
Shares and instruct the AP
Representative to redeem them and then
sell the underlying portfolio securities
from its Confidential Account in an
attempt to profit when the Shares trade
at a discount to the portfolio securities.
According to the Exchange, the
authorized participant’s purchase of the
Shares in the secondary market,
combined with the sale of the portfolio
securities from its Confidential Account,
may create upward pressure on the
price of the Shares and/or downward
pressure on the price of portfolio
17 According to the Exchange, statistical arbitrage
enables a trader to construct an accurate proxy for
another instrument, allowing it to hedge the other
instrument or buy or sell the instrument when it is
cheap or expensive in relation to the proxy. The
Exchange states that statistical analysis permits
traders to discover correlations, based purely on
trading data without regard to other fundamental
drivers. The Exchange also states that correlations
are a function of differentials, over time, between
one instrument or group of instruments and one or
more other instruments, and that once the nature
of these price deviations have been quantified, a
universe of securities is searched in an effort to, in
the case of a hedging strategy, minimize the
differential. In addition, the Exchange also states
that, once a suitable hedging proxy has been
identified, a trader can minimize portfolio risk by
executing the hedging basket. According to the
Exchange, the trader then can monitor the
performance of this hedge throughout the trade
period, making correction where warranted. The
Exchange states that, in the case of correlation
hedging, the analysis seeks to find a proxy that
matches the pricing behavior of the Fund, and that
in the case of beta hedging, the analysis seeks to
determine the relationship between the price
movement over time of the Fund and that of
another stock.
VerDate Sep<11>2014
22:14 May 01, 2018
Jkt 244001
securities, driving the market price of
the Shares and the value of the Fund’s
portfolio securities closer together. The
Exchange states that, according to
Precidian Funds LLC, the investment
adviser to the Trust (‘‘Adviser’’), this
process is identical to how many
authorized participants currently
arbitrage existing, traditional ETFs,
except for the use of the Confidential
Account.
D. The Creation and Redemption
Procedures
The Exchange states that, generally,
the Shares will be purchased and
redeemed on an in-kind basis, so that,
except where the purchase or
redemption would include cash under
the circumstances described in the
applicable Fund’s registration
statement, purchasers will be required
to purchase ‘‘Creation Units’’ by making
an in-kind deposit of specified
instruments (‘‘Deposit Instruments’’),
and authorized participants redeeming
their Shares will receive an in-kind
transfer of specified instruments
(‘‘Redemption Instruments’’) in their
Confidential Account through an AP
Representative. On any given business
day, the names and quantities of the
instruments that constitute the Deposit
Instruments and the names and
quantities of the instruments that
constitute the Redemption Instruments
will be identical, and these instruments
may be referred to, in the case of either
a purchase or redemption, as the
‘‘Creation Basket.’’
In the case of a redemption, a Fund’s
custodian (‘‘Custodian’’) will typically
deliver securities to the Confidential
Account on a pro rata basis with a value
approximately equal to the value of the
Shares tendered for redemption at the
order cut-off time established by the
Fund. The Custodian will make delivery
of the securities by appropriate entries
on its books and records, transferring
ownership of the securities to the
authorized participant’s Confidential
Account, subject to delivery of the
Shares redeemed. The AP
Representative will in turn liquidate,
hedge, or otherwise manage the
securities based on instructions from the
authorized participant.18 The AP
Representative will pay the liquidation
proceeds net of expenses, plus or minus
any cash balancing amount, to the
18 The Exchange represents that an authorized
participant will issue execution instructions to the
AP Representative and be responsible for all
associated profit or losses. Like a traditional ETF,
the authorized participant has the ability to sell the
basket securities at any point during normal trading
hours.
PO 00000
Frm 00163
Fmt 4703
Sfmt 4703
19373
authorized participant through DTC.19
The redemption securities that the
Confidential Account receives are
expected to mirror the portfolio
holdings of a Fund pro rata.
In the case of a creation, the
authorized participant will enter into an
irrevocable creation order with the Fund
and then direct the AP Representative to
purchase the necessary basket of
portfolio securities. The AP
Representative will then purchase the
necessary securities in the Confidential
Account. Once the necessary basket of
securities has been acquired, the
purchased securities held in the
Confidential Account will be
contributed in-kind to the Fund.
The Exchange states that, in
purchasing the necessary securities for
creation purposes, and, conversely, in
selling the portfolio securities for
redemption purposes, the AP
Representative will be required, by the
terms of the Confidential Account
agreement, to obfuscate the trades by
use of tactics such as breaking the trades
into multiple purchases or sales and
transacting in multiple marketplaces.
E. Availability of Information
Each Fund will be required to file
with the Commission its complete
portfolio schedules for the second and
fourth fiscal quarters on Form N–CSR
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. The Trust’s SAI
and each Fund’s shareholder reports
will be available free upon request from
the Trust. These documents and forms
may be viewed on-screen or
downloaded from the Commission’s
website at www.sec.gov.
In addition, the VIIV will be widely
disseminated by the Reporting
Authority and/or one or more major
market-data vendors at least every
second during the Exchange’s Core
Trading Session. According to the
19 According to the Exchange, under applicable
provisions of the Internal Revenue Code, the
authorized participant is expected to be deemed a
‘‘substantial owner’’ of the Confidential Account
because it receives distributions from the
Confidential Account. As a result, the Exchange
states, all income, gain, or loss realized by the
Confidential Account will be directly attributed to
the authorized participant. The Exchange also states
that, in a redemption, the authorized participant
will have a basis in the distributed securities equal
to the fair market value at the time of the
distribution, and any gain or loss realized on the
sale of those Shares will be taxable income to the
authorized participant.
E:\FR\FM\02MYN1.SGM
02MYN1
19374
Federal Register / Vol. 83, No. 85 / Wednesday, May 2, 2018 / Notices
daltland on DSKBBV9HB2PROD with NOTICES
Exchange, the VIIV will include all
accrued income and expenses of a Fund,
and any extraordinary expenses booked
during the day that would be taken into
account in calculating the Fund’s NAV
will also be taken into account in
calculating the VIIV.
For purposes of the VIIV, securities
held by a Fund will be valued
throughout the day based on the midpoint between the disseminated current
national best bid and offer. According to
the Exchange, by utilizing the mid-point
pricing for purposes of VIIV calculation,
stale prices are eliminated and a more
accurate representation of the real-time
value of the underlying securities is
provided to the market. Specifically,
according to the Exchange, quotations
based on the mid-point of bid/ask
spreads more accurately reflect current
market sentiment by providing real time
information on where market
participants are willing to buy or sell
securities at that point in time. The
Exchange also believes that the use of
quotations will dampen the impact of
any momentary spikes in the price of a
portfolio security.
According to the Exchange, each
Fund will utilize two separate pricing
feeds to provide two separate,
independent sources of pricing
information. Each Fund will also utilize
a ‘‘Pricing Verification Agent’’ and
establish a computer-based protocol that
will permit the Pricing Verification
Agent to continuously compare the two
data streams on a real time basis.20 A
single VIIV will be disseminated
publicly for each Fund; however, the
Pricing Verification Agent will
continuously compare the public VIIV
against a non-public, alternative intraday indicative value to which the
Pricing Verification Agent has access.
Upon notification to the Exchange by
the issuer of a series of Managed
Portfolio Shares, or its agent, that the
public VIIV and non-public, alternative
intra-day indicative value differ by more
than 25 basis points for 60 seconds, the
Exchange will halt trading as soon as
practicable in the Shares until the
discrepancy is resolved.21 Each Fund’s
20 The Exchange states that a Fund’s Custodian
will provide, on a daily basis, the identities and
quantities of portfolio securities that will form the
basis for the Fund’s calculation of NAV at the end
of the business day, plus any cash in the portfolio,
to the Pricing Verification Agent for purposes of
pricing.
21 According to the Exchange, for the period
January 1, 2017, to October 31, 2017, the average
bid/ask spread on actively managed equity ETFs
(Managed Fund Shares) traded on NYSE Arca, as
a percentage, was 38 basis points. For the same
period, the spread on all exchange-traded products
traded on NYSE Arca, as a percentage, was 54 basis
points. A continuous deviation for sixty seconds
VerDate Sep<11>2014
22:14 May 01, 2018
Jkt 244001
board of directors will review the
procedures used to calculate the VIIV
and maintain its accuracy as
appropriate, but not less than annually.
The specific methodology for
calculating the VIIV will be disclosed on
each Fund’s website.
F. Surveillance
The Exchange represents that trading
in the Shares will be subject to the
existing trading surveillances,
administered by the Exchange, as well
as cross-market surveillances
administered by the Financial Industry
Regulatory Authority (‘‘FINRA’’) on
behalf of the Exchange, which are
designed to detect violations of
Exchange rules and applicable federal
securities laws. The Exchange
represents that these procedures are
adequate to properly monitor Exchange
trading of the Shares in all trading
sessions and to deter and detect
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange.22
The Exchange represents that the
Adviser will make available daily to
FINRA and the Exchange the portfolio
holdings of each Fund in order to
facilitate the performance of the
surveillances referred to above. In
addition, the Exchange states that it has
a general policy prohibiting the
distribution of material, non-public
information by its employees.
II. Summary of Comment Letters
The Commission has received five
comment letters on the proposed rule
change, each of which expresses
opposition to the proposed rule
change.23 As of the date of this order
instituting proceedings, the Exchange
could indicate an error in the feed or in a
calculation engine used to calculate the two
intraday indicative values. The Exchange states that
the Trust reserves the right to change these
thresholds to the extent deemed appropriate and
approved by the Fund’s board of directors.
22 The Exchange states that these surveillances
generally focus on detecting securities trading
outside their normal patterns, which could be
indicative of manipulative or other violative
activity. The Exchange represents that the Exchange
or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the
Shares, underlying common stocks, rights,
warrants, ETFs, and exchange-listed options with
other markets and other entities that are members
of the Intermarket Surveillance Group (‘‘ISG’’), and
the Exchange or FINRA, on behalf of the Exchange,
or both, may obtain trading information regarding
such securities from such markets and other
entities. In addition, the Exchange may obtain
information regarding trading in the Shares,
underlying common stocks, rights, warrants, ETFs
and exchange-listed options from markets and other
entities that are members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.
23 See supra note 6.
PO 00000
Frm 00164
Fmt 4703
Sfmt 4703
has not submitted a response to the
comments.
A. Blue Tractor Letter I.24 The
commenter opposes the proposed rule
change and raises the following
concerns: 25
• Under the proposal, market
participants will not be able to engage
in bona fide arbitrage or efficient
statistical arbitrage to keep the price of
Shares close to a Fund’s NAV; 26
• Funds can be reverse engineered to
determine the composition of the
portfolio securities, which will make the
Funds susceptible to front-running;
• The proposed fund structure will
result in asymmetric disclosure of
confidential portfolio information to
selected parties;
• Details regarding the VIIV
generation process, as well as
calculation engine verification
procedures, are inadequate for market
participants and market makers;
• One second dissemination of VIIVs
in a high frequency trading environment
is inadequate for authorized participants
and market makers and not of value to
retail investors; and
• Requiring AP Representatives to
obfuscate trades for creation and
redemption purposes in an effort to
keep portfolio composition confidential
will delay execution and increase costs
for authorized participants.
B. Blue Tractor Letter II.27 The
commenter reiterates its concern that
the Funds can be reverse engineered to
determine their trading strategies and
that ‘‘predatory traders’’ can use such
information in order to front run the
Funds.
24 The Blue Tractor Letter I is available at https://
www.sec.gov/comments/sr-nysearca-2018-04/
nysearca201804-3004003-161880.pdf.
25 Although the commenter purports to comment
on the Notice, the comments are more directly
related to the Trust’s December 4, 2017, exemptive
application. See Fifth Amended and Restated
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–
14405), dated December 4, 2017 (‘‘Exemptive
Application’’). The commenter also references
concerns that it raised in its comment letters to a
similar, previous proposal filed by the Exchange to
list and trade Managed Portfolio Shares, which the
Exchange withdrew. See Securities Exchange Act
Release No. 80553 (April 28, 2017), 82 FR 20932
(May 4, 2017) (‘‘Prior Proposal’’).
26 The commenter also notes that market makers
will not be able to construct optimized tracking
portfolios using the proposed fund structure and
cites to a comment letter that it filed in response
to the Prior Proposal. See Letter from Simon P.
Goulet, Co-Founder, Blue Tractor Group, LLC, to
Brent J. Fields, Secretary, Commission, dated
November 22, 2017. This letter is available at
https://www.sec.gov/comments/sr-nysearca201736/nysearca201736-2735961-161533.pdf.
27 The Blue Tractor Letter II is available at https://
www.sec.gov/comments/sr-nysearca-2018-04/
nysearca201804-3053961-161905.pdf.
E:\FR\FM\02MYN1.SGM
02MYN1
Federal Register / Vol. 83, No. 85 / Wednesday, May 2, 2018 / Notices
daltland on DSKBBV9HB2PROD with NOTICES
C. Broms Letter.28 The commenter
opposes the proposed rule change and
raises the following concerns: 29
• Selective disclosure of confidential
portfolio information to AP
Representatives to trade on behalf of
authorized participants violates federal
securities policy and facilitates illegal
insider trading;
• The portfolio holdings can be
reverse engineered and result in harm to
the Funds’ shareholders; and
• Because authorized participants
cannot engage in bona fide arbitrage, the
Shares will not trade efficiently.
D. Haeberle Letter.30 The commenter
opposes the proposed rule change and
raises the following concerns: 31
• Selective disclosure of portfolio
information to AP Representatives, and
the use of such information by AP
Representatives to engage in creations
and redemptions, may violate Section
10(b) of the Exchange Act and Rule 10b–
5 thereunder; 32
• The proposal does not address how
the Funds will ensure that AP
Representatives comply with
representations and contractual
agreements to keep the Funds’ portfolio
securities confidential;
• Because AP Representatives will be
required to obfuscate the sale and
purchase of portfolio securities for
creations and redemptions, they will be
less likely to uphold their best
execution obligations to authorized
participants;
• Any failure of best execution will
frustrate efficient market-making and
arbitrage, leading to reduced liquidity in
the Shares; and
• AP Representative services will
likely be costly and, due to compliance
constraints, few may offer such services,
which will lead to higher expenses for
28 The Broms Letter is available at https://
www.sec.gov/comments/sr-nysearca-2018-04/
nysearca201804-3110868-161910.pdf.
29 The commenter also generally references
concerns that it raised in its comment letters related
to the Prior Proposal. See Letter from Todd J.
Broms, Chief Executive Officer, Broms & Company
LLC, to Brent J. Fields, Secretary, Commission,
dated May 25, 2017, available at https://
www.sec.gov/comments/sr-nysearca-2017-36/
nysearca201736.htm. See also Letter from Todd J.
Broms, Chief Executive Officer, Broms & Company
LLC, to Brent J. Fields, Secretary, Commission,
dated June 27, 2016, available at https://
www.sec.gov/comments/sr-nysearca-2016-08/
nysearca201608-10.pdf.
30 The Haeberle Letter is available at https://
www.sec.gov/comments/sr-nysearca-2018-04/
nysearca201804-3110867-161909.pdf.
31 The commenter also summarizes the main
points of its letter regarding the Prior Proposal. See
Letter from Kevin S. Haeberle, Associate Professor
of Law, William & Mary Law School, to Brent J.
Fields, Secretary, Commission, dated December 15,
2017, available at https://www.sec.gov/comments/
sr-nysearca-2017-36/nysearca201736.htm.
32 15 U.S.C. 78j; 17 CFR 240.10b–5.
VerDate Sep<11>2014
22:14 May 01, 2018
Jkt 244001
the Funds and reduced liquidity for the
Shares.
E. Gastineau Letter.33 The commenter
opposes the proposed rule change and
raises the following concerns:
• The filing and other related
documents are ‘‘riddled with
demonstrably false statements of fact,
unsubstantiated and misleading
expressions of opinion, and omissions
of critical analysis and disclosure.
. . .’’; 34
• The portfolio holdings information
can be uncovered by (1) time-series
analysis of the VIIV or other publicly
disseminated Fund information (reverse
engineering), (2) observations of
Confidential Account trading, (3)
misuse or misappropriation of Fund
holdings information communicated to
AP Representatives, or (4) loss or theft
of confidential Fund holdings
information communicated to AP
Representatives;
• By not assuring the protection of
the Funds’ proprietary investment
strategies, the proposal 35 fails to
demonstrate a public purpose or to offer
investors advantages over currently
approved structures;
• The proposal violates the
requirements for selective disclosure in
the 2004 adopting release to the N1–A
Amendments and as well as the
principles of Regulation FD; 36
• The proposed disclosure of the
Funds’ portfolio holdings on a daily
basis to AP Representatives, Fund
service providers, and oversight
authorities, and the lack of a
surveillance or monitoring program to
ensure that the Funds’ confidential
information is protected and not
misused, facilitate illegal insider trading
in the Funds’ portfolio securities to the
detriment of the Funds’ shareholders;
33 The Gastineau Letter is available at https://
www.sec.gov/comments/sr-nysearca-2018-04/
nysearca201804-3201927-162011.pdf.
34 See Gastineau Letter, supra note 6, at 7.
35 In his comment letter, the commenter defines
the ‘‘proposal’’ as the Notice, the Exemptive
Application, the registration statement that the
Trust filed on Form N–1A with respect to the Funds
(Registration Statement on Form N–1A for the
Trust, File Nos. 333–217142 and 811–23246, as
filed on April 5, 2017), and certain comments on
the Prior Proposal (see Letter from Mark Criscitello,
Chairman, Precidian Funds LLC, to Brent J. Fields,
Secretary, Commission, dated October 11, 2017;
Letter from Daniel J. McCabe, Chief Executive,
Precidian Investments, to Brent J. Fields, Secretary,
Commission, dated October 12, 2017; and Letter
from Joseph A. Sullivan, Chairman and Chief
Executive Officer, Legg Mason, Inc., to Brent J.
Fields, Secretary, Commission, dated October 12,
2017, which are available at https://www.sec.gov/
comments/sr-nysearca-2017-36/
nysearca201736.htm). Accordingly, the term
‘‘proposal’’ as used to describe the commenter’s
comment letter refers to the same.
36 17 CFR 243.100 et seq.
PO 00000
Frm 00165
Fmt 4703
Sfmt 4703
19375
• The proposed Fund structure raises
impediments to the successful arbitrage
of, and market making in, the Shares,
especially during volatile or stressed
markets, because of: (1) The deficiencies
of VIIVs as intraday price signals, (2)
market makers’ forced reliance on
statistical arbitrage and related
correlation-based hedging techniques to
manage their intraday exposures, and
(3) the higher costs and loss of
execution control over transactions in
Creation Basket securities effected
through the Confidential Accounts;
• The Shares will be more susceptible
to trading halts because even a minimal
level of quote disruption in the portfolio
holdings will halt the Shares, which in
turn will harm the Shares’ liquidity and
trading efficiency;
• Fund shareholders will incur
significant new costs, liabilities, and
risks in connection with the calculation
and public dissemination of the VIIVs
and the selective private disclosure of
the Funds’ confidential portfolio
holdings information;
• The Shares will not trade efficiently
because the Funds will invest in smallcap stocks, illiquid assets, and ETFs
potentially holding foreign equities and/
or less-liquid fixed income instruments;
• Information to investors is
inadequate, and the Funds should
provide publicly available, enhanced
real-time VIIVs, daily closing market
price and premium/discount based on
the NAV, daily intraday estimated
premiums/discounts, and daily
purchase and redemption transaction
fees; and
• (1) Widespread dissemination of the
Funds’ confidential portfolio holdings
on a daily basis and ‘‘the absence of a
discernible program’’ to protect the
Funds’ confidential information, and (2)
the ‘‘high likelihood’’ that the Shares
will trade at wider bid-ask spreads and
more variable premiums/discounts than
existing active ETFs, render the
proposal inconsistent with the Section
6(b)(5) requirements that Exchange rules
must be designed to prevent fraudulent
and manipulative acts and practices,
protect investors and the public interest,
and not to permit unfair discrimination
among customers, issuers, brokers and
dealers.37
37 In addition, the commenter believes that the
proposal fails to meet the statutory standards for
exemptive relief pursuant to Section 6(c) of the
1940 Act and asserts that the normal tax benefits
of ETF investing will likely not apply to the Funds.
E:\FR\FM\02MYN1.SGM
02MYN1
19376
Federal Register / Vol. 83, No. 85 / Wednesday, May 2, 2018 / Notices
III. Proceedings To Determine Whether
To Approve or Disapprove SR–
NYSEArca–2018–04 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act 38 to
determine whether the proposed rule
change should be approved or
disapproved. Institution of such
proceedings is appropriate at this time
in view of the legal and policy issues
raised by the proposed rule change.
Institution of proceedings does not
indicate that the Commission has
reached any conclusions with respect to
any of the issues involved. Rather, as
described below, the Commission seeks
and encourages interested persons to
provide comments on the proposed rule
change.
Pursuant to Section 19(b)(2)(B) of the
Exchange Act,39 the Commission is
providing notice of the grounds for
disapproval under consideration. The
Commission is instituting 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, . . . to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.’’ 40
daltland on DSKBBV9HB2PROD with NOTICES
IV. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Section
6(b)(5) or any other provision of the
Exchange Act, or the rules and
regulations thereunder. Although there
do not appear to be any issues relevant
to approval or disapproval that would
be facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
38 15
U.S.C. 78s(b)(2)(B).
39 Id.
40 15
U.S.C. 78f(b)(5).
VerDate Sep<11>2014
22:14 May 01, 2018
Jkt 244001
opportunity to make an oral
presentation.41
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by May 23, 2018. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by June 6, 2018.
The Commission asks that
commenters address the sufficiency of
the Exchange’s statements in support of
the proposal, which are set forth in the
Notice,42 the issues raised by the
commenters, and any other issues raised
by the proposed rule change under the
Exchange Act. In particular, the
Commission seeks commenters’ views
regarding the concerns raised with
respect to selective disclosure of
confidential portfolio information,
namely, whether such disclosure is
consistent with the requirement of
Section 6(b)(5) that the rules of the
exchange be designed to prevent
fraudulent and manipulative acts and
practices. The Commission also seeks
commenters’ views regarding the
various concerns raised about how the
Shares may trade in the secondary
market, including the potential for
frequent trading halts and poor trading
performance during times of market
volatility and stress. In this regard, the
Commission specifically seeks
commenters’ views on whether the
proposal is consistent with the
maintenance of a fair and orderly
market.
Comments may be submitted by any
of the following methods:
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–2018–04 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
Numbers SR–NYSEArca-2018–04. This
41 Section 19(b)(2) of the Exchange Act, as
amended by the Securities Act Amendments of
1975, Public Law 94–29 (June 4, 1975), grants the
Commission flexibility to determine what type of
proceeding—either oral or notice and opportunity
for written comments—is appropriate for
consideration of a particular proposal by a selfregulatory organization. See Securities Act
Amendments of 1975, Senate Comm. on Banking,
Housing & Urban Affairs, S. Rep. No. 75, 94th
Cong., 1st Sess. 30 (1975).
42 See supra note 3.
PO 00000
Frm 00166
Fmt 4703
Sfmt 4703
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 website (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 website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of these
filings also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2018–04 and
should be submitted on or before May
23, 2018. Rebuttal comments should be
submitted by June 6, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–09265 Filed 5–1–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83113; File No. SR–NYSE–
2018–15]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change to Adopt
Transaction Fees In Connection with
the Exchange’s Trading of UTP
Securities on Pillar
April 26, 2018.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
43 17
1 15
CFR 200.30–3(a)(57).
U.S.C.78s(b)(1).
E:\FR\FM\02MYN1.SGM
02MYN1
]]>Agencies
[Federal Register Volume 83, Number 85 (Wednesday, May 2, 2018)]
[Notices]
[Pages 19371-19376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09265]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83120; File No. SR-NYSEArca-2018-04]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To Adopt New NYSE Arca Rule 8.900-E and To List and Trade
Shares of the Royce Pennsylvania ETF; Royce Premier ETF; and Royce
Total Return ETF Under Proposed NYSE Arca Rule 8.900-E
April 26, 2018.
On January 8, 2018, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to: (1) Adopt NYSE Arca Rule 8.900-E (Managed Portfolio Shares);
and (2) list and trade shares (``Shares'') of the Royce Pennsylvania
ETF, Royce Premier ETF, and Royce Total Return ETF under proposed NYSE
Arca Rule 8.900-E. The proposed rule change was published for comment
in the Federal Register on January 26, 2018.\3\ On March 7, 2018,
pursuant to Section 19(b)(2) of the Exchange Act,\4\ the Commission
designated a longer period within which to approve the proposed rule
change, disapprove the proposed rule change, or institute proceedings
to determine whether to disapprove the proposed rule change.\5\ The
Commission has received five comments on the proposed rule change.\6\
This order institutes proceedings under Section 19(b)(2)(B) of the
Exchange Act \7\ to determine whether to approve or disapprove the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 82549 (January 19,
2018), 83 FR 3846 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 82824, 83 FR 10934
(March 13, 2018). The Commission designated April 26, 2018, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ See letters from: (1) Terence W. Norman, Founder, Blue
Tractor Group, LLC, dated February 6, 2018 (``Blue Tractor Letter
I''); (2) Simon P. Goulet, Co-Founder, Blue Tractor Group, LLC,
dated February 13, 2018 (``Blue Tractor Letter II''); (3) Todd J.
Broms, Chief Executive Officer, Broms & Company LLC, dated February
16, 2018 (``Broms Letter''); (4) Kevin S. Haeberle, Associate
Professor of Law, William & Mary Law School, dated February 16, 2018
(``Haeberle Letter''); and (5) Gary L. Gastineau, President, ETF
Consultants.com, Inc., dated March 6, 2018 (``Gastineau Letter'').
The comment letters are available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Summary of the Exchange's Description of the Proposed Rule Change
\8\
---------------------------------------------------------------------------
\8\ For a complete description of the Exchange's proposal,
including a description of the Precidian ETF Trust II (``Trust''),
see the Notice, supra note 3.
---------------------------------------------------------------------------
The Exchange proposes to adopt new NYSE Arca Rule 8.900-E, which
would govern the listing and trading of Managed Portfolio Shares.\9\
The Exchange also proposes to list and trade the Shares of the Royce
Pennsylvania ETF, Royce Premier ETF, and Royce Total Return ETF under
proposed NYSE Arca Rule 8.900-E (each the ``Fund,'' and collectively
the ``Funds'').
---------------------------------------------------------------------------
\9\ Proposed NYSE Arca Rule 8.900-E(c)(1) defines the term
``Managed Portfolio Share'' as a security that (a) represents an
interest in 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 a specified aggregate minimum number of shares equal to a
Creation Unit (as defined in proposed Rule 8.900-E(c)(3)), or
multiples thereof, in return for a designated portfolio of
securities (and/or an amount of cash) with a value equal to the next
determined net asset value (``NAV''); and (c) when aggregated in the
same specified aggregate number of shares equal to a Redemption Unit
(as defined in proposed Rule 8.900-E(c)(4)), or multiples thereof,
may be redeemed at the request of an authorized participant, which
authorized participant will be paid through a confidential account
established for its benefit (``Confidential Account'') a portfolio
of securities and/or cash with a value equal to the next determined
NAV.
---------------------------------------------------------------------------
A. Description of the Funds
The portfolio for each Fund will consist of long and/or short
positions in U.S.-listed securities and shares issued
[[Page 19372]]
by other U.S.-listed exchange-traded funds (``ETFs'').\10\ All
exchange-listed equity securities in which the Funds will invest will
be listed and traded on U.S. national securities exchanges.
---------------------------------------------------------------------------
\10\ The Exchange represents that, for purposes of the filing,
ETFs include Investment Company Units (as described in NYSE Arca
Rule 5.2-E(j)(3)); Portfolio Depository Receipts (as described in
NYSE Arca Rule 8.100-E); and Managed Fund Shares (as described in
NYSE Arca Rule 8.600-E). The ETFs in which the Funds will invest all
will be listed and traded on U.S. national securities exchanges.
While the Funds may invest in inverse ETFs, the Funds will not
invest in leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs.
---------------------------------------------------------------------------
1. Royce Pennsylvania ETF
Under normal market conditions,\11\ the Royce Pennsylvania ETF will
invest at least 65% of its assets in U.S. exchange-listed equity
securities of small-cap companies with market capitalizations up to $3
billion that Royce & Associates, LP (``Royce''), the Fund's investment
sub-adviser, believes are trading below the sub-adviser's estimate of
their current worth. The Fund may invest in U.S. exchange-listed ETFs.
The Fund may sell securities to, among other things, secure gains,
limit losses, re-deploy assets into what Royce deems to be more
promising opportunities, and/or manage cash levels in the Fund's
portfolio.
---------------------------------------------------------------------------
\11\ Proposed Rule 8.900-E(c)(6) defines the term ``normal
market conditions'' as including, but not limited to, the absence of
trading halts in the applicable financial markets generally;
operational issues (e.g., systems failure) causing dissemination of
inaccurate market information; or force majeure type events such as
natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption or any similar intervening
circumstance.
---------------------------------------------------------------------------
2. Royce Premier ETF
Under normal market conditions, the Royce Premier ETF will invest
at least 80% of its net assets in a limited number of U.S. exchange-
listed equity securities of primarily small-cap companies with market
capitalizations from $1 billion to $3 billion at the time of
investment. The Fund may invest in U.S. exchange-listed ETFs. The Fund
may sell securities to, among other things, secure gains, limit losses,
re-deploy assets into what Royce deems to be more promising
opportunities, and/or manage cash levels in the Fund's portfolio.
3. Royce Total Return ETF
Under normal market conditions, the Royce Total Return ETF will
invest at least 65% of its assets in dividend-paying U.S.-listed
securities of small-cap companies with market capitalizations up to $3
billion that Royce believes are trading below its estimate of their
current worth. The Fund may invest in U.S. exchange-listed ETFs. The
Fund may sell securities to, among other things, secure gains, limit
losses, re-deploy assets into what Royce deems to be more promising
opportunities, and/or manage cash levels in the Fund's portfolio.
4. Other Investments
While each Fund, under normal market conditions, will invest
primarily in U.S.-listed equity securities, as described above, each
Fund may invest its remaining assets in other securities and financial
instruments as follows: (i) U.S. exchange-listed warrants, rights, and
options (limited to 5% of total assets); (ii) cash or cash equivalents;
\12\ and (iii) the securities of other investment companies.
---------------------------------------------------------------------------
\12\ The Exchange states that, for purposes of the filing, cash
equivalents include short-term instruments (instruments with
maturities of less than 3 months) of the following types: (i) U.S.
Government securities, including bills, notes, and bonds differing
as to maturity and rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities; (ii) certificates of deposit issued against funds
deposited in a bank or savings and loan association; (iii) bankers'
acceptances, which are short-term credit instruments used to finance
commercial transactions; (iv) repurchase agreements and reverse
repurchase agreements; (v) bank time deposits, which are monies kept
on deposit with banks or savings and loan associations for a stated
period of time at a fixed rate of interest; (vi) commercial paper,
which are short-term unsecured promissory notes; and (vii) money
market funds.
---------------------------------------------------------------------------
5. Investment Restrictions
The Funds will not invest in futures, forwards, or swaps. Further,
each Fund's investments will be consistent with its investment
objective and will not be used to enhance leverage. While the Funds may
invest in inverse ETFs, they will not invest in leveraged (e.g., 2X, -
2X, 3X or -3X) ETFs. Finally, the equity securities (other than non-
exchange-listed investment company securities) and options in which the
Funds invest will be listed on a U.S. national securities exchange.
B. Key Features of Managed Portfolio Shares
According to the Exchange, while Investment Companies issuing
Managed Portfolio Shares would be actively-managed, and in that respect
would be similar to those issuing Managed Fund Shares,\13\ Managed
Portfolio Shares would differ from Managed Fund Shares in the following
respects:
---------------------------------------------------------------------------
\13\ Managed Fund Shares are shares of actively-managed
Investment Companies listed and traded under NYSE Arca Rule 8.600-E.
---------------------------------------------------------------------------
First, issues of Managed Fund Shares are required to
disseminate their ``Disclosed Portfolio'' at least once daily.\14\ By
contrast, the portfolio for an issue of Managed Portfolio Shares would
be disclosed only quarterly.
---------------------------------------------------------------------------
\14\ NYSE Arca Rule 8.600-E(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 NAV at the end of the
business day. NYSE Arca Rule 8.600-E(d)(2)(B)(i) requires that, for
Managed Fund Shares, the Disclosed Portfolio will be disseminated at
least once daily and will be made available to all market
participants at the same time.
---------------------------------------------------------------------------
Second, in connection with the creation of shares in
``Creation Unit'' size or the redemption of shares in ``Redemption
Unit'' size, the delivery or receipt of any portfolio securities in
kind would be effected through an agent (``AP Representative'') in a
Confidential Account established for the benefit of the creating or
redeeming authorized participant without disclosing the identity of the
securities to the authorized participant.
Third, for each series of Managed Portfolio Shares, a
Verified Intraday Indicative Value (``VIIV'') would be disseminated by
the Reporting Authority (as defined in proposed NYSE Arca Rule 8.900-
E(c)(5)) and/or by one or more major market-data vendors every second
during the Exchange's Core Trading Session (normally, 9:30 a.m. to 4:00
p.m., Eastern Time (``E.T.'')).\15\ The Exchange states that the
dissemination of the VIIV will allow investors to determine the
estimated intra-day value of the underlying portfolio of a series of
Managed Portfolio Shares and will provide a close estimate of that
value throughout the trading day.\16\
---------------------------------------------------------------------------
\15\ Proposed NYSE Arca Rule 8.900-E(c)(2) defines the VIIV as
the estimated indicative value of a Managed Portfolio Share based on
all of the holdings of a series of Managed Portfolio Shares as of
the close of business on the prior business day, and, for corporate
actions, based on the applicable holdings as of the opening of
business on the current business day, priced and disseminated in one
second intervals during the Core Trading Session.
\16\ According to the Exchange, the VIIV should not be viewed as
a ``real-time'' update of the NAV per Share of each Fund, because
the VIIV may not be calculated in the same manner as the NAV, which
will be computed once a day.
---------------------------------------------------------------------------
C. Arbitrage of Managed Portfolio Shares
The Exchange asserts that market makers will be able to make
efficient and liquid markets in the Shares priced near the VIIV as long
as the VIIV is disseminated every second and market makers employ
market making techniques such as ``statistical arbitrage,'' including
correlation hedging, beta hedging, and dispersion trading, which the
Exchange represents is currently used throughout the
[[Page 19373]]
financial services industry, to make efficient markets in exchange-
traded products.\17\ According to the Exchange, if an authorized
participant believes that the Shares are trading at a price that is
higher than the value of the underlying portfolio--for example, if the
market price for the Shares is higher than the VIIV--then the
authorized participant may sell the Shares short and purchase
securities that the authorized participant believes will track the
movements of the Shares. When the spread narrows, the authorized
participant would execute offsetting orders or enter an order with its
AP Representative to create Shares. According to the Exchange, the
authorized participant's purchase of the portfolio securities into its
Confidential Account, combined with the sale of the Shares, may create
downward pressure on the price of the Shares and/or upward pressure on
the price of the portfolio securities, bringing the market price of the
Shares and the value of a Fund's portfolio securities closer together.
---------------------------------------------------------------------------
\17\ According to the Exchange, statistical arbitrage enables a
trader to construct an accurate proxy for another instrument,
allowing it to hedge the other instrument or buy or sell the
instrument when it is cheap or expensive in relation to the proxy.
The Exchange states that statistical analysis permits traders to
discover correlations, based purely on trading data without regard
to other fundamental drivers. The Exchange also states that
correlations are a function of differentials, over time, between one
instrument or group of instruments and one or more other
instruments, and that once the nature of these price deviations have
been quantified, a universe of securities is searched in an effort
to, in the case of a hedging strategy, minimize the differential. In
addition, the Exchange also states that, once a suitable hedging
proxy has been identified, a trader can minimize portfolio risk by
executing the hedging basket. According to the Exchange, the trader
then can monitor the performance of this hedge throughout the trade
period, making correction where warranted. The Exchange states that,
in the case of correlation hedging, the analysis seeks to find a
proxy that matches the pricing behavior of the Fund, and that in the
case of beta hedging, the analysis seeks to determine the
relationship between the price movement over time of the Fund and
that of another stock.
---------------------------------------------------------------------------
Similarly, according to the Exchange, an authorized participant
could buy the Shares and instruct the AP Representative to redeem them
and then sell the underlying portfolio securities from its Confidential
Account in an attempt to profit when the Shares trade at a discount to
the portfolio securities. According to the Exchange, the authorized
participant's purchase of the Shares in the secondary market, combined
with the sale of the portfolio securities from its Confidential
Account, may create upward pressure on the price of the Shares and/or
downward pressure on the price of portfolio securities, driving the
market price of the Shares and the value of the Fund's portfolio
securities closer together. The Exchange states that, according to
Precidian Funds LLC, the investment adviser to the Trust (``Adviser''),
this process is identical to how many authorized participants currently
arbitrage existing, traditional ETFs, except for the use of the
Confidential Account.
D. The Creation and Redemption Procedures
The Exchange states that, generally, the Shares will be purchased
and redeemed on an in-kind basis, so that, except where the purchase or
redemption would include cash under the circumstances described in the
applicable Fund's registration statement, purchasers will be required
to purchase ``Creation Units'' by making an in-kind deposit of
specified instruments (``Deposit Instruments''), and authorized
participants redeeming their Shares will receive an in-kind transfer of
specified instruments (``Redemption Instruments'') in their
Confidential Account through an AP Representative. On any given
business day, the names and quantities of the instruments that
constitute the Deposit Instruments and the names and quantities of the
instruments that constitute the Redemption Instruments will be
identical, and these instruments may be referred to, in the case of
either a purchase or redemption, as the ``Creation Basket.''
In the case of a redemption, a Fund's custodian (``Custodian'')
will typically deliver securities to the Confidential Account on a pro
rata basis with a value approximately equal to the value of the Shares
tendered for redemption at the order cut-off time established by the
Fund. The Custodian will make delivery of the securities by appropriate
entries on its books and records, transferring ownership of the
securities to the authorized participant's Confidential Account,
subject to delivery of the Shares redeemed. The AP Representative will
in turn liquidate, hedge, or otherwise manage the securities based on
instructions from the authorized participant.\18\ The AP Representative
will pay the liquidation proceeds net of expenses, plus or minus any
cash balancing amount, to the authorized participant through DTC.\19\
The redemption securities that the Confidential Account receives are
expected to mirror the portfolio holdings of a Fund pro rata.
---------------------------------------------------------------------------
\18\ The Exchange represents that an authorized participant will
issue execution instructions to the AP Representative and be
responsible for all associated profit or losses. Like a traditional
ETF, the authorized participant has the ability to sell the basket
securities at any point during normal trading hours.
\19\ According to the Exchange, under applicable provisions of
the Internal Revenue Code, the authorized participant is expected to
be deemed a ``substantial owner'' of the Confidential Account
because it receives distributions from the Confidential Account. As
a result, the Exchange states, all income, gain, or loss realized by
the Confidential Account will be directly attributed to the
authorized participant. The Exchange also states that, in a
redemption, the authorized participant will have a basis in the
distributed securities equal to the fair market value at the time of
the distribution, and any gain or loss realized on the sale of those
Shares will be taxable income to the authorized participant.
---------------------------------------------------------------------------
In the case of a creation, the authorized participant will enter
into an irrevocable creation order with the Fund and then direct the AP
Representative to purchase the necessary basket of portfolio
securities. The AP Representative will then purchase the necessary
securities in the Confidential Account. Once the necessary basket of
securities has been acquired, the purchased securities held in the
Confidential Account will be contributed in-kind to the Fund.
The Exchange states that, in purchasing the necessary securities
for creation purposes, and, conversely, in selling the portfolio
securities for redemption purposes, the AP Representative will be
required, by the terms of the Confidential Account agreement, to
obfuscate the trades by use of tactics such as breaking the trades into
multiple purchases or sales and transacting in multiple marketplaces.
E. Availability of Information
Each Fund will be required to file with the Commission its complete
portfolio schedules for the second and fourth fiscal quarters on Form
N-CSR 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. The Trust's SAI and each Fund's
shareholder reports will be available free upon request from the Trust.
These documents and forms may be viewed on-screen or downloaded from
the Commission's website at www.sec.gov.
In addition, the VIIV will be widely disseminated by the Reporting
Authority and/or one or more major market-data vendors at least every
second during the Exchange's Core Trading Session. According to the
[[Page 19374]]
Exchange, the VIIV will include all accrued income and expenses of a
Fund, and any extraordinary expenses booked during the day that would
be taken into account in calculating the Fund's NAV will also be taken
into account in calculating the VIIV.
For purposes of the VIIV, securities held by a Fund will be valued
throughout the day based on the mid-point between the disseminated
current national best bid and offer. According to the Exchange, by
utilizing the mid-point pricing for purposes of VIIV calculation, stale
prices are eliminated and a more accurate representation of the real-
time value of the underlying securities is provided to the market.
Specifically, according to the Exchange, quotations based on the mid-
point of bid/ask spreads more accurately reflect current market
sentiment by providing real time information on where market
participants are willing to buy or sell securities at that point in
time. The Exchange also believes that the use of quotations will dampen
the impact of any momentary spikes in the price of a portfolio
security.
According to the Exchange, each Fund will utilize two separate
pricing feeds to provide two separate, independent sources of pricing
information. Each Fund will also utilize a ``Pricing Verification
Agent'' and establish a computer-based protocol that will permit the
Pricing Verification Agent to continuously compare the two data streams
on a real time basis.\20\ A single VIIV will be disseminated publicly
for each Fund; however, the Pricing Verification Agent will
continuously compare the public VIIV against a non-public, alternative
intra-day indicative value to which the Pricing Verification Agent has
access. Upon notification to the Exchange by the issuer of a series of
Managed Portfolio Shares, or its agent, that the public VIIV and non-
public, alternative intra-day indicative value differ by more than 25
basis points for 60 seconds, the Exchange will halt trading as soon as
practicable in the Shares until the discrepancy is resolved.\21\ Each
Fund's board of directors will review the procedures used to calculate
the VIIV and maintain its accuracy as appropriate, but not less than
annually. The specific methodology for calculating the VIIV will be
disclosed on each Fund's website.
---------------------------------------------------------------------------
\20\ The Exchange states that a Fund's Custodian will provide,
on a daily basis, the identities and quantities of portfolio
securities that will form the basis for the Fund's calculation of
NAV at the end of the business day, plus any cash in the portfolio,
to the Pricing Verification Agent for purposes of pricing.
\21\ According to the Exchange, for the period January 1, 2017,
to October 31, 2017, the average bid/ask spread on actively managed
equity ETFs (Managed Fund Shares) traded on NYSE Arca, as a
percentage, was 38 basis points. For the same period, the spread on
all exchange-traded products traded on NYSE Arca, as a percentage,
was 54 basis points. A continuous deviation for sixty seconds could
indicate an error in the feed or in a calculation engine used to
calculate the two intraday indicative values. The Exchange states
that the Trust reserves the right to change these thresholds to the
extent deemed appropriate and approved by the Fund's board of
directors.
---------------------------------------------------------------------------
F. Surveillance
The Exchange represents that trading in the Shares will be subject
to the existing trading surveillances, administered by the Exchange, as
well as cross-market surveillances administered by the Financial
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange,
which are designed to detect violations of Exchange rules and
applicable federal securities laws. The Exchange represents that these
procedures are adequate to properly monitor Exchange trading of the
Shares in all trading sessions and to deter and detect violations of
Exchange rules and federal securities laws applicable to trading on the
Exchange.\22\
---------------------------------------------------------------------------
\22\ The Exchange states that these surveillances generally
focus on detecting securities trading outside their normal patterns,
which could be indicative of manipulative or other violative
activity. The Exchange represents that the Exchange or FINRA, on
behalf of the Exchange, or both, will communicate as needed
regarding trading in the Shares, underlying common stocks, rights,
warrants, ETFs, and exchange-listed options with other markets and
other entities that are members of the Intermarket Surveillance
Group (``ISG''), and the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading information regarding such
securities from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares,
underlying common stocks, rights, warrants, ETFs and exchange-listed
options from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement.
---------------------------------------------------------------------------
The Exchange represents that the Adviser will make available daily
to FINRA and the Exchange the portfolio holdings of each Fund in order
to facilitate the performance of the surveillances referred to above.
In addition, the Exchange states that it has a general policy
prohibiting the distribution of material, non-public information by its
employees.
II. Summary of Comment Letters
The Commission has received five comment letters on the proposed
rule change, each of which expresses opposition to the proposed rule
change.\23\ As of the date of this order instituting proceedings, the
Exchange has not submitted a response to the comments.
---------------------------------------------------------------------------
\23\ See supra note 6.
---------------------------------------------------------------------------
A. Blue Tractor Letter I.\24\ The commenter opposes the proposed
rule change and raises the following concerns: \25\
---------------------------------------------------------------------------
\24\ The Blue Tractor Letter I is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3004003-161880.pdf.
\25\ Although the commenter purports to comment on the Notice,
the comments are more directly related to the Trust's December 4,
2017, exemptive application. See Fifth Amended and Restated
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. 812-14405), dated December 4, 2017 (``Exemptive
Application''). The commenter also references concerns that it
raised in its comment letters to a similar, previous proposal filed
by the Exchange to list and trade Managed Portfolio Shares, which
the Exchange withdrew. See Securities Exchange Act Release No. 80553
(April 28, 2017), 82 FR 20932 (May 4, 2017) (``Prior Proposal'').
---------------------------------------------------------------------------
Under the proposal, market participants will not be able
to engage in bona fide arbitrage or efficient statistical arbitrage to
keep the price of Shares close to a Fund's NAV; \26\
---------------------------------------------------------------------------
\26\ The commenter also notes that market makers will not be
able to construct optimized tracking portfolios using the proposed
fund structure and cites to a comment letter that it filed in
response to the Prior Proposal. See Letter from Simon P. Goulet, Co-
Founder, Blue Tractor Group, LLC, to Brent J. Fields, Secretary,
Commission, dated November 22, 2017. This letter is available at
https://www.sec.gov/comments/sr-nysearca-201736/nysearca201736-2735961-161533.pdf.
---------------------------------------------------------------------------
Funds can be reverse engineered to determine the
composition of the portfolio securities, which will make the Funds
susceptible to front-running;
The proposed fund structure will result in asymmetric
disclosure of confidential portfolio information to selected parties;
Details regarding the VIIV generation process, as well as
calculation engine verification procedures, are inadequate for market
participants and market makers;
One second dissemination of VIIVs in a high frequency
trading environment is inadequate for authorized participants and
market makers and not of value to retail investors; and
Requiring AP Representatives to obfuscate trades for
creation and redemption purposes in an effort to keep portfolio
composition confidential will delay execution and increase costs for
authorized participants.
B. Blue Tractor Letter II.\27\ The commenter reiterates its concern
that the Funds can be reverse engineered to determine their trading
strategies and that ``predatory traders'' can use such information in
order to front run the Funds.
---------------------------------------------------------------------------
\27\ The Blue Tractor Letter II is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3053961-161905.pdf.
---------------------------------------------------------------------------
[[Page 19375]]
C. Broms Letter.\28\ The commenter opposes the proposed rule change
and raises the following concerns: \29\
---------------------------------------------------------------------------
\28\ The Broms Letter is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3110868-161910.pdf.
\29\ The commenter also generally references concerns that it
raised in its comment letters related to the Prior Proposal. See
Letter from Todd J. Broms, Chief Executive Officer, Broms & Company
LLC, to Brent J. Fields, Secretary, Commission, dated May 25, 2017,
available at https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736.htm. See also Letter from Todd J. Broms, Chief
Executive Officer, Broms & Company LLC, to Brent J. Fields,
Secretary, Commission, dated June 27, 2016, available at https://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-10.pdf.
---------------------------------------------------------------------------
Selective disclosure of confidential portfolio information
to AP Representatives to trade on behalf of authorized participants
violates federal securities policy and facilitates illegal insider
trading;
The portfolio holdings can be reverse engineered and
result in harm to the Funds' shareholders; and
Because authorized participants cannot engage in bona fide
arbitrage, the Shares will not trade efficiently.
D. Haeberle Letter.\30\ The commenter opposes the proposed rule
change and raises the following concerns: \31\
---------------------------------------------------------------------------
\30\ The Haeberle Letter is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3110867-161909.pdf.
\31\ The commenter also summarizes the main points of its letter
regarding the Prior Proposal. See Letter from Kevin S. Haeberle,
Associate Professor of Law, William & Mary Law School, to Brent J.
Fields, Secretary, Commission, dated December 15, 2017, available at
https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736.htm.
---------------------------------------------------------------------------
Selective disclosure of portfolio information to AP
Representatives, and the use of such information by AP Representatives
to engage in creations and redemptions, may violate Section 10(b) of
the Exchange Act and Rule 10b-5 thereunder; \32\
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78j; 17 CFR 240.10b-5.
---------------------------------------------------------------------------
The proposal does not address how the Funds will ensure
that AP Representatives comply with representations and contractual
agreements to keep the Funds' portfolio securities confidential;
Because AP Representatives will be required to obfuscate
the sale and purchase of portfolio securities for creations and
redemptions, they will be less likely to uphold their best execution
obligations to authorized participants;
Any failure of best execution will frustrate efficient
market-making and arbitrage, leading to reduced liquidity in the
Shares; and
AP Representative services will likely be costly and, due
to compliance constraints, few may offer such services, which will lead
to higher expenses for the Funds and reduced liquidity for the Shares.
E. Gastineau Letter.\33\ The commenter opposes the proposed rule
change and raises the following concerns:
---------------------------------------------------------------------------
\33\ The Gastineau Letter is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3201927-162011.pdf.
---------------------------------------------------------------------------
The filing and other related documents are ``riddled with
demonstrably false statements of fact, unsubstantiated and misleading
expressions of opinion, and omissions of critical analysis and
disclosure. . . .''; \34\
---------------------------------------------------------------------------
\34\ See Gastineau Letter, supra note 6, at 7.
---------------------------------------------------------------------------
The portfolio holdings information can be uncovered by (1)
time-series analysis of the VIIV or other publicly disseminated Fund
information (reverse engineering), (2) observations of Confidential
Account trading, (3) misuse or misappropriation of Fund holdings
information communicated to AP Representatives, or (4) loss or theft of
confidential Fund holdings information communicated to AP
Representatives;
By not assuring the protection of the Funds' proprietary
investment strategies, the proposal \35\ fails to demonstrate a public
purpose or to offer investors advantages over currently approved
structures;
---------------------------------------------------------------------------
\35\ In his comment letter, the commenter defines the
``proposal'' as the Notice, the Exemptive Application, the
registration statement that the Trust filed on Form N-1A with
respect to the Funds (Registration Statement on Form N-1A for the
Trust, File Nos. 333-217142 and 811-23246, as filed on April 5,
2017), and certain comments on the Prior Proposal (see Letter from
Mark Criscitello, Chairman, Precidian Funds LLC, to Brent J. Fields,
Secretary, Commission, dated October 11, 2017; Letter from Daniel J.
McCabe, Chief Executive, Precidian Investments, to Brent J. Fields,
Secretary, Commission, dated October 12, 2017; and Letter from
Joseph A. Sullivan, Chairman and Chief Executive Officer, Legg
Mason, Inc., to Brent J. Fields, Secretary, Commission, dated
October 12, 2017, which are available at https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736.htm). Accordingly, the
term ``proposal'' as used to describe the commenter's comment letter
refers to the same.
---------------------------------------------------------------------------
The proposal violates the requirements for selective
disclosure in the 2004 adopting release to the N1-A Amendments and as
well as the principles of Regulation FD; \36\
---------------------------------------------------------------------------
\36\ 17 CFR 243.100 et seq.
---------------------------------------------------------------------------
The proposed disclosure of the Funds' portfolio holdings
on a daily basis to AP Representatives, Fund service providers, and
oversight authorities, and the lack of a surveillance or monitoring
program to ensure that the Funds' confidential information is protected
and not misused, facilitate illegal insider trading in the Funds'
portfolio securities to the detriment of the Funds' shareholders;
The proposed Fund structure raises impediments to the
successful arbitrage of, and market making in, the Shares, especially
during volatile or stressed markets, because of: (1) The deficiencies
of VIIVs as intraday price signals, (2) market makers' forced reliance
on statistical arbitrage and related correlation-based hedging
techniques to manage their intraday exposures, and (3) the higher costs
and loss of execution control over transactions in Creation Basket
securities effected through the Confidential Accounts;
The Shares will be more susceptible to trading halts
because even a minimal level of quote disruption in the portfolio
holdings will halt the Shares, which in turn will harm the Shares'
liquidity and trading efficiency;
Fund shareholders will incur significant new costs,
liabilities, and risks in connection with the calculation and public
dissemination of the VIIVs and the selective private disclosure of the
Funds' confidential portfolio holdings information;
The Shares will not trade efficiently because the Funds
will invest in small-cap stocks, illiquid assets, and ETFs potentially
holding foreign equities and/or less-liquid fixed income instruments;
Information to investors is inadequate, and the Funds
should provide publicly available, enhanced real-time VIIVs, daily
closing market price and premium/discount based on the NAV, daily
intraday estimated premiums/discounts, and daily purchase and
redemption transaction fees; and
(1) Widespread dissemination of the Funds' confidential
portfolio holdings on a daily basis and ``the absence of a discernible
program'' to protect the Funds' confidential information, and (2) the
``high likelihood'' that the Shares will trade at wider bid-ask spreads
and more variable premiums/discounts than existing active ETFs, render
the proposal inconsistent with the Section 6(b)(5) requirements that
Exchange rules must be designed to prevent fraudulent and manipulative
acts and practices, protect investors and the public interest, and not
to permit unfair discrimination among customers, issuers, brokers and
dealers.\37\
---------------------------------------------------------------------------
\37\ In addition, the commenter believes that the proposal fails
to meet the statutory standards for exemptive relief pursuant to
Section 6(c) of the 1940 Act and asserts that the normal tax
benefits of ETF investing will likely not apply to the Funds.
---------------------------------------------------------------------------
[[Page 19376]]
III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-04 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act \38\ to determine whether the proposed
rule change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Exchange Act,\39\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting 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, . . . to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest.'' \40\
---------------------------------------------------------------------------
\39\ Id.
\40\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Exchange
Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4, any request for
an opportunity to make an oral presentation.\41\
---------------------------------------------------------------------------
\41\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by May 23, 2018. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 6,
2018.
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice,\42\ the issues raised by the commenters, and any other
issues raised by the proposed rule change under the Exchange Act. In
particular, the Commission seeks commenters' views regarding the
concerns raised with respect to selective disclosure of confidential
portfolio information, namely, whether such disclosure is consistent
with the requirement of Section 6(b)(5) that the rules of the exchange
be designed to prevent fraudulent and manipulative acts and practices.
The Commission also seeks commenters' views regarding the various
concerns raised about how the Shares may trade in the secondary market,
including the potential for frequent trading halts and poor trading
performance during times of market volatility and stress. In this
regard, the Commission specifically seeks commenters' views on whether
the proposal is consistent with the maintenance of a fair and orderly
market.
---------------------------------------------------------------------------
\42\ See supra note 3.
---------------------------------------------------------------------------
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2018-04 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 Numbers SR-NYSEArca-2018-04. 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 website (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 website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of these filings also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2018-04 and should be submitted
on or before May 23, 2018. Rebuttal comments should be submitted by
June 6, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09265 Filed 5-1-18; 8:45 am]
BILLING CODE 8011-01-P
