80_FR_34845 80 FR 34729 - Request for Comment on Exchange-Traded Products

80 FR 34729 - Request for Comment on Exchange-Traded Products

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 116 (June 17, 2015)

Page Range34729-34743
FR Document2015-14890

The Securities and Exchange Commission (``Commission'') is seeking public comment on topics related to the listing and trading of exchange-traded products on national securities exchanges and sales of these products by broker-dealers.

Federal Register, Volume 80 Issue 116 (Wednesday, June 17, 2015)
[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34729-34743]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-14890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75165; File No. S7-11-15]


Request for Comment on Exchange-Traded Products

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
seeking public comment on topics related to the listing and trading of 
exchange-traded products on national securities exchanges and sales of 
these products by broker-dealers.

DATES: Comments should be received by August 17, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml);
     Send an email to rule-comments@sec.gov, including File 
Number S7-11-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov), following the instructions for submitting 
comments.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-11-15. 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 of submission. The Commission will post all 
comments on the Commission's Web site (http://www.sec.gov). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: Edward Cho, Special Counsel, at (202) 
551-5508; Christopher Chow, Special Counsel, at (202) 551-5622; or 
Sarah Schandler, Special Counsel, at (202) 551-7145, Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-7010.

Table of Contents

I. Discussion
    A. Introduction
    B. The Types of ETPs
    C. How Existing ETPs Function
    1. Purchases, Sales, Creations, and Redemptions
    2. Arbitrage Between an ETP's Market Price and Its NAV
    D. The Commission's Oversight of Exchange-Traded Products
    1. Exchange Act Exemptive and No-Action Relief for Existing ETPs
    2. Exchange Listing Standards and the Rule 19b-4 Process
    3. Broker-Dealer Sales Practices
II. Request For Comment
    A. Arbitrage and Market Pricing
    B. Exchange Act Exemptions and No-Action Positions
    C. Exchange Listing Standards
    D. Broker-Dealer Sales Practices and Investor Understanding and 
Use of ETPs
    E. Other

I. Discussion

A. Introduction

    Exchange-traded products (``ETPs'') constitute a diverse class of 
financial products that seek to provide investors with exposure to 
financial instruments, financial benchmarks, or investment strategies 
across a wide range of asset classes. ETP trading occurs on national 
securities exchanges and other secondary markets that are regulated by 
the Commission under the Securities Exchange Act of 1934 (``Exchange 
Act''),\1\ making ETPs widely available to market participants, from 
individual investors to institutional investors, including hedge funds 
and pension funds.
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    \1\ 15 U.S.C. 78a et seq. Once listed on a national securities 
exchange, ETP shares also can be traded on Alternative Trading 
Systems (as defined in Rule 300 of Regulation ATS, 17 CFR 242.300) 
or in other over-the-counter transactions.
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    The Commission approved the listing and trading of shares of the 
first ETP--the SPDR S&P 500 ETF (``SPY'')--in 1992.\2\ Since the SPY 
began trading on January 22, 1993, there has been enormous growth in 
the number, aggregate market capitalization, and variety of ETPs. The 
chart below depicts the growth of ETPs, both in number and market 
capitalization, since 1993.
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    \2\ See Securities Exchange Act Release No. 31591 (Dec. 11, 
1992), 57 FR 60253 (Dec. 18, 1992) (SR-Amex-92-18) (order approving 
the adoption of listing standards for Portfolio Depositary Receipts 
and the listing and trading of shares of SPY pursuant to those 
listing standards).
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    As reflected in Figure 1 (below), from 2006 to 2013, the total 
number of ETPs listed and traded as of year end rose by an average of 
160 per year, with a net increase of more than 200 in both 2007 and 
2011. By comparison, from 1993 to 2005, the total number of ETPs listed 
and traded as of year end rose by an average of just 17 per year, with 
a net increase of 60 in 2000. The total market capitalization of ETPs 
has also grown substantially, nearly doubling since the end of 2009. 
Much of this growth has been in index-based ETPs.

[[Page 34730]]

[GRAPHIC] [TIFF OMITTED] TN17JN15.001

    As of December 31, 2014, there were 1,664 U.S.-listed ETPs, and 
they had an aggregate market capitalization of just over $2 
trillion.\4\ Trading in these ETPs makes up a significant portion of 
secondary-market equities trading. For example, during 2014, trading in 
U.S.-listed ETPs made up about 16.7% of U.S. equity trading by share 
volume and 25.7% of U.S. equity trading by dollar volume.\5\
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    \3\ The figures underlying this chart were produced by an 
analysis by Commission staff of year-end market data obtained 
through subscriptions to Morningstar Direct and Bloomberg 
Professional services.
    \4\ These figures reflect an analysis by Commission staff of 
market data obtained through subscriptions to Morningstar Direct and 
Bloomberg Professional services.
    \5\ These figures reflect an analysis by Commission staff of 
market data obtained through the Commission's Market Information 
Data and Analytics System (``MIDAS''). The staff's analysis of MIDAS 
data also shows that approximately 32.4% of the trading activity (by 
share volume) in ETPs during 2014 took place on trading venues other 
than national securities exchanges, which is roughly comparable to 
the approximately 35.2% of share volume in all equity trading that 
took place off an exchange in 2014.
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    There has also been significant growth in the range of investment 
strategies that ETPs pursue. These strategies have expanded from 
exchange-traded funds (``ETFs'') that track equity indices (such as the 
original SPY) to include, among other things: (i) ETPs that track other 
types of indices (such as those based on fixed-income securities or on 
derivatives contracts on commodities and currencies); (ii) actively 
managed ETPs that hold portfolios of equities, fixed-income 
instruments, foreign securities, commodities, currencies, futures, 
options, or other over-the-counter or exchange-traded derivatives; \6\ 
(iii) leveraged, inverse, and inverse leveraged ETPs; \7\ and (iv)

[[Page 34731]]

ETPs employing market volatility, hedging, or options-based 
strategies.\8\
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    \6\ See, e.g., Securities Exchange Act Release Nos. 50603 (Oct. 
28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22) (order 
approving the adoption of listing standards for Equity Gold Shares 
and the listing and trading of shares of the streetTRACKS Gold 
Trust, which was subsequently renamed the SPDR Gold Trust); 60064 
(June 8, 2009), 74 FR 28315 (June 15, 2009) (SR-NYSEArca-2009-30) 
(order granting approval for the listing and trading of shares of 
the iShares Diversified Alternatives Trust); 68390 (Dec. 10, 2012), 
77 FR 74540 (Dec. 14, 2012) (SR-BATS-2012-042) (order granting 
approval for the listing and trading of shares of the Sovereign 
Screened Global Bond Fund); 68871 (Feb. 8, 2013), 78 FR 11238 (Feb. 
15, 2013) (SR-NYSEArca-2012-138) (order granting approval for the 
listing and trading of shares of the PIMCO Foreign Currency Strategy 
Exchange-Traded Fund); 68972 (Feb. 22, 2013), 78 FR 13721 (Feb. 28, 
2013) (SR-NASDAQ-2012-147) (order granting approval for the listing 
and trading of shares of the First Trust High Yield Long/Short ETF); 
70209 (Aug. 15, 2013), 78 FR 51769 (Aug. 21, 2013) (SR-NYSEArca-
2013-60) (order granting approval to list and trade shares of the 
Market Vectors Low Volatility Commodity ETF and Market Vectors Long/
Short Commodity ETF); and 71378 (Jan. 23, 2014), 79 FR 4786 (Jan. 
29, 2014) (SR-NYSEArca-2013-137) (order granting approval to list 
and trade shares of the Merk Gold Trust).
    \7\ Leveraged ETPs seek to achieve performance results, over a 
specified period, that are a multiple or an inverse multiple of the 
performance of the index or benchmark they track. Inverse ETPs (also 
called ``short'' funds) seek to deliver the opposite of the 
performance of the index or benchmark they track. Like traditional 
ETPs, some leveraged and inverse ETPs track broad indices, some are 
sector-specific, and others are linked to commodities, currencies, 
or some other benchmark. See U.S. Securities and Exchange 
Commission, Leveraged and Inverse ETFs: Specialized Products with 
Extra Risks for Buy-and-Hold Investors, available at http://www.sec.gov/investor/pubs/leveragedetfs-alert.htm; see also 
Securities Exchange Act Release No. 52553 (Oct. 3, 2005), 70 FR 
59100 (Oct. 11, 2005) (SR-Amex-2004-62) (order granting approval for 
the adoption of listing standards to accommodate leveraged ETFs and 
for the listing and trading of shares of the xtraShares Trust).
    \8\ For example, recent ETPs have included an ETF that seeks to 
track the performance of the CBOE S&P 500 VIX Tail Hedge Index, see 
Securities Exchange Act Release No. 67485 (July 23, 2012), 77 FR 
44291 (July 27, 2012) (SR-NYSEArca-2012-50); an ETF that writes 
covered call options on underlying ETPs that it owns, see Securities 
Exchange Act Release No. 67552 (Aug. 1, 2012), 77 FR 47131 (Aug. 7, 
2012) (SR-NYSEArca-2012-55); an ETF that holds long and short 
positions in underlying ETFs and ETNs, see Securities Exchange Act 
Release No. 67559 (Aug. 1, 2012), 77 FR 47482 (Aug. 8, 2012) (SR-
NYSEArca-2012-57); an ETF that holds a portfolio including equities, 
equity futures, and volatility-related instruments, see Securities 
Exchange Act Release No. 68158 (Nov. 5, 2012), 77 FR 67412 (Nov. 9, 
2012) (SR-NYSEArca-2012-101); and an ETF that seeks to track the 
performance of an index of over-the-counter put options on volatile 
stocks, see Securities Exchange Act Release No. 69373 (Apr. 15, 
2013), 78 FR 23601 (Apr. 19, 2013) (SR-NYSEArca-2012-108).
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    The increasing scope and complexity of ETP investment strategies in 
recent years have led to an increase in the number and complexity of 
requests by issuers for exemptive relief under the Exchange Act (to 
allow ETPs to be offered for sale on exchanges) and in the number and 
complexity of proposed rule changes filed with the Commission by 
exchanges seeking to establish listing standards for the securities of 
new ETPs. Accordingly, the Commission believes that this is an 
opportune time to seek public comment on topics associated with its 
oversight of the listing and trading of ETPs on national securities 
exchanges.\9\
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    \9\ The Commission has previously sought comment on topics 
related to exchange-traded funds, most recently in 2008. See 
Exchange-Traded Funds, Investment Company Act Release No. 28193 
(Mar. 11, 2008), 73 FR 14618 (Mar. 18, 2008) (proposed rule), 
available at http://www.sec.gov/rules/proposed/2008/33-8901.pdf. The 
Commission has not adopted the rule that was proposed in the 2008 
release.
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B. The Types of ETPs

    Although ETPs constitute a diverse class of financial products, for 
purposes of this Request for Comment they are classified into three 
broad categories.\10\
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    \10\ Recently, the Commission approved an exchange proposal to 
adopt rules that provide for the listing and trading of Exchange-
Traded Managed Fund Shares (``ETMFs''), which would operate 
differently from existing ETPs. See Securities Exchange Act Release 
No. 73562 (Nov. 7, 2014), 79 FR 68309 (Nov. 14, 2014) (SR-NASDAQ-
2014-020) (Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1 thereto, Relating to the Listing and Trading of 
Exchange-Traded Managed Fund Shares) (``ETMF Approval Order''). No 
ETMFs are currently listed or traded on an exchange, and this 
Request for Comment does not therefore address their listing and 
trading.
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Exchange-Traded Funds (ETFs)
    The first, and largest, category comprises ETFs, which are open-end 
fund vehicles or unit investment trusts that are registered as 
investment companies under the Investment Company Act of 1940 (``1940 
Act'').\11\ Like an open-end fund, an ETF pools the assets of multiple 
investors and invests those assets according to its investment 
objective and principal investment strategies, and each share of an ETF 
represents an undivided interest in the underlying assets of the ETF. 
However, unlike open-end funds--shares of which are purchased or 
redeemed at the fund's current net asset value (``NAV''),\12\ which is 
typically calculated at the end of the trading day--ETF shares may be 
bought or sold by investors throughout the day through a broker-dealer 
at a market-determined price.\13\
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    \11\ 15 U.S.C. 80a-1 et seq.
    \12\ The NAV of an investment company is the net value of all 
the assets and liabilities in the investment company's portfolio 
divided by the number of the shares issued by the investment 
company.
    \13\ Closed-end funds are also registered 1940 Act investment 
companies that issue securities that are traded on an exchange, and 
they may pursue investment strategies similar to those of ETFs. The 
trading of closed-end funds differs from that of ETFs, however, in 
that closed-end funds do not operate with the creation and 
redemption mechanism that, as described below, helps to keep an 
ETF's market price closely tied to the value of the assets it holds. 
See infra at Section I.C.
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Non-1940 Act Pooled Investment Vehicles
    The second category comprises ETPs that, generally, are trust or 
partnership vehicles that are not registered under the 1940 Act because 
they do not invest primarily in securities. Examples of ETPs in this 
category include those that physically hold a precious metal or that 
hold a portfolio of futures or other derivatives contracts on certain 
commodities or currencies. Offerings of securities issued by ETPs in 
this second category are registered only under the Securities Act of 
1933 (``Securities Act'') \14\ and are not also registered under the 
1940 Act.
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    \14\ 15 U.S.C. 77a et seq.
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Exchange-Traded Notes (ETNs)
    The third category comprises exchange-traded notes (``ETNs''). ETNs 
are senior debt instruments issued by financial institutions, and they 
pay a return based on the performance of a ``reference asset''--an 
asset, market benchmark, or other investment strategy, such as the 
return on the S&P 500 Index, the performance of commodities or 
commodity indices, or the performance of the common stock of an 
individual public company. Unlike the other two categories of ETPs 
described above, ETNs are not pooled vehicles, and they do not hold an 
underlying portfolio of securities, futures, over-the-counter 
derivatives, or other assets. Offerings of ETNs are registered under 
the Securities Act, and the performance of the reference assets 
generally determines the amount owed by the issuer of the ETN to the 
holder of the ETN at maturity.
Market Statistics
    To provide a general overview of the distribution of market 
capitalization and trading volume across broad categories of ETPs, the 
table below shows the number of ETP products (by underlying or 
reference asset and by type of ETP), their aggregate market 
capitalization, and the total value traded as of year end 2014.

                      ETPs by Underlying or Reference Asset Type, as of Year End 2014 \15\
----------------------------------------------------------------------------------------------------------------
                                                                                                   Total value
         Underlying or reference asset or strategy               Number       Total market cap   traded in 2014
                                                                                 (millions)        (millions)
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Asset Allocation..........................................                36            $7,435           $14,380
    ETF...................................................                34             7,402            14,344
    ETN...................................................                 2                33                36
Alternative Strategies....................................               330            42,985         1,952,802
    ETF...................................................               209            31,865         1,296,485
    Non-1940 Act Pooled Investment Vehicles...............                25             4,727           142,465

[[Page 34732]]

 
    ETN...................................................                96             6,392           513,852
Commodities...............................................               118            55,366           406,728
    ETF...................................................                 7               213               810
    1940 Act Pooled Investment............................
Vehicles..................................................                38            50,880           390,213
    ETN...................................................                73             4,273            15,705
International Equity......................................               367           380,023         2,497,521
    ETF...................................................               361           376,941         2,495,865
    ETN...................................................                 6             3,082             1,657
Municipal Bond............................................                32            14,273            20,186
    ETF...................................................                32            14,273            20,186
Sector Equity.............................................               297           304,588         2,782,522
    ETF...................................................               281           293,673         2,764,385
    ETN...................................................                16            10,915            18,137
Taxable Bond..............................................               217           290,245         1,000,086
    ETF...................................................               214           290,219         1,000,037
    ETN...................................................                 3                26                49
U.S. Equity...............................................               267           909,677         8,581,038
    ETF...................................................               252           907,557         8,579,330
    ETN...................................................                15             2,119             1,707
                                                           -----------------------------------------------------
    Grand Total...........................................             1,664         2,004,591        17,255,263
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C. How Existing ETPs Function
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    \15\ These figures reflect an analysis by Commission staff of 
market data obtained through subscriptions to Morningstar Direct and 
Bloomberg Professional services. Figures are as of the last trading 
day of 2014.
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1. Purchases, Sales, Creations, and Redemptions
    Most investors in an ETP buy and sell the ETP's securities in the 
secondary market, at a market-determined price, with other market 
participants, including other investors, broker-dealers, and market 
makers, on the other side of the transaction. The ETP securities that 
are listed for trading on an exchange (``ETP Securities'') are either 
(i) shares issued by the ETP or (ii) in the case of ETNs (which are, as 
noted above, debt instruments issued by a financial institution), the 
debt instruments themselves.
    Although most investors can buy or sell ETP Securities only in the 
secondary market through a broker-dealer, certain large market 
participants, typically broker-dealers, can become authorized 
participants (``Authorized Participants'') with respect to most 
ETPs.\16\ Each Authorized Participant enters into a contractual 
relationship with the ETP issuer that allows it to engage in purchases 
and redemptions of ETP Securities directly with that issuer.
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    \16\ ETNs, as credit instruments issued by a financial 
institution, do not have Authorized Participants.
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    For almost all ETPs,\17\ the issuance and redemption of ETP 
Securities operates in essentially the same manner.\18\ ETPs generally 
issue ETP Securities only in large aggregations or blocks (for example, 
50,000 ETP shares) called creation units (``Creation Units''). Most 
ETPs are structured so that an Authorized Participant will purchase a 
Creation Unit with a portfolio deposit (``Portfolio Deposit''), which 
is a basket of assets (and sometimes cash) that generally reflects the 
composition of the ETP's portfolio.\19\ The ETP makes public the 
contents of the Portfolio Deposit before the beginning of the trading 
day.\20\ Because the purchase price of a Creation Unit and its 
aggregate NAV must be equal, an amount of cash will be exchanged 
between the Authorized Participant and the ETP at the time of purchase 
when necessary to balance the value of the Portfolio Deposit with that 
of the Creation Unit. After purchasing a Creation Unit, an Authorized 
Participant may hold the ETP Securities or sell (or lend) some or all 
of them to investors in the secondary market.
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    \17\ ETNs may or may not be redeemable, and they employ 
different calculations and procedures to issue and redeem ETN units 
based on the value or performance of the underlying reference asset 
or benchmark. The issuance and redemption process for ETNs is 
generally performed by institutional investors, as issuers require 
issuance or redemption to occur in large blocks of ETNs (e.g., 
25,000 to 50,000 ETNs). ETNs are issued and redeemed (where 
redeemable) solely for cash.
    \18\ Some ETPs, however, do not permit regular creations after 
the initial public offering of the ETP, allowing only ETP 
redemptions. See, e.g., Securities Exchange Act Release No. 66930 
(May 7, 2012), 77 FR 27817 (May 11, 2012) (SR-NYSEArca 2012-18) 
(APMEX Physical--1 oz. Gold Redeemable Trust).
    \19\ Some issuers may allow or require Creation Units to be 
created for cash only.
    \20\ In most cases, ETPs publish the contents of their Portfolio 
Deposit through the National Securities Clearing Corporation 
(``NSCC''). The NSCC provides its members with several methods to 
access this information. See http://www.dtcc.com/clearing-services/equities-trade-capture/etf.aspx.
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    Similarly, for most ETPs, when an Authorized Participant wishes to 
redeem ETP Securities, it presents a Creation Unit to the ETP for 
redemption and receives in return a redemption basket (``Redemption 
Basket''), the contents of which are made public by the ETP before the 
beginning of the trading day. The Redemption Basket (which is usually, 
but not always, the same as the Portfolio Deposit) typically consists 
of securities or commodities and a small amount of cash.\21\ As with 
purchases from the ETP, redemptions to the ETP are priced at NAV,\22\ 
and an amount of cash will be exchanged when necessary to balance the 
value of the Redemption Basket with that of the Creation Unit.
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    \21\ Some issuers may allow or require cash-only Redemption 
Baskets.
    \22\ Certain ETPs that hold physical commodities and are not 
ETFs redeem Creation Units, at the Authorized Participant's option, 
either for commodities with a value equal to the NAV of the Creation 
Unit or for cash at less than the NAV of the Creation Unit. See, 
e.g., Securities Exchange Act Release No. 66930, supra note 18.
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    When creation and redemption transactions occur wholly or partly 
``in kind''--in other words, when securities constituting the ETP's 
portfolio are exchanged for ETP Securities and vice versa--certain 
benefits can accrue to the ETP and its investors. In-kind exchanges 
generally result in lower trading expenses (because securities received 
or

[[Page 34733]]

delivered in kind do not need to be purchased or sold in the market by 
the ETP, thus avoiding brokerage fees) and lower taxable gains to 
shareholders (because appreciated securities are not sold but are 
delivered in kind to redeeming Authorized Participants).
2. Arbitrage Between an ETP's Market Price and Its NAV
    Because of the creation and redemption mechanisms, most existing 
ETPs present market participants, including Authorized Participants, 
market makers, and institutional investors, with opportunities to 
engage in arbitrage, which generally helps to prevent the market price 
of ETP Securities from diverging significantly from the value of the 
ETP's underlying or reference assets.\23\ Although most ETPs calculate 
and disseminate their official NAV only once per day as of the close of 
regular trading hours, market participants can use other methods during 
the trading day to calculate or approximate the value of the assets 
underlying or referenced by a share of an ETP.\24\
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    \23\ Arbitrage for ETNs may operate differently from that for 
other existing ETPs, because the in-kind creation and redemption 
process for most ETPs differs from the cash-only issuance and 
redemption process for ETNs. The Commission seeks comment on the 
operation of arbitrage for ETNs. See infra at Section II.A (Question 
8).
    \24\ ETNs do not calculate a NAV because they do not hold an 
underlying portfolio of assets. See supra Section I.B. See also 
infra note 26.
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    For example, exchange listing standards require every currently 
traded, actively managed ETP to make daily disclosure of its entire 
portfolio.\25\ Current exchange listing standards do not require 
similar disclosures for index-based ETPs, but the make-up and value of 
the underlying indices are widely available, and most index-based ETPs, 
as a matter of practice, make daily disclosure of their portfolios. 
With this information, market participants can access pricing data 
about an ETP's portfolio assets and perform their own calculations of 
the per-share value of that portfolio.
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    \25\ See, e.g., NYSE Arca Equities Rule 8.600(d)(2)(B)(i). An 
actively managed ETP does not seek to track the return of a 
particular securities index. Instead, an actively managed ETP's 
investment adviser selects investments designed to meet a particular 
investment objective or policy.
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    In addition, exchange listing standards require existing ETPs to 
publicly disseminate during the trading day an intraday indicative 
value (``IIV''), which is designed to provide investors with 
information on the value of the investments held by the ETP (or, in the 
case of an ETN, the reference assets).\26\ The IIV is typically 
calculated and disseminated at least every 15 seconds during the 
trading day and is typically disseminated over the Consolidated Tape or 
via an exchange data feed. The IIV may or may not be based on the 
entire portfolio held by an ETP, and it may or may not be equal to the 
per-share value of an ETP's underlying portfolio or reference 
assets.\27\
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    \26\ See, e.g., NYSE Arca Equities Rule 5.2(j)(3), Commentary 
.01(c). The IIV is also referred to as an ``Indicative Optimized 
Portfolio Value,'' ``Intraday Value,'' or ``Portfolio Indicative 
Value.'' Most ETN issuers also make publicly available on their Web 
sites or through third-party vendors a value called the closing 
indicative value, which is determined as of the close of each 
trading day. The closing indicative value, in contrast to the 
intraday indicative value, represents the value of the ETN at that 
point in time and is used to calculate the amounts due to investors 
at maturity or on redemption.
    \27\ For example, the IIV for some ETPs is based on the current 
value of the securities or cash required to be deposited in exchange 
for a creation unit, which may differ from the composition of 
portfolio holdings on any given day. See, e.g., Securities Exchange 
Act Release No. 67320 (June 29, 2012), 77 FR 39763 (July 5, 2012) 
(SR-NYSEArca-2012-44) (order granting approval for the listing and 
trading of shares of the iShares Strategic Beta U.S. Large Cap Fund 
and iShares Strategic Beta U.S. Small Cap Fund). The IIV for certain 
other ETPs is based on the current value of some, but not all, 
assets held in the investment portfolio. See, e.g., Securities 
Exchange Act Release No. 61881 (Apr. 9, 2010), 75 FR 20028 (Apr. 16, 
2010) (SR-NYSEArca-2010-14) (order granting approval to list and 
trade partnership units of the United States Brent Oil Fund, LP, a 
commodity pool that seeks to track changes in Brent crude oil 
futures traded on the ICE Futures Exchange and that calculates and 
disseminates an IIV based solely on these futures contracts, 
excluding other crude-oil-related investments held in the 
portfolio).
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    A simplified example of ``riskless'' arbitrage will help to clarify 
how the arbitrage process for existing ETPs is intended to work. If the 
shares of an ETP that uses an in-kind creation and redemption process 
begin to trade at a discount to the value of the underlying portfolio 
at any point during the trading day, arbitrageurs can capture this 
difference (minus expenses) by: (i) Purchasing ETP Securities in the 
secondary market in an amount equal to a Creation Unit while 
simultaneously selling short the securities or commodities in the 
Redemption Basket; (ii) redeeming the Creation Unit with the ETP at the 
end-of-day NAV (either as an Authorized Participant or through a 
relationship with an Authorized Participant), thereby receiving the 
securities or commodities in the Redemption Basket; and (iii) using the 
contents of the Redemption Basket to close out the arbitrageur's short 
position. Purchasing the ETP Securities and selling short the 
securities or commodities in the Redemption Basket also apply market 
pressure that tends, all other things being equal, to bring the ETP 
Security's market price closer to the value of the underlying portfolio 
assets.
    Similarly, if the shares of this same ETP begin to trade at a 
premium to the value of the underlying portfolio, arbitrageurs may 
profit by: (i) Selling short the ETP Securities; (ii) purchasing the 
securities or commodities that make up the Portfolio Deposit; (iii) 
exchanging the Portfolio Deposit for a Creation Unit through an 
Authorized Participant; and then (iv) using the ETP Securities in the 
Creation Unit to close out the short position. Again, the sales of the 
ETP Securities and the purchases of the contents of the Portfolio 
Deposit apply market pressure that tends, all other things being equal, 
to bring the price of the ETP Securities closer to the value of the 
underlying portfolio assets.
    Market participants can also engage in arbitrage activities that do 
not necessarily require them to engage in creations or redemptions. For 
example, if a market participant believes that an ETP is overvalued 
relative to its underlying or reference assets, the market participant 
may sell ETP Securities; buy the underlying or reference assets; and, 
if the trading prices move toward parity, close out the positions in 
both the ETP Securities and the underlying or reference assets. The 
market participant would thereby realize a profit from the relative 
movement of those trading prices without engaging in an ETP creation. 
Similarly, a market participant could buy ETP Securities and sell the 
underlying or reference assets in an attempt to profit when an ETP 
Security is trading at a discount to its underlying or reference 
assets. As discussed above, the trading of an ETP Security and its 
underlying or reference assets applies market pressure that may bring 
the prices of the ETP Security and those assets closer together.

D. The Commission's Oversight of Exchange-Traded Products \28\
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    \28\ In addition to the exemptive or no-action relief provided 
with respect to the Exchange Act rules and regulations described 
infra, in 1998 and 1999 the Commission's staff provided no-action 
relief under Section 13(d) of the Exchange Act, 15 U.S.C. 78m(d), 
and Section 16(a) of the Exchange Act, 15 U.S.C. 78p(a), to certain 
funds registered under the 1940 Act with respect to the required 
filing of ownership reports by insiders and five percent beneficial 
owners of the shares of the ETFs. See Letter from James J. Moloney, 
Division of Corporation Finance, and Evan Geldzahler, Division of 
Investment Management, Securities and Exchange Commission, to Sam 
Scott Miller, Orrick, Herrington & Sutcliffe LLP, 1998 SEC No.-Act. 
LEXIS 1050 (Dec. 14, 1998) (providing no-action relief under Section 
13(d) of the Exchange Act); Letter from Anne M. Krauskopf, Division 
of Corporation Finance, and Evan Geldzahler, Division of Investment 
Management, Securities and Exchange Commission, to Stuart M. 
Strauss, Gordon, Altman, Butowsky, Weitzen, Shalov & Wein, 1999 SEC 
No-Act. LEXIS 500 (May 6, 1999) (``Select Sector SPDR Trust 
Letter'') (providing no-action relief under Section 16(a) of the 
Exchange Act). This no-action relief was based, in large part, on 
the representation that the trading prices of the ETFs did not 
deviate materially from their NAV. See id. Having stated its views 
on whether insiders and five percent beneficial owners of ETPs must 
file ownership reports under Sections 16(a) and 13(d) of the 
Exchange Act, the Division staff stated that it would not respond to 
further requests for no-action relief in this area unless the 
request presented a ``novel or unusual issue.'' See Select Sector 
SPDR Trust Letter, 1999 SEC No-Act. LEXIS 500, *9.
---------------------------------------------------------------------------

    Before ETP Securities can be listed and traded on a national 
securities

[[Page 34734]]

exchange, those securities and their issuer must comply with, or obtain 
exemptions from, several provisions of the securities laws. First, as 
with other securities, the offer and sale of ETP Securities must be 
registered under the Securities Act.\29\ In addition, in the case of 
ETFs, certain relief from the requirements of the 1940 Act is 
necessary,\30\ because ETFs differ from other open-end investment 
companies in that they issue and redeem shares only in Creation Units 
and their shares trade in the secondary market at market prices.
---------------------------------------------------------------------------

    \29\ For ETPs that are not registered under the 1940 Act, 
offerings of ETP Securities require the filing of a registration 
statement on Form S-1 or Form S-3, depending on the issuer. 
Depending on the form type used to register the offering, the staff 
of the Division of Corporation Finance may review the disclosures 
included in the registration statement and may issue comments. ETN 
offerings in many cases are made through takedowns off of effective 
shelf registration statements. For ETFs registered under the 1940 
Act, offerings require the filing of a registration statement on 
Form N-1A. The staff of the Division of Investment Management 
reviews the information disclosed in the Form N-1A and may issue 
comments requesting that the issuer revise or expand its disclosures 
before the registration statement becomes effective.
    \30\ For an ETF to operate, it must first obtain an order under 
Section 6(c) of the 1940 Act for an exemption from Sections 
2(a)(32), 5(a)(1), 22(d), and 22(e) of the 1940 Act and from Rule 
22c-1 thereunder, and under Sections 6(c) and 17(b) for an exemption 
from Sections 17(a)(1) and 17(a)(2) of the 1940 Act.
---------------------------------------------------------------------------

    While ETPs are governed by various provisions of the securities 
laws, including the Securities Act and, in certain cases, the 1940 Act, 
the focus of this Request for Comment is on the listing of ETP 
Securities on an exchange and the trading of ETP Securities on 
exchanges and other venues. Therefore, in issuing this Request for 
Comment, the Commission seeks public comment relating specifically to 
the oversight of ETPs under the provisions of the Exchange Act and the 
rules thereunder, including both (i) the exemptive and no-action relief 
granted to ETPs under the Exchange Act and (ii) the requirement that a 
national securities exchange have Commission-approved listing standards 
applicable to the ETP Securities being traded.
1. Exchange Act Exemptive and No-Action Relief for Existing ETPs
    The trading of ETP Securities on an exchange generally will require 
that the issuer obtain exemptive or no-action relief from various 
provisions of, or rules promulgated under, the Exchange Act. As 
explained more fully below, the normal operation of an ETP would 
usually violate these provisions absent relief.
a. Regulation M
    Regulation M proscribes certain activities that may increase a 
security's offering price (and so increase the offering proceeds); 
stabilize the market price of an offered security in order to avoid a 
price decline during the sales period or in the immediate aftermarket; 
or induce or attempt to induce prospective investors to buy in the 
aftermarket.\31\ Rules 101 and 102 of Regulation M generally prohibit 
distribution participants, issuers, selling security holders, and their 
affiliated purchasers from purchasing, bidding for, or attempting to 
induce others to purchase or bid for covered securities during the 
restricted period of a distribution of securities.\32\ Because most 
ETPs are in continuous distribution, meaning that they are continually 
creating and distributing new securities, this restricted period 
usually extends indefinitely.\33\ Absent relief, the purchase of ETP 
Securities by an Authorized Participant (who would be considered a 
distribution participant), or by the issuer in the redemption process, 
would violate Rules 101 and 102 of Regulation M.
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    \31\ See Amendments to Regulation M: Anti-Manipulation Rules 
Concerning Securities Offerings, Securities Exchange Act Release No. 
50831 (Dec. 9, 2004), 69 FR 75774 (Dec. 17, 2004) (S7-41-04) 
(proposed rule).
    \32\ 17 CFR 242.101 and 242.102. See also 17 CFR 242.100 
(defining ``distribution participants,'' ``selling security 
holder,'' ``affiliated purchaser,'' and other terms for purposes of 
Regulation M). In addition to being promulgated under the Exchange 
Act, Rules 101 and 102 of Regulation M are also promulgated under 
the Securities Act and under the 1940 Act. See Anti-Manipulation 
Rules Concerning Securities Offerings, Securities Exchange Act 
Release No. 38067 at n. 10 (Dec. 20, 1996), 62 FR 520, 521 n. 10 
(Jan. 3, 1997) (S7-11-96).
    \33\ See 17 CFR 242.100 (definition of ``Restricted Period'').
---------------------------------------------------------------------------

    When it has granted relief with respect to Regulation M, the 
Commission has relied upon representations from ETPs that the 
continuing existence of effective and efficient arbitrage mechanisms 
help ensure that the secondary market price of ETP Securities does not 
vary substantially from the ETP's NAV or underlying index value.\34\ 
The relief is based in part on an ETP issuer's representation that the 
continuing existence of effective and efficient arbitrage mechanisms 
makes it difficult to manipulate distributions of ETP Securities. 
Relief for classes of ETPs relies on similar bases.\35\ The 
consideration of effective and efficient arbitrage mechanisms for 
purposes of Regulation M, and the Commission's overall consideration of 
ETPs, can take into account not only the end-of-day differences between 
an ETP Security's closing market price and the ETP's NAV, but also any 
intra-day premiums or discounts between the secondary market price of 
an ETP Security and the value of its underlying portfolio or reference 
assets.
---------------------------------------------------------------------------

    \34\ See, e.g., Letter from W. John McGuire, Morgan, Lewis & 
Bockius LLP, to Josephine Tao, Division of Trading and Markets, 
Securities and Exchange Commission, re: AdvisorShares Trust 
Actively-Managed ETF WCM/BNY Mellon Focused Growth ADR (June 18, 
2010) (representing that a close alignment between market price and 
NAV is expected for the relevant ETP due in part to an effective and 
efficient arbitrage mechanism), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2010/advisorshares061810.pdf. See 
also Letter from Josephine Tao, Division of Trading and Markets, 
Securities and Exchange Commission, to W. John McGuire, Morgan, 
Lewis & Bockius LLP, re: AdvisorShares Trust Actively-Managed ETF 
WCM/BNY Mellon Focused Growth ADR (June 18, 2010), available at 
http://www.sec.gov/divisions/marketreg/mr-noaction/2010/advisorshares061810.pdf.
    \35\ See Letter from James A. Brigagliano, Division of Trading 
and Markets, Securities and Exchange Commission, to Stuart M. 
Strauss, Clifford Chance US LLP, re: Class Relief for Exchange 
Traded Index Funds (Oct. 24, 2006) (``Equity Index-Based ETF 
Letter'') (noting that relief is only appropriate when the secondary 
market price of the ETF's shares does not vary substantially from 
NAV), available at http://www.sec.gov/divisions/marketreg/mr-noaction/etifclassrelief102406-msr.pdf.
---------------------------------------------------------------------------

    In granting relief, the Commission also has relied on 
representations by ETP issuers that the characteristics of their 
proposed ETPs will mitigate against the types of abuses that Regulation 
M is intended to address.\36\ In the case of ETFs, for example, this 
includes representations that the shares are issued by an open-end 
investment company or unit investment trust registered with the 
Commission under the 1940 Act and that the index underlying an index-
based ETP has at least 20 different component securities to promote 
sufficient diversification. It also includes representations that those 
components have publicly available trade information, to facilitate the

[[Page 34735]]

availability of sufficient information for arbitrage.\37\
---------------------------------------------------------------------------

    \36\ See supra note 31 and accompanying text.
    \37\ See, e.g., Equity Index-based ETF Letter, supra note 35. 
Broadly speaking, ETP sponsors seeking relief make the same 
representations as those made by similar products that have 
previously been granted relief.
---------------------------------------------------------------------------

b. Exchange Act Section 11(d)(1) and Rule 11d1-2
    Section 11(d)(1) of the Exchange Act generally prohibits a broker-
dealer from extending or maintaining credit, or arranging for the 
extension or maintenance of credit, on shares of new-issue securities 
if the broker-dealer participated in the distribution of the new-issue 
securities within the preceding 30 days.\38\ The Commission's view is 
that, because ETP Securities are distributed in a continuous manner, 
broker-dealers that sell these securities are thereby participating in 
the ``distribution'' of a new issue for purposes of Section 
11(d)(1).\39\ Further, if an ETF held a portfolio composed solely or 
largely of newly issued securities, there is a risk that Authorized 
Participants--rather than lending on, or arranging for lending on, the 
newly issued securities directly--could use the ETF structure to avoid 
the new-issue lending restriction.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78k(d)(1).
    \39\ See, e.g., Letter from Catherine McGuire, Division of 
Trading and Markets, Securities and Exchange Commission, to 
Securities Industry Association (Nov. 21, 2005), available at http://www.sec.gov/divisions/marketreg/mr-noaction/sia112105.htm.
---------------------------------------------------------------------------

    The Commission has granted ETP issuers exemptions from, and the 
staff has issued no-action positions regarding, Section 11(d)(1) in 
circumstances in which these evasion concerns are reduced because: (i) 
the portfolio is sufficiently diversified that evasion becomes 
impractical; \40\ (ii) the portfolio is composed of securities that are 
not subject to Section 11(d)(1) (e.g., government securities); \41\ or 
(iii) the portfolio is not composed of securities at all (e.g., the 
product is an ETP that invests in commodities).\42\
---------------------------------------------------------------------------

    \40\ See, e.g., Letter from Catherine McGuire, Division of 
Trading and Markets, Securities and Exchange Commission, to 
Securities Industry Association (Nov. 21, 2005) (conditionally 
exempting from Section 11(d)(1) an ETF that consists of a basket of 
twenty or more component securities, with no one component security 
constituting more than 25% of the total value of the ETF), available 
at http://www.sec.gov/divisions/marketreg/mr-noaction/sia112105.htm; 
Letter from Joseph Furey, Division of Trading and Markets, 
Securities and Exchange Commission, to W. John McGuire, Morgan, 
Lewis & Bockius LLP, re: AdvisorShares Madrona & Meidell ETFs (June 
16, 2011) (``Madrona & Meidell Letter'') (providing conditional 
staff no-action relief to ETFs whose portfolios consist of other 
diversified ETFs), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2011/advisorsharesmadrona061611.pdf.
    \41\ See, e.g., Letter from James A. Brigagliano, Division of 
Market Regulation, Securities and Exchange Commission, to Richard F. 
Kadlick, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, re: MACRO 
Securities Depositor, LLC (Dec. 22, 2006) (``MACRO Securities 
Depositor Letter'') (providing conditional staff no-action relief), 
available at http://www.sec.gov/divisions/marketreg/mr-noaction/macro122206-11d1.pdf.
    \42\ See, e.g., Letter from James A. Brigagliano, Division of 
Market Regulation, Securities and Exchange Commission, to Michael 
Schmidtberger, Sidley Austin Brown & Wood LLP, re: DB Commodity 
Index Tracking Fund (Jan. 19, 2006) (``DB Commodity Index Tracking 
Fund Letter'') (providing conditional staff no-action relief), 
available at http://www.sec.gov/divisions/marketreg/mr-noaction/commodityidxtf011906.htm.
---------------------------------------------------------------------------

c. Exchange Act Rule 10b-10
    Rule 10b-10 under the Exchange Act \43\ requires broker-dealers to 
provide their customers with certain disclosures at or before the 
completion of a securities transaction, including the identity, price, 
and number of shares or units (or principal amount) of the security 
purchased or sold. As described above, ETP Securities are issued and 
redeemed only in Creation Units of a minimum size, and a Portfolio 
Deposit or Redemption Basket may comprise dozens or hundreds of 
securities. Because it would be administratively burdensome for broker-
dealers to provide transaction confirmations for each security in a 
Portfolio Deposit or Redemption Basket, the Commission has issued 
exemptive relief from Rule 10b-10 to permit broker-dealers to omit this 
information with respect to ETPs, provided that (i) the Creation Unit 
is sufficiently large (at least 25,000 shares and $500,000), (ii) it is 
probable that creation and redemption transactions are entered into 
only by sophisticated investors, and (iii) the broker-dealer provides 
the omitted confirmation information to customers upon request.\44\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.10b-10.
    \44\ See, e.g., Letter from Catherine McGuire to Securities 
Industry Association, supra note 40.
---------------------------------------------------------------------------

d. Exchange Act Rule 10b-17
    Rule 10b-17 under the Exchange Act generally requires issuers to 
give notice 10 days in advance of certain specified actions (e.g., a 
dividend distribution, stock split, or rights offering) relating to 
their securities, in accordance with the procedures laid out in the 
rule.\45\ Generally this rule is relevant to an ETP when it must 
distribute cash--for example, income from fixed-income holdings or cash 
from a realized investment gain--to its shareholders. Because some ETP 
Securities are continuously being issued or redeemed, issuers have 
represented that it is impractical to project, and to provide, some of 
the information required by Rule 10b-17 ten days in advance.\46\ 
According to these issuers, particularly difficult are the requirements 
for the issuer to disclose (i) in the case of a distribution in cash, 
the amount of cash to be paid or distributed per share, and (ii) in the 
case of a distribution in the same security, the amount of the 
securities outstanding immediately before and immediately after the 
dividend or distribution and the rate of the dividend or 
distribution.\47\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.10b-17.
    \46\ See e.g., Letter from Jeremy Senderowicz, Dechert LLP, to 
Josephine Tao, Division of Trading and Markets, Securities and 
Exchange Commission, re: ALPS ETF Trust, ALPS/GS Momentum Builder 
Growth Markets Equities and U.S. Treasuries Index ETF, ALPS/GS 
Momentum Builder Multi-Asset Index ETF, and ALPS/GS Momentum Builder 
Asia Ex-Japan Equities and U.S. Treasuries Index ETF (Dec. 18, 
2012), available at http://www.sec.gov/rules/exorders/2012/34-68459-letter.pdf.
    \47\ These disclosures are required by 17 CFR 240.10b-
17(b)(1)(v)(a) and (b).
---------------------------------------------------------------------------

    When the Commission has granted exemptions to permit these 
distributions to occur without ETP issuers providing 10-day advance 
notice of the two items of information noted above, this relief has 
been conditioned on the issuer providing the two items of information 
to the national securities exchange on which the ETP Securities are 
registered (pursuant to Section 12 of the Exchange Act) as soon as 
practicable before trading begins on the ex-dividend date, but in no 
event later than the time (on the day before the ex-dividend date) the 
exchange last accepts information relating to distributions.\48\ The 
Commission has granted these exemptions because, other than receiving a 
delayed notice of these two items of information, market participants 
will have timely notice of the existence and timing of a pending 
distribution, as required by Rule 10b-17.\49\ Further, under the terms 
of the exemption, the timing of the availability of the two items of 
information should allow market participants time to update their 
systems to reflect the accurate price of the ETP Securities before 
trading begins on the ex-dividend date.\50\
---------------------------------------------------------------------------

    \48\ See, e.g., Order Granting a Limited Exemption from Exchange 
Act Rule 10b-17, Securities Exchange Act Release No. 67215 (June 19, 
2012), 77 FR 37941 (June 25, 2012) (TP-11-07) (``10b-17 Actively 
Managed ETP Exemption'').
    \49\ See id.
    \50\ See id.
---------------------------------------------------------------------------

e. Exchange Act Rule 14e-5
    Rule 14e-5 under the Exchange Act \51\ is designed to prevent the 
manipulation

[[Page 34736]]

of tender offers. In particular, Rule 14e-5 prohibits ``covered 
persons'' \52\ from purchasing or arranging to purchase any securities 
subject to a tender offer except as part of that tender offer.\53\ This 
prohibition is in effect from the announcement of the tender offer 
until the expiration of the tender offer. An Authorized Participant 
acting as the dealer-manager of a tender offer for a component security 
is a covered person for purposes of Rule 14e-5.\54\
---------------------------------------------------------------------------

    \51\ 17 CFR 240.14e-5.
    \52\ For purposes of Exchange Act Rule 14e-5, a ``covered 
person'' is defined as: (i) The offeror and its affiliates; (ii) the 
offeror's dealer-manager and its affiliates; (iii) any advisor to 
any of the persons specified in (i) or (ii) whose compensation is 
dependent on the completion of the offer; and (iv) any person 
acting, directly or indirectly, in concert with any of the persons 
specified in (i), (ii), or (iii) in connection with any purchase or 
arrangement to purchase the securities or any related securities. 
See 17 CFR 240.14e-5(c)(3).
    \53\ Rule 14e-5 is designed to protect investors by preventing 
an offeror from extending greater or different consideration to some 
security holders outside the offer, while other security holders are 
limited to the offer's terms, and by ensuring that large security 
holders do not demand greater consideration. See Securities Exchange 
Act Release No. 8712 (Oct. 8, 1969), 34 FR 15838 (Oct. 15, 1969) 
(order adopting Rule 10b-13, which was later redesignated as Rule 
14e-5 in Securities Exchange Act Release No. 42055 (Oct. 22, 1999), 
64 FR 61408 (Nov. 10, 1999)). In addition, Rule 14e-5 prevents 
purchases outside the offer that, depending on the conditions in the 
market and the nature of the purchases, may be fraudulent or 
manipulative in nature, such as purchases that are used to defeat a 
tender offer by driving the market price above the offer price or by 
otherwise reducing the number of shares tendered below the stated 
minimum. See id.
    \54\ See 17 CFR 240.14e-5(c)(3)(ii).
---------------------------------------------------------------------------

    The Commission has granted relief to various entities with respect 
to the application of Rule 14e-5 so that Authorized Participants may 
redeem Creation Units and purchase ETP Securities even though component 
securities may be subject to a Rule 14e-5 restricted period.\55\ ETP 
issuers generally seek relief on the basis that: (i) Acquiring 
individual securities held by an ETP through redemptions of the ETP's 
securities would be impractical and inefficient; (ii) facilitating a 
tender offer in a particular security included in a Portfolio Deposit 
by means of purchasing all of the specific portfolio securities 
constituting the Portfolio Deposit would be inefficient; and (iii) 
applying the Rule 14e-5 prohibition would impede the valid and useful 
market and arbitrage activity that would assist secondary market 
trading and improve the pricing efficiency of ETP Securities.\56\ 
Moreover, the issuers generally represent that the type of trading 
described above does not result in the abuses that Rule 14e-5 was 
designed to prevent.\57\ As a condition of the relief that has been 
issued, the issuer of ETP Securities generally also represents that the 
purchases or redemptions would not, in fact, be used to facilitate a 
tender offer.
---------------------------------------------------------------------------

    \55\ See, e.g., Equity Index-Based ETF Letter, supra note 35, at 
6. The entities to which relief has been granted include open-end 
investment companies that issue ETP Securities, the listing exchange 
and any other national securities exchange on or through which the 
ETP Securities may subsequently trade, and persons or entities 
engaging in transactions in ETP Securities.
    \56\ See, e.g., Letter from W. John McGuire, Bingham McCutchen 
LLP, to Michele M. Anderson and David Orlic, Division of Corporation 
Finance, Securities and Exchange Commission, re: SSgA Active ETF 
Trust (July 3, 2013), available at http://www.sec.gov/divisions/corpfin/cf-noaction/2013/ssga-active-etf-trust-14e5.pdf.
    \57\ See supra note 53.
---------------------------------------------------------------------------

f. Exchange Act Rules 15c1-5 and 15c1-6
    Rule 15c1-5 under the Exchange Act \58\ requires a broker-dealer to 
disclose to its customers if it has a control relationship with an 
issuer prior to a customer's purchase or sale of the issuer's 
securities. Rule 15c1-6 under the Exchange Act \59\ requires a broker-
dealer to disclose to its customer, at or before the completion of a 
transaction, that the broker-dealer is participating in the primary or 
secondary distribution of the securities that it is selling or 
purchasing for the customer's account. Because applying these rules to 
all the securities in a creation or redemption transaction would be 
administratively burdensome for broker-dealers, and because creations 
and redemptions are consummated at prices that are fixed by the ETP, 
there appears to be little potential for a broker-dealer to manipulate 
the price of the securities in the creation and redemption 
transactions.\60\ Therefore, the staff has stated that it will not 
recommend enforcement action to the Commission with respect to 
Authorized Participants' compliance with Rules 15c1-5 and 15c1-6 in 
creation and redemption transactions if a broker-dealer executes 
transactions in shares of ``Qualifying ETFs'' without disclosing any 
control relationship with an issuer of a security in the Portfolio 
Deposit or Redemption Basket.\61\ The staff has similarly stated that 
it will not recommend enforcement action if a broker-dealer executes 
transactions in shares of Qualifying ETFs without disclosing its 
participation or interest in a primary or secondary distribution of a 
security included within the Portfolio Deposit or Redemption 
Basket.\62\
---------------------------------------------------------------------------

    \58\ 17 CFR 240.15c1-5.
    \59\ 17 CFR 240.15c1-6.
    \60\ See, e.g., Letter from Catherine McGuire to Securities 
Industry Association, supra note 40.
    \61\ A ``Qualifying ETF'' was initially limited to an ETF 
meeting certain conditions, including that it is issued by an open-
end investment company or unit investment trust registered with the 
Commission under the 1940 Act; that it is listed and traded on a 
national securities exchange; that it comprises twenty or more 
diversified component securities, with no one component security 
constituting more than 25% of the total value of the ETF; and that 
it is managed to track a particular index, all components of which 
are publicly available. Id. Subsequent staff no-action positions 
have provided no-action relief to more ETPs with respect to 
treatment as Qualifying ETFs. See, e.g., DB Commodity Index Tracking 
Fund Letter, supra note 42 (certain commodity-based exchange-traded 
trusts); MACRO Securities Depositor Letter, supra note 41 (an ETP 
holding government securities); Letter from Brian A. Bussey, 
Division of Trading and Markets, Securities and Exchange Commission, 
to W. Thomas Conner and Eric C. Freed, Sutherland Asbill & Brennan 
LLP, re: Ameristock ETF Trust (June 29, 2007) (certain fixed income 
ETFs), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/ameristock062907-msr.pdf; Letter from James A. 
Brigagliano, Division of Trading and Markets, Securities and 
Exchange Commission, to Kathleen H. Moriarty, Carter, Ledyard & 
Milburn, re: Proshares Trust (Jan. 24, 2007) (certain ETFs tracking 
a multiple, inverse, or multiple inverse of an index), available at 
http://www.sec.gov/divisions/marketreg/mr-noaction/2007/proshares012407-msr.pdf; Letter from Josephine J. Tao, Division of 
Trading and Markets, Securities and Exchange Commission, to Richard 
F. Morris, Deputy General Counsel, WisdomTree Asset Management, Inc. 
(May 9, 2008) (certain actively-managed ETFs not tied to an index), 
available at http://www.sec.gov/divisions/marketreg/mr-noaction/2008/wisdomtree050908-msr.pdf; and Madrona & Meidell Letter, supra 
note 40 (certain ETFs whose portfolios consist of other diversified 
ETFs).
    \62\ Id.
---------------------------------------------------------------------------

g. Class Relief
    In connection with the application of the Exchange Act provisions 
described above, the Commission has issued a number of ``class'' 
exemptions to the trading of ETP Securities.\63\ Class exemptions for 
ETPs from the Exchange Act provisions discussed above are generally 
issued only if the Commission and the staff have had experience with 
individual exemptions and no-action positions and have determined that 
class relief is appropriate.\64\ In the case of exemptions, the 
Commission must also determine that a class exemption meets the 
statutory standard of being necessary or appropriate in the public 
interest and consistent with the protection of investors.\65\ An ETP 
relying on a class exemption or no-action position must meet all of the 
conditions of the relevant Commission order or staff letter for the 
life of the product (or until the relief is no longer necessary), just 
as if the ETP had obtained its own individual relief. Class exemptions 
or no-action positions have been issued for equity index-based

[[Page 34737]]

ETFs,\66\ commodity-based investment vehicles that are not registered 
under the 1940 Act,\67\ fixed-income index-based ETFs,\68\ 
``combination'' index-based ETFs,\69\ ETNs,\70\ and actively-managed 
ETFs.\71\ These orders and no-action positions cover a number of the 
Exchange Act rules and regulations described above.\72\
---------------------------------------------------------------------------

    \63\ See, e.g., Equity-Index Based ETF Letter, supra note 35.
    \64\ See Letter from Catherine McGuire to Securities Industry 
Association, supra note 40.
    \65\ See 15 U.S.C. 78mm(a)(1).
    \66\ See Equity Index-Based ETF Letter, supra note 35.
    \67\ See Letter from Racquel L. Russell, Division of Trading and 
Markets, Securities and Exchange Commission, to George T. Simon, 
Foley & Lardner LLP, re: CurrencyShares British Pound Sterling Trust 
et al. (June 21, 2006), available at http://www.sec.gov/divisions/marketreg/mr-noaction/currencyshares062106-10a1.pdf.
    \68\ See Letter from James A. Brigagliano, Division of Trading 
and Markets, Securities and Exchange Commission, to Benjamin J. 
Haskin, Willkie Farr & Gallagher LLP, re: Class Relief for Fixed 
Income ETFs (Apr. 9, 2007), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/fietfclassrelief040907-msr.pdf.
    \69\ See Letter from Josephine Tao, Division of Trading and 
Markets, Securities and Exchange Commission, to Domenick Pugliese, 
Paul, Hastings, Janofsky and Walker LLP, re: Combination ETFs (June 
27, 2007), available at http://www.sec.gov/Archives/edgar/vprr/07/9999999997-07-047147.
    \70\ See, e.g., Letter from Josephine Tao, Division of Trading 
and Markets, Securities and Exchange Commission, to Arthur S. Long, 
Davis Polk & Wardwell LLP, re: Deutsche Bank AG ETNs (Oct. 12, 2007) 
(``ETN No-action Letter''), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/dbab101207.pdf.
    \71\ See 10b-17 Actively Managed ETP Exemption, supra note48, 
and Division of Trading and Markets: Staff Legal Bulletin No. 9 
``Frequently Asked Questions About Regulation M'' (as revised Sep. 
10, 2010) (regarding Regulation M), available at http://www.sec.gov/interps/legal/mrslb9.htm.
    \72\ See supra Sections I.D.1.a through I.D.1.f.
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2. Exchange Listing Standards and the Rule 19b-4 Process
    Before ETP Securities can trade on a national securities exchange, 
that exchange must agree to list the ETP Securities for trading on its 
market, and it must have Commission-approved initial and continued 
listing standards that permit listing of that type or ``class'' of ETP 
Security.\73\ ETP listing standards can be broadly categorized as 
either generic or non-generic.
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    \73\ See 15 U.S.C. 78s(b) and 17 CFR 240.19b-4. The Exchange Act 
also permits an exchange to trade a security that is listed on 
another exchange. The non-listing exchange that trades the security 
is said to extend ``unlisted trading privileges'' (or ``UTP'') to 
the security. See Section 12(f) of the Exchange Act, 15 U.S.C. 
78l(f); Exchange Act Rule 12f-5 (17 CFR 240.12f-5) (providing that 
an exchange shall not extend UTP to a security unless the exchange 
has in effect a rule or rules providing for transactions in the 
class or type of security to which the exchange extends UTP).
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    Generic listing standards permit an exchange to list and trade 
specific ETP Securities of a broader class of ETPs without filing a 
product-specific proposed rule change with the Commission.\74\ When 
listing ETP Securities in this way, however, exchanges are required to 
file a notice with the Commission within five business days after 
trading commences.\75\ Examples of ETP classes for which generic 
listing standards exist include what are commonly called index-based 
ETFs (which the exchanges' rules call Investment Company Units, Index-
Fund Shares, Portfolio Depositary Receipts, or security-based Trust 
Issued Receipts), and certain ETNs (which the exchanges' rules call 
Index-Linked Securities or Linked Securities).\76\
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    \74\ See 17 CFR 240.19b-4(e)(1). In 1998, the Commission issued 
a final rule setting forth the standards under which exchanges can 
list and trade ``new derivatives securities products'' (a category 
that encompasses ETPs) under ``generic listing standards.'' See 
Amendments to Rule Filing Requirements for Self-Regulatory 
Organizations Regarding New Derivative Securities Products, 
Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 
70952 (Dec. 22, 1998) (S7-13-98).
    \75\ See 17 CFR 240.19b-4(e)(2)(ii). The required notice is 
filed on Form 19b-4(e). 17 CFR 249.820.
    \76\ See, e.g., Securities Exchange Act Release Nos. 42787 (May 
15, 2000), 65 FR 33598 (May 24, 2000) (SR-Amex-2000-14) (approving 
generic listing standards for ETFs called Portfolio Depositary 
Receipts and Index Fund Shares); 45718 (Apr. 9, 2002), 67 FR 18965 
(Apr. 17, 2002) (SR-NYSE-2002-07) (approving generic listing 
standards for Trust Issued Receipts); and 55687 (May 1, 2007), 72 FR 
25824 (May 7, 2007) (SR-NYSE-2007-27) (approving generic listing 
standards for Index-Linked Securities). See also, e.g., BATS Rules 
14.11(b) (Portfolio Depositary Receipts), 14.11(c) (Index Fund 
Shares), 14.11(d) (ETNs), and 14.11(f) (Trust Issued Receipts), 
available at http://batstrading.com/resources/regulation/rule_book/BATS_Exchange_Rulebook.pdf; NASDAQ Rules 5705 (Index Fund Shares and 
Portfolio Depositary Receipts), 5710 (ETNs), and 5720 (Trust Issued 
Receipts), available at http://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode=chp%5F1%5F1%5F4%5F3&manual=%2Fnasdaq%2Fmain%2Fnasdaq%2Dequityrules%2F; NYSE Arca Equities Rules 5.2(j)(3) 
(Investment Company Units), 5.2(j)(6) (ETNs), 8.100 (Portfolio 
Depositary Receipts), and 8.200 (Trust Issued Receipts), available 
at http://nysearcarules.nyse.com/PCX/.
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    Generic ETP listing standards approved by the Commission contain 
quantitative criteria with respect to components included in the ETP's 
underlying or reference index or benchmark. With respect to underlying 
indices, these quantitative criteria provide minimum thresholds 
regarding trading volume, market capitalization, number of index 
components, and index concentration limits.\77\ To mitigate the 
potential for manipulation and other trading abuses, and to help 
maintain a fair and orderly market for the ETP Securities, these 
quantitative criteria are designed to help ensure a minimum degree of 
liquidity and diversification for the underlying or reference 
securities, assets, or instruments.
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    \77\ For example, with respect to equity-index-based ETFs, the 
generic listing standards generally contain the following 
requirements with respect to the underlying index: (1) That each 
component have a minimum market value; (2) that each component have 
a minimum monthly trading volume over the most recent six-month 
period; (3) that the index observe certain concentration limits 
(e.g., that no component may exceed 30% of the weight of the index 
and that the five most heavily weighted components may not exceed 
65% of the weight of the index); (4) that there be a minimum number 
of components in the index; and (5) that each component either be an 
exchange-listed NMS stock or, if a non-U.S. stock, be listed and 
traded on an exchange that has last-sale reporting. See, e.g., BATS 
Rule 14.11(c); NASDAQ Rule 5705; NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .01. With respect to ETNs, the generic listing standards 
also include minimum requirements relating to the issuer of the 
securities (e.g., minimum tangible net worth and minimum amount of 
assets), which are designed to mitigate issuer credit risk. See, 
e.g., BATS Rule 14.11(d); NASDAQ Rule 5710; NYSE Arca Equities Rule 
5.2(j)(6).
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    Non-generic listing standards permit an exchange to list and trade 
a specific ETP Security (within a class of ETPs) only after the 
exchange has filed and the Commission has approved a proposed rule 
change that is specific to the new ETP Security.\78\ Because of their 
security-specific nature, non-generic listing standards typically do 
not contain generalized quantitative criteria for the components 
included in an ETP's underlying or reference index or benchmark.
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    \78\ The ETP product classes that have non-generic listing 
standards include the following: Trust Issued Receipts based on 
investments in ``investment shares'' or ``financial instruments,'' 
Commodity-Based Trust Shares, Commodity Index Trust Shares, 
Commodity Futures Trust Shares, Partnership Units, Paired Trust 
Shares, Trust Units, Managed Fund Shares, Managed Trust Securities, 
and Trust Certificates. See, e.g., BATS Rules 14.11(e)(3) (Trust 
Certificates), 14.11(e)(4) (Commodity-Based Trust Shares), 
14.11(e)(6) (Commodity Index Trust Shares), 14.11(e)(7) (Commodity 
Futures Trust Shares), 14.11(e)(8) (Partnership Units), 14.11(e)(9) 
(Trust Units), 14.11(e)(10) (Managed Trust Securities), and 14.11(i) 
(Managed Fund Shares); NASDAQ Rules 5711(c) (Trust Certificates), 
5711(d) (Commodity-Based Trust Shares), 5711(f) (Commodity Index 
Trust Shares), 5711(g) (Commodity Futures Trust Shares), 5711(h) 
(Partnership Units), 5711(i) (Trust Units), 5711(j) (Managed Trust 
Securities), and 5735 (Managed Fund Shares); NYSE Arca Equities 
Rules 8.200 (Commentary .02) (Trust Issued Receipts based on 
investment shares or financial instruments), 8.201 (Commodity-Based 
Trust Shares), 8.203 (Commodity Index Trust Shares), 8.204 
(Commodity Futures Trust Shares), 8.300 (Partnership Units), 8.400 
(Paired Trust Shares), 8.500 (Trust Units), 8.600 (Managed Fund 
Shares), 8.700 (Managed Trust Securities).
---------------------------------------------------------------------------

    Exchanges seeking to adopt listing standards applicable to a new 
ETP product class--or to list and trade specific ETP Securities 
pursuant to existing non-generic listing standards for an ETP product 
class--are required to file proposed rule changes under Section 
19(b)(1) of the Exchange Act \79\ and Rule 19b-4 thereunder.\80\ Once 
an

[[Page 34738]]

exchange files a proposed rule change that complies with the Exchange 
Act, the rules thereunder, and the form governing such filings, 
statutory deadlines apply to Commission consideration of the filing.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 78s(b).
    \80\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Section 19(b)(2) of the Exchange Act, as amended by the Dodd-Frank 
Act,\81\ effectively requires the Commission to publish notice of a 
proposed rule change within 15 days of filing.\82\ In general, for 
proposals that must be approved by the Commission before they may take 
effect (such as a filing concerning a new ETP), the Commission is 
required to take action within 45 days (which can be extended by the 
Commission or the exchange for another 45 days) after the date of 
publication of the proposal in the Federal Register.\83\ The Commission 
may, however, institute proceedings to determine whether to disapprove 
a proposal, in which case the Commission is required to take final 
action to approve or disapprove a proposed rule change no later than 
240 days after the proposal is published in the Federal Register.\84\ 
If the Commission fails to meet any of the deadlines for final action 
on a proposed rule change, that proposed rule change is, pursuant to 
the Exchange Act, deemed to have been approved by the Commission.\85\
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    \81\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, Sec.  916(a), 124 Stat. 1376, 1833-34 (2010).
    \82\ 15 U.S.C. 78s(b)(2)(E).
    \83\ Certain proposed rule changes are entitled to become 
``immediately effective'' upon filing, without prior Commission 
approval. See 15 U.S.C. 78s(b)(3)(A) and 17 CFR 240.19b-4(f) 
(setting forth certain limited conditions under which a proposed 
rule change may take effect immediately upon filing with the 
Commission).
    \84\ See 15 U.S.C. 78s(b)(2)(B)(ii).
    \85\ 15 U.S.C. 78s(b)(2)(D).
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    To approve an exchange's proposed rule change, the Commission must 
find that the proposed rule change is consistent with the applicable 
requirements of the Exchange Act and the rules and regulations 
thereunder.\86\ The requirements imposed by the Exchange Act include 
those set forth in Section 6(b)(5), which provides that the rules of an 
exchange must be designed to do the following: (i) Prevent fraudulent 
and manipulative acts and practices; (ii) promote just and equitable 
principles of trade; (iii) foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; (iv) remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and (v) in general, 
to protect investors and the public interest.\87\ With respect to the 
listing standards for ETP Securities, most exchange filings in 
connection with proposed rule changes include a general description of 
the following: (i) the ETP and its permitted investments or reference 
assets; (ii) how the ETP will seek to meet its investment objective; 
(iii) whether and to what extent information is available to investors 
about the pricing and valuation of the ETP Securities, the ETP's 
underlying assets, and the relevant index or reference assets; \88\ 
(iv) how the exchange will monitor trading in the ETP Securities; and 
(v) the information that will be available to investors about the ETP 
Securities.\89\
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    \86\ 15 U.S.C. 78s(b)(2)(C).
    \87\ 15 U.S.C. 78f(b)(5). In addition, the proposed rule change 
must not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers or to regulate by virtue of 
any authority conferred by the Exchange Act matters not related to 
the purposes of the Exchange Act or the administration of the 
exchange. Id.
    \88\ For index-based ETPs, exchange rules generally require that 
the underlying or reference index or benchmark be calculated and 
disseminated throughout the trading day. The frequency of 
dissemination depends on whether the components are U.S. equities, 
foreign equities, or fixed-income securities. See, e.g., Commentary 
.01(b)(2) to NYSE Arca Equities Rule 5.2(j)(3) (requiring that the 
current index value be widely disseminated every 15 seconds during 
the exchange's Core Trading Session for investment company units 
that track a U.S. equity index and every 60 seconds for investment 
company units that track an international or global equity index); 
Commentary .02(b)(ii) to NYSE Arca Equities Rule 5.2(j)(3) 
(requiring that the current index value for investment company units 
that track a fixed-income index be disseminated at least once per 
day). For ETNs, exchange rules generally require that the value of 
the reference assets be calculated and disseminated throughout the 
trading day. See, e.g., NYSE Arca Equities Rule 
5.2(j)(6)(B)(II)(1)(b)(ii) (requiring that the value of the 
commodity reference asset be calculated and widely disseminated on 
at least a 15-second basis during the exchange's Core Trading 
Session for commodity-linked securities). As noted above, most ETN 
issuers also make publicly available a closing indicative value that 
is determined as of the close of each trading day. See supra note 
26.
    \89\ Exchanges are required by their listing standards to 
distribute information circulars or bulletins to exchange members 
relating to the listing of ETP Securities. See, e.g., NYSE Arca 
Equities Rules 5.1(a)(2), 5.2(j)(3) Commentary .01(g), 8.100(c), and 
8.600 Commentary .05. The information to be contained in these 
circulars is generally specified in a Commission order approving the 
listing and trading of new ETP Securities and typically includes: 
(a) The special characteristics and risks associated with trading 
ETP Securities; (b) the procedures for creations and redemptions of 
ETP Securities; (c) the exchange requirements relating to the 
members' obligations to learn the essential facts in connection with 
every customer prior to trading ETP Securities and other suitability 
requirements, such as information contained in guidance issued by 
FINRA with respect to the trading and sales of leveraged and 
inverse-leveraged ETPs and other complex securities products; (d) 
how information regarding the IIV is disseminated and the risks 
involved in trading ETP Securities outside of regular trading hours 
when an updated IIV is not calculated or available; (e) applicable 
prospectus delivery requirements; and (f) other information (e.g., 
fees and expenses of the ETP and the time at which the NAV will be 
calculated and published daily). See, e.g., Securities Exchange Act 
Release Nos. 65136 (Aug. 15, 2011), 76 FR 52037, 52040 (Aug. 19, 
2011) (SR-NYSEArca-2011-24); 68390 (Dec. 10, 2012), 77 FR 74540, 
74543 (Dec. 14, 2012) (SR-BATS-2012-042); and 70829 (Nov. 7, 2013), 
78 FR 68482, 68485 (Nov. 14, 2013) (SR-NASDAQ-2013-122).
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3. Broker-Dealer Sales Practices
    Broker-dealers, which are registered with and regulated by the 
Commission under the Exchange Act, are also subject to regulation by 
the self-regulatory organizations (``SROs'') to which they belong--
e.g., FINRA and the exchanges. Both federal and SRO regulations impose 
duties on broker-dealers when dealing with their customers and, in 
particular, when recommending the purchase or sale of securities by 
their customers.\90\ These duties include making suitable 
recommendations, engaging in fair and balanced communications with the 
public, disclosing conflicts of interest, and receiving fair 
compensation both in agency and principal transactions.\91\
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    \90\ See e.g., Exchange Act Section 15(c) and FINRA Rule 2111.
    \91\ See, e.g., A Joint Report of the SEC and CFTC on 
Harmonization of Regulation, at 8 (Oct. 16, 2009), http://www.sec.gov/news/press/2009/cftcjointreport101609.pdf (``Under the 
federal securities laws and SRO rules, broker-dealers are required 
to deal fairly with their customers. This includes having a 
reasonable basis for recommendations given the customer's financial 
situation (suitability), engaging in fair and balanced 
communications with the public, . . . disclosing conflicts of 
interest, and receiving fair compensation both in agency and 
principal transactions. In addition, the SEC's suitability approach 
requires BDs [i.e., broker-dealers] to determine whether a 
particular investment recommendation is suitable for a customer, 
based on customer-specific factors and factors relating to the 
securities and investment strategy. A BD must investigate and have 
adequate information regarding the security it is recommending and 
ensure that its recommendations are suitable based on the customer's 
financial situation and needs. The suitability approach in the 
securities industry is premised on the notion that securities have 
varying degrees of risk and serve different investment objectives, 
and that a BD is in the best position to determine the suitability 
of a securities transaction for a customer. Disclosure of risks 
alone is not sufficient to satisfy a broker-dealer's suitability 
obligation.'')
---------------------------------------------------------------------------

    In addition, a broker-dealer that recommends buying, holding, or 
selling an ETP, or an investment strategy involving an ETP, may be 
subject to additional or heightened scrutiny regarding ETPs with 
respect to brokerage customers, as described in FINRA guidance 
regarding complex products and non-traditional ETPs.\92\
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    \92\ See FINRA Notice to Members (``FINRA NTM'') 12-03 (Jan. 
2012) (Heightened Supervision of Complex Products). See also FINRA 
NTM 10-51 (Oct. 2010) (Sales Practice Obligations for Commodity 
Futures-Linked Securities); FINRA NTM 09-73 (Dec. 2009) (FINRA 
Reminds Firms of their Sales Practice Obligations Relating to 
Principal-Protected Notes); FINRA NTM 09-31 (June 2009) (FINRA 
Reminds Firms of Sales Practice Obligations Relating to Leveraged 
and Inverse Exchange-Traded Funds); FINRA NTM 08-81 (Dec. 2008) 
(FINRA Reminds Firms of their Sales Practice Obligations with Regard 
to the Sale of Securities in a High Yield Environment); NASD Notice 
to Members (``NASD NTM'') 05-59 (Sept. 2005) (NASD Provides Guidance 
Concerning the Sale of Structured Products); and NASD NTM 03-71 
(Nov. 2003) (NASD Reminds Members of Obligations When Selling Non-
Conventional Instruments).

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[[Page 34739]]

II. Request for Comment

    The Commission is soliciting public comment to help inform its 
review of the listing and trading of new, novel, or complex ETPs, 
including requests by ETPs for exemptive and no-action relief under the 
Exchange Act and filings by exchanges to adopt listing standards 
applicable to ETPs. The Commission is also soliciting comment regarding 
the ways in which broker-dealers, which are regulated under the 
Exchange Act, market these products, especially to retail investors. 
Finally, the Commission seeks comment on investor understanding of the 
nature and uses of ETPs, particularly by retail investors.
    The Commission periodically has solicited public comment on issues 
relating to ETFs since their inception over two decades ago. In 2001, 
the Commission issued a Concept Release on Actively Managed Exchange-
Traded Funds.\93\ That release sought comment on a number of issues 
relating to actively managed ETFs, focusing in particular on the 
operation of actively managed ETFs as open-end investment companies and 
on the exemptive relief under the 1940 Act that would be required for 
such funds.\94\ Then, in 2008, the Commission proposed and sought 
comment on a rule that would exempt ETFs from certain provisions of the 
1940 Act and permit certain ETFs to begin operating without the need to 
obtain an exemptive order under the 1940 Act.\95\ Once again, the focus 
of that release was on the operation of ETFs as open-end investment 
companies under the 1940 Act and on the exemptive relief provided to 
such funds under the 1940 Act.\96\
---------------------------------------------------------------------------

    \93\ Concept Release: Actively Managed Exchange-Traded Funds, 
Investment Company Act Release No. IC-25258 (Nov. 8, 2001), 66 FR 
57614 (Nov. 15, 2001) (S7-20-01), available at http://www.sec.gov/rules/concept/ic-25258.htm.
    \94\ In response, the Commission received 20 comment letters, 
which are available on the Commission's Web site at http://www.sec.gov/rules/concept/s72001.shtml.
    \95\ See Exchange-Traded Funds (proposed rule), supra note 9.
    \96\ In response to these proposals, the Commission received 25 
comment letters, which are available on the Commission's Web site at 
http://www.sec.gov/comments/s7-07-08/s70708.shtml.
---------------------------------------------------------------------------

    Here, the Commission seeks comment on the treatment of a broader 
group of products--ETPs, rather than just ETFs--and the Commission 
seeks public comment specifically with respect to its oversight of ETPs 
under the Exchange Act. As noted above, ETP trading makes up a 
significant percentage of equity trading in the United States.\97\ And, 
while the Commission has gained extensive experience and familiarity 
with the topics discussed in the questions below, the Commission 
believes that it would be beneficial to engage broader public comment 
on these important topics.
---------------------------------------------------------------------------

    \97\ See supra note 5 and accompanying text.
---------------------------------------------------------------------------

    To inform the Commission's review of new, novel, or complex ETPs 
under the Exchange Act, commenters are invited to provide their views 
regarding the listing and trading of ETP Securities, such as the manner 
in which ETP Securities are initially listed on a national securities 
exchange, the manner in which ETP Securities trade in the secondary 
market, and the exemptive or no-action relief that has been granted to 
ETPs under the Exchange Act. Commenters are further invited to provide 
their views regarding how broker-dealers (which are regulated under the 
Exchange Act) recommend and sell ETPs to investors, how broker-dealers 
fulfill their obligations to investors when they recommend and sell 
ETPs, and investors' understanding and use of ETPs. Commenters should 
be as specific as possible in their responses, explain the reasoning 
supporting those responses, and provide supporting data wherever 
possible.

A. Arbitrage and Market Pricing

    As discussed above, existing ETPs trade at market prices rather 
than at a price based on NAV. When providing exemptive or no-action 
relief under the Exchange Act, the Commission and its staff have 
analyzed and relied upon the representations from ETP issuers regarding 
the continuing existence of effective and efficient arbitrage to help 
ensure that the secondary market prices of ETP Securities do not vary 
substantially from the value of their underlying portfolio or reference 
assets.
    In the Commission's experience, the deviation between the daily 
closing price of ETP Securities and their NAV, averaged across broad 
categories of ETP investment strategies and over time periods of 
several months, has been relatively small. For example, the average 
absolute value of the daily difference between the NAV and the closing 
market price during a six-month period ending in December 2014 was just 
0.21% for ETPs based on U.S. equities indices and 0.38% for actively 
managed ETPs based on U.S. equities.\98\ The respective figures for 
index-based and actively managed ETPs based on U.S. fixed-income 
securities were 0.26% and 0.19%.\99\
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    \98\ The average of the absolute value of these differences is 
used because the closing market price of an ETP can deviate either 
above or below its NAV on any given day, and a calculation that 
allowed positive deviations to offset negative deviations would 
understate the extent of the deviations.
    \99\ Figures in this paragraph represent an analysis by 
Commission staff of market data obtained through a subscription to 
Bloomberg Professional services.
---------------------------------------------------------------------------

    Other types of ETPs have had a somewhat higher deviation between 
NAV and their closing price. For example, ETPs based on international 
indices had an average absolute value of daily difference of 0.52% 
between NAV and the closing price, while actively managed ETPs based on 
international fixed-income securities had an average absolute value of 
daily difference of 0.44% between NAV and the closing price during the 
six-month period studied.\100\ These numbers, however, represent only 
broad averages with respect to end-of-day differences, and intraday 
premiums or discounts between an ETP's market price and the value of 
its portfolio or reference assets (or, for certain ETNs, the value of 
the note according to its terms) can be greater under certain 
circumstances.\101\ Moreover, these numbers represent broad averages, 
and the Commission seeks public comment and data in response to the 
specific questions below.
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    \100\ The figures in this paragraph reflect an analysis by the 
staff of the Office of Analytics and Research in the Division of 
Trading and Markets of market data obtained through a subscription 
to Bloomberg Professional services.
    \101\ As an extreme example, during the so-called ``Flash 
Crash'' of May 6, 2010, many ETP Securities temporarily traded at 
significant discounts to their IIV, even though their prices 
recovered before the end of the day. See Findings Regarding the 
Market Events of May 6, 2010, Report of the Staffs of the CFTC and 
SEC to the Joint Advisory Committee on Emerging Regulatory Issues 
(Sept. 30, 2010), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
---------------------------------------------------------------------------

    The Commission seeks comment with respect to all aspects of the 
arbitrage mechanism for ETPs, including the nature, extent, and 
potential causes of premiums and discounts across the wide range of ETP 
strategies and holdings. Additionally, in connection with its review of 
the listing and trading of ETPs, the Commission seeks comment on the 
trading of ETPs investing in less-liquid assets,\102\

[[Page 34740]]

including fixed-income instruments, during periods of market stress.
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    \102\ As used in this release, ``liquidity'' generally refers to 
the ability of a market participant to buy or sell an asset 
immediately without significantly affecting the market price for 
that asset. Although certain fixed-income instruments, such as on-
the-run U.S. Treasury securities, trade in markets with substantial 
liquidity, fixed-income instruments generally trade with less 
liquidity than equity securities.
---------------------------------------------------------------------------

    1. Arbitrage mechanisms are designed to keep intraday trading 
prices of ETP Securities equal (or nearly equal) to the contemporaneous 
value of the underlying portfolio or reference assets. Do these 
mechanisms work better for some types or categories of ETPs? To what 
extent do arbitrage mechanisms help ensure efficient market pricing for 
ETPs throughout periods of market volatility, including times of market 
stress?
    2. Do commenters believe that there are other mechanisms besides 
arbitrage mechanisms that do, or could, help ensure efficient market 
pricing of ETPs? Do other factors play a role in efficient market 
pricing of ETPs? If so, what are these mechanisms or factors, and how 
effective are they? Are these mechanisms or factors more effective for 
certain types or categories of ETPs? To what extent are these 
mechanisms or factors effective during periods of market volatility?
    3. What characteristics of an ETP facilitate or hinder the 
alignment of secondary market share prices with the value of the 
underlying portfolio or reference assets? What characteristics of an 
ETP's underlying or reference assets facilitate or hinder the alignment 
of secondary market share prices with the value of the underlying 
portfolio or reference assets? Does liquidity in the market for an 
ETP's underlying or reference assets affect arbitrage, and if so, how 
and to what extent? Does the availability of current and historical 
pricing information, as well as trading history, for the underlying or 
reference assets affect arbitrage, and if so, how and to what extent? 
To what extent does the availability of correlated hedges for the ETP's 
underlying or reference assets affect arbitrage and pricing efficiency? 
To what extent does an ETP's use of a sampling methodology (investing 
in a subset of the components of an index) to track an index affect 
arbitrage and pricing efficiency? Does the use of over-the-counter 
instruments by an ETP affect the opportunity for market makers or other 
participants to engage in arbitrage, and if so, how and to what extent? 
Do non-synchronous market hours between an ETP and its underlying 
assets (e.g., international equities) affect the pricing of an ETP and 
the opportunity for arbitrage, and if so, how? Does the use of cash-
only creation or redemption baskets and variable cash fees affect 
efficient market pricing, and if so, how?
    4. How closely do investors or other market participants expect the 
intraday trading price of ETP Securities to be aligned with the 
contemporaneous value of their underlying portfolio or reference 
assets? Do these expectations differ depending on the type of ETP, the 
nature of the underlying assets, or market conditions? What methods, if 
any, do investors use to determine whether the intraday trading price 
of ETP Securities closely tracks the value of their underlying 
portfolio or reference assets?
    5. Do market participants conduct analyses of how well intraday 
prices of ETP Securities track the value of their underlying portfolio 
or reference assets? If so, how much weight do market participants 
place on such analyses?
    6. Under what circumstances might the prices of ETP Securities not 
track (on an intraday, temporary end-of-day, or permanent basis) the 
value of their underlying portfolio or reference assets? Are there 
circumstances in which the price of an ETP's Securities, though 
different from its NAV, might be a more accurate measure of the value 
of the ETP's underlying assets? What are the implications for investors 
(both individual and institutional) and other market participants if 
intraday prices for ETP Securities do not closely track the value of 
their underlying portfolio or reference assets, either on an intraday, 
temporary end-of-day or permanent basis?
    7. To what extent do arbitrage mechanisms affect trading in an 
ETP's underlying or reference assets? Does the answer vary depending on 
whether the underlying or reference assets are equities, fixed-income 
securities, commodities, derivatives, or another type of asset? If so, 
how?
    8. To what extent do ETNs offer opportunities for arbitrage? How do 
market participants engage in arbitrage for ETNs? How is arbitrage 
affected by ETN issuers' ability to suspend and restart issuances of 
notes at their discretion? How are arbitrage opportunities affected 
when an issuer suspends the issuance of its ETNs? Are certain ETNs 
easier or more difficult to arbitrage due to the nature of the ETN's 
reference asset or index, and, if so, which ones?
    9. As noted above, the IIV for an ETP is generally designed to 
provide investors information during the trading day on the value of 
the ETP's portfolio (or, in the case of an ETN, on the value of a 
reference asset or index). The IIV may be subject to various 
calculation methodologies. How does the calculation of IIV vary, if at 
all, among ETPs? Does the calculation methodology depend on the class 
or type of ETP, and if so, how? Does the calculation methodology depend 
on the nature of the underlying portfolio or reference assets, and if 
so, how? Are certain IIV calculation methodologies more or less useful 
for investors, market makers, or other market participants?
    10. To what extent do market participants make use of the IIV for 
an ETP based on less-liquid securities? If underlying assets trade 
infrequently or are priced only at the end of the trading day for 
purposes of NAV calculation, does an IIV that is disseminated every 15 
seconds (as is currently the case) contain useful pricing information? 
Would a different dissemination frequency be more appropriate, and if 
so, what would that be?
    11. Do investors or other market participants use intraday or 
closing indicative values for ETNs? If so, for what purpose? How does 
the intraday or closing indicative value differ from the market value 
of an ETN or its redemption amount?
    12. How much disclosure about the contents of an ETP's underlying 
portfolio is necessary for arbitrage to function efficiently to keep 
the market price of an ETP aligned with the contemporaneous value of 
its underlying or reference portfolio? Please explain.
    13. In the absence of daily portfolio disclosure for an ETP, could 
other mechanisms enable market makers or other market participants to 
make efficient markets in that ETP? If so, what are those mechanisms 
and how would they function? What, if any, information disclosure, 
characteristics of the ETP, or other circumstances would be necessary 
for those mechanisms to function?
    14. Under what circumstances would an ETP suspend creations? Under 
what circumstances could an ETP (other than a 1940-Act registered ETF) 
suspend redemptions? What effect does this or could this have on 
arbitrage mechanisms or the market value of these products? How might 
suspension of creations or redemptions affect the ETP's continued 
compliance with the conditions of its exemptive and no-action relief 
under the Exchange Act? How would an ETP issuer be likely to respond to 
the suspension of creation or redemption activity by one or more of its 
Authorized Participants?
    15. How do arbitrage mechanisms work in the case of ETPs with less-
liquid underlying or reference assets? Are arbitrage mechanisms for 
ETPs with less-liquid underlying or reference assets effective and 
efficient in aligning

[[Page 34741]]

share prices with the value of the underlying portfolio or reference 
assets?
    16. To what extent do arbitrage mechanisms help ensure efficient 
market pricing throughout rising and falling markets, including times 
of market stress, for ETPs with underlying or reference assets that are 
less-liquid? Do periods of market stress affect arbitrage mechanisms 
for such ETPs, and if so, how? Could there be a point at which the 
amount of ETP Securities outstanding relative to the amount of 
underlying or reference assets outstanding results in an imbalance that 
inhibits the redemption process during periods of market stress?
    17. To what extent, if any, does trading activity in ETP Securities 
affect price discovery, price correlation, liquidity, or volatility in 
the ETP's underlying or reference assets? What role, if any, do ETP 
Securities that are based on less-liquid underlying securities have in 
providing additional price discovery for the underlying securities?
    18. Should the listing exchange for an ETP have an obligation to 
monitor the effectiveness of that ETP's arbitrage mechanism? If yes, 
what should be the nature of that obligation?

B. Exchange Act Exemptions and No-Action Positions

    The Commission believes it is useful and timely to examine the 
application of Rules 101 and 102 of Regulation M in the context of 
ETPs--particularly those ETPs with an underlying trust or other 
collection of underlying assets--given the increasing complexity of ETP 
investment strategies and the expansion of the types of underlying and 
reference assets and benchmarks. The Commission solicits comment on 
approaches for preventing manipulation of an ETP Securities 
distribution by persons who may have an incentive to do so in light of 
the nature, variety, and complexity of ETP investment strategies and 
ETP markets.
    19. The staff has issued no-action relief from Rules 101 and 102 of 
Regulation M to ETNs in part on the basis of assumptions that the 
secondary market price for such products should not vary substantially 
from the value of the relevant reference index.\103\ Given that the 
secondary market price of an ETN can substantially deviate from its 
reference assets when the issuer of that ETN suspends issuances, how 
should Rules 101 and 102 of Regulation M apply to such products? Should 
relief from these rules be limited to ETNs where there is a clear, 
independent index, where there is no limitation on issuances or 
redemptions, or where an ETN's secondary market price does not vary 
substantially from the relevant reference index? What effect would such 
a change have? Are there any other relevant factors in this context? 
Are there any risks in maintaining the current relief for ETNs? What 
are the benefits of the relief? How should the Commission balance the 
risks against any benefits resulting from the ability of Authorized 
Participants to suspend issuances or redemptions? Should relief for 
ETNs contain different conditions than relief for other ETPs?
---------------------------------------------------------------------------

    \103\ See, e.g., ETN No-action Letter, supra note 70.
---------------------------------------------------------------------------

    20. Because ETPs are in continuous distribution, they generally 
need, on an ongoing basis, to meet the conditions of the Regulation M 
relief that has been extended to them and to meet the representations 
made in seeking relief under Regulation M.\104\ What would an ETP do if 
it could no longer meet one or more of these conditions or 
representations and could no longer rely on the relief? In such 
situations, would the ETP halt creations or, for ETPs not registered 
under the 1940 Act, redemptions? What effect would that have on the 
market for that ETP's securities? What would be the effect if this 
resulted in a halt or suspension of trading activity in the ETP 
Securities, or in the ETP Securities being delisted? How would 
investors be affected?
---------------------------------------------------------------------------

    \104\ Conditions and representations concerning relief under 
Regulation M are discussed in section I.D.1.a, supra.
---------------------------------------------------------------------------

    21. What purchasing activities do distribution participants (such 
as Authorized Participants) engage in during the distribution of ETP 
Securities? Are these activities limited to the purchasing of shares to 
accumulate a redemption unit, or are there other reasons for 
distribution participants to engage in purchases of ETP Securities?
    The Commission also invites comment on the conditions pertaining to 
ETPs' exemptions from, and the criteria relied on by the staff in no-
action positions regarding, Section 11(d)(1) of the Exchange Act and 
Exchange Act Rules 10b-10, 11d1-2, 14e-5, 15c1-5, and 15c1-6.
    22. How well do the conditions of the ETPs' exemptions and the 
staff no-action relief from Section 11(d)(1) and Rule 11d1-2 
thereunder, as discussed in section I.D.1.b above, achieve Section 
11(d)(1)'s purpose of prohibiting broker-dealers from using favorable 
margin arrangements to aid in the distribution of securities in which 
they have an interest? Could different conditions be more effective at 
achieving this purpose?
    23. How often do ETP investors request detailed confirmation 
information, as discussed in Section I.D.1.c above, in creation and 
redemption transactions as provided for in the Commission's exemptions 
from Rule 10b-10 and the related staff no-action positions? What is the 
cost to broker-dealers of providing this information? Has the 
availability of modern information technology reduced these costs? Who 
bears those costs? Do ETP investors use and benefit from this 
information, and if so, how? What would be the effect of eliminating 
the exemptions and no-action relief from Rule 10b-10, thereby requiring 
broker-dealers to provide detailed confirmations to ETP purchasers in 
all transactions? What would be the effect of eliminating the 
requirement to send this information to ETP investors upon request? 
Could different conditions achieve the purposes of Rule 10b-10 at less 
cost or burden to broker-dealers? If so, what trade-offs would there 
be, if any?
    24. Has Rule 14e-5, discussed in Section I.D.1.e above, affected 
the structure of ETPs and, if so, in what ways?
    25. Authorized Participants generally have no-action relief from 
the requirements in Rules 15c1-5 and 15c1-6, as discussed in Section 
I.D.1.f above, to disclose the Authorized Participants' control 
relationships or interest in the distribution of securities that 
compose Portfolio Deposits and Redemption Baskets. Given the large 
number of securities included in many ETPs, would investors realize any 
benefit from receiving this information in creation and redemption 
transactions? What would be the cost of providing this information in 
all transactions or, alternatively, upon an ETP investor's request, and 
who would bear those costs? Has the availability of modern information 
technology made it easier or less costly to provide such information? 
Could different conditions for ``Qualifying ETFs''\105\ achieve the 
purposes of those rules at less cost or burden to broker-dealers? If 
so, what trade-offs would there be, if any?
---------------------------------------------------------------------------

    \105\ See note 62, supra.
---------------------------------------------------------------------------

C. Exchange Listing Standards

    26. The exchanges (as SROs) and the Commission both have 
responsibilities with respect to determining whether the proposed 
listing and trading of ETP Securities is consistent with the Exchange 
Act and the rules and

[[Page 34742]]

regulations thereunder.\106\ Do commenters believe that these 
independent obligations, in practice, complement each other? Do 
commenters believe that these obligations overlap each other? To the 
extent that these obligations overlap, how do commenters believe they 
should be allocated between the exchanges and the Commission?
---------------------------------------------------------------------------

    \106\ Exchanges seeking to adopt listing standards applicable to 
a new ETP product class--or to list and trade specific ETP 
Securities pursuant to existing non-generic listing standards for an 
ETP product class--are required to file proposed rule changes on 
Form 19b-4. See 17 CFR 249.819. The instructions to Form 19b-4 state 
that an exchange filing the form must provide ``a statement of the 
purpose of the proposed rule change and its basis under the 
[Exchange] Act and the rules and regulations thereunder applicable 
to the [exchange]'' and this statement ``should be sufficiently 
detailed and specific to support a finding that the proposed rule 
change is consistent with the requirements of the [Exchange] Act and 
the rules and regulations thereunder. . . .'' To approve an 
exchange's proposed rule change, the Commission must find that the 
proposed rule change is consistent with the applicable requirements 
of the Exchange Act and the rules and regulations thereunder. 15 
U.S.C. 78s(b)(2)(C). See also supra notes 79-89 and accompanying 
text.
---------------------------------------------------------------------------

    27. Do the business practices of an exchange with respect to 
attracting, listing, and trading ETP Securities differ from an 
exchange's business practices with respect to more traditional equity 
listing services? If so, how do these business practices align with the 
existing regulatory framework for exchanges as SROs?
    28. Are current exchange listing standards (including standards 
with respect to component eligibility, diversification, and pricing) 
effective, given the increasing complexity of ETP investment strategies 
and the expansion of the types of underlying and reference assets and 
benchmarks? For example, do existing listing standards adequately 
address the use by ETPs of non-exchange-listed derivatives or of 
leverage?
    29. Given the increasing complexity of ETP investment strategies 
and the expansion of the types of underlying or reference assets and 
benchmarks, what types of information do commenters believe would 
assist the Commission in evaluating whether a proposed rule filing by 
an exchange to list and trade a specific ETP is consistent with the 
Exchange Act?
    30. Should certain characteristics of an ETP receive particular 
emphasis in the Commission's evaluation of whether a proposed rule 
filing related to that ETP is consistent with the Exchange Act? If so, 
which ones? For example, should the Commission's evaluation focus on 
the nature, characteristics, or liquidity of the specific investments, 
holdings, indices, or reference assets of the ETP and on the public 
availability of information about these underlying or reference assets? 
Should the Commission's evaluation focus on the effectiveness or 
efficiency of the creation and redemption process in facilitating 
arbitrage opportunities with respect to an ETP? What other factors, if 
any, should the Commission consider in its evaluation of whether a 
proposed rule filing related to an ETP is consistent with the Exchange 
Act?
    31. Exchange listing standards for ETP Securities often contain 
both initial listing criteria and continuing listing criteria. The 
initial listing criteria include requirements that must be met when ETP 
Securities are initially listed on an exchange. The continuing listing 
criteria include requirements that must be met on an ongoing basis. 
Should exchange listing standards always contain both initial and 
continuing listing criteria? Should initial and continuing listing 
standards for ETP Securities be substantially identical?
    32. What, if any, is the appropriate role of an exchange that lists 
ETP Securities with respect to monitoring creation and redemption 
activity? For example, should the exchange be informed of an ETP's 
decision to suspend creations or redemptions during the trading day? If 
so, should the exchange be required to alert its members, investors, 
and other market participants?
    33. What, if any, is the appropriate role of an exchange that lists 
ETP Securities with respect to monitoring or overseeing the calculation 
of IIV or NAV?
    34. Do market participants believe that certain types of ETPs are 
more susceptible to manipulation than others? If so, please explain. To 
what extent, if at all, does the nature, characteristics, liquidity, or 
volatility of an ETP's underlying or reference assets affect the ETP's 
susceptibility to manipulation?

D. Broker-Dealer Sales Practices and Investor Understanding and Use of 
ETPs

    The Commission seeks comment on the use of ETPs by investors and 
the ways in which ETPs are recommended or sold to investors, 
particularly retail investors. In particular, the Commission seeks 
comment on the extent to which individual investors buy or sell ETPs 
with complex investment strategies based on the recommendation of a 
broker-dealer and the extent to which individual investors understand 
the nature and operation of such ETPs. The Commission also seeks 
comment on how broker-dealers meet their obligations to customers when 
recommending ETPs. While the questions below focus on broker-dealer 
sales practices, the Commission recognizes that investment advisers 
also play a role in the purchase or sale of ETPs by investors. 
Consequently, the Commission invites commenters to address the role of 
investment advisers in their responses, where applicable.
    35. Do individual investors tend to buy and hold ETP Securities? 
Does the answer depend on the type of ETP (e.g., investment objective, 
structure, or type of underlying asset)? Do investments by individual 
investors tend to be solicited or unsolicited? Please explain and 
provide data where available. If solicited, are solicitations limited 
to certain categories of investors (e.g., retail investors or high-net-
worth individuals) and certain types of ETPs? If so, which categories 
of investors receive solicitations and how are the parameters of the 
category determined--e.g., net worth, income, investment experience, 
options trading eligibility? In addition, which types of ETPs are 
recommended and what are the parameters being used to determine whether 
those ETPs should be recommended? Are individual investors purchasing 
ETPs on the basis of recommendations by brokers?
    36. How effective are the suitability requirements applicable to 
brokerage accounts in addressing broker-dealer sales practices for ETPs 
in light of the breadth of available ETP options and the growing 
complexity of ETP investment strategies?
    37. What methods do, or could, broker-dealers employ to meet their 
sales-practice and suitability obligations for ETP Securities?
    38. Do investors have access to sufficient information to 
understand ETPs, how ETP Securities trade, the costs associated with 
trading ETP Securities, and how their prices and valuations are 
determined, particularly as ETPs encompass increasingly complex 
benchmarks, asset classes, and investment strategies? What is the 
source of information (e.g., exchanges, broker-dealers, market 
intermediaries, prospectuses, SEC releases, or investor alerts) 
available to investors? Are there ways to better enable investors to 
access information about the listing and trading of ETP Securities? If 
yes, what are they?
    39. What roles, if any, should the exchanges have in communicating 
information about ETP Securities to their members, their members' 
customers, and the general public? Should the answer depend on whether 
the exchange is the listing exchange or

[[Page 34743]]

an exchange that trades the ETP pursuant to unlisted trading 
privileges?
    40. How do broker-dealers communicate information about ETP 
Securities to their customers? Are investors introduced to ETPs through 
information provided generally by broker-dealers (e.g., posted on a 
broker-dealer's Web site for all investors to consider)? Do broker-
dealers provide information to investors regarding the type of investor 
for which a specific product is suitable and what holding periods are 
appropriate? Are there any other ways that broker-dealers should 
communicate information relevant to the ETP Securities to their 
customers? Do broker-dealers restrict or otherwise limit access by 
certain types of investors to certain types of ETP Securities? If so, 
please describe these restrictions.
    41. Do broker-dealer communications concerning ETPs provide enough 
information for a retail investor to evaluate the facts concerning 
ETPs? Do the communications disclose the risks and benefits potentially 
associated with ETPs? Are those disclosures reasonably understandable 
for retail investors, and are they presented in a balanced manner? What 
types of broker-dealer communications about ETPs are most effective?
    42. Are there specific aspects of ETP trading that should be 
communicated to investors to better inform their investment decisions 
(e.g., the specific risks of investing in certain products or that 
certain products may not be suitable for certain types of investors)? 
Are there types of risks in particular ETPs that should be highlighted? 
If so, in what way, and who should have the responsibility for 
communicating that information? When should that information be 
communicated (e.g., prior to making recommendations or prior to 
accepting a customer order)?
    43. Should broker-dealers have additional responsibility to make 
available or provide information to investors about the risks of 
investing in ETPs with complex strategies prior to making a 
recommendation or accepting a customer order for such securities? What 
costs would broker-dealers incur in providing such information? Who 
would bear those costs? What costs do broker-dealers currently incur in 
providing information to customers about ETPs? Who bears those costs?
    44. Do broker-dealer communications to investors about ETPs present 
any performance data? If so, how is that data presented? What types of 
disclosures accompany the performance data?
    45. Are there aspects of ETP arbitrage mechanisms that should be 
prominently disclosed to investors? If so, how and where? Do investors 
understand the arbitrage mechanisms of ETPs, and, if so, do they 
consider the effectiveness and efficiency of these mechanisms when 
making an investment decision? If so, how?
    46. Do broker-dealers use the term ``ETF'' to describe all types of 
ETPs (as opposed to only those products registered under the 1940 Act)? 
If so, is this confusing to investors?
    47. What use do investors or other market participants make of 
publicly available information such as the index value, IIV, NAV, or 
portfolio holdings of an ETP? Does the answer depend on the type of 
market participant? If so, why do certain market participants use 
certain information? If market participants do not use certain 
information, why not? Do the answers depend on the type of underlying 
asset?
    48. Do investors understand what an ETP's IIV represents and what 
it does not? For example, do they understand that the IIV is not a 
``real-time'' update of the NAV and that it is not the price at which 
they can purchase ETP Securities? Do investors understand how the IIV 
calculation method can differ from the method used to calculate NAV? Do 
investors understand that IIV may be a lagging indicator of actual 
portfolio values during periods of rapid price movements? Please 
describe the basis for any views expressed regarding the understanding 
of investors.
    49. Do investors' expectations of the nature of the liquidity, the 
bid-ask spreads, and the market prices of an ETP holding less-liquid 
underlying securities differ from their expectations of the 
characteristics of those underlying securities? If so, in what ways do 
investors expect ETPs based on less-liquid securities to trade 
differently than the underlying securities themselves?

E. Other

    50. The Commission notes that, over the years, there have been ETPs 
that have closed after being listed and traded for some period of time. 
What are the consequences to investors of the closure and liquidation 
or termination of an ETP?
    51. How are the types and complexity of the investment strategies 
and investment objectives of ETPs, and the nature of the market for 
ETPs, likely to develop in the future? How might these changes affect 
the listing and trading of ETP Securities? How might these changes 
affect any underlying securities held by an ETP--for example with 
respect to liquidity, volatility, and capital formation?
    52. As noted above, the total market capitalization of ETPs has 
grown significantly, nearly doubling since the end of 2009. What do 
commenters believe are the main reasons for this growth? Do commenters 
expect significant growth in the number, variety, and market 
capitalization of ETPs to continue? If such growth continues, how might 
that affect the exchanges' listing and trading of ETP Securities? How 
might this growth affect investors, broker-dealers, or other market 
participants?
    53. The Commission provides market structure research, interactive 
data visualization tools, and advanced market metrics on its Market 
Structure Data and Analysis Web site, http://www.sec.gov/marketstructure/index.html. Users of the Web site and its data can, 
among other things, compare quoting and trading characteristics of ETPs 
to those of other equity securities. Have commenters drawn any 
observations or conclusions from this data about the listing and 
trading of ETPs? What effects, if any, does market structure have on 
the quoting and trading of ETPs? What effects, if any, does the quoting 
and trading of ETPs have on the general characteristics of current 
equity market structure? Do any specific aspects of current equity 
market structure facilitate or hinder the fair and efficient quoting 
and trading of ETPs? What types of additional information or data would 
commenters like to see regarding the quoting and trading 
characteristics of ETPs?
    The Commission welcomes all comments and encourages commenters to 
discuss any other questions, issues, concerns, or data regarding the 
listing and trading of ETP Securities on national securities exchanges.

    By the Commission.
    Dated: June 12, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-14890 Filed 6-16-15; 8:45 am]
 BILLING CODE 8011-01-P



                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                     34729

                                                    number should be included on the                        exchanges and sales of these products                     1. Purchases, Sales, Creations, and
                                                    subject line if email is used. To help the              by broker-dealers.                                           Redemptions
                                                    Commission process and review your                                                                                2. Arbitrage Between an ETP’s Market Price
                                                                                                            DATES: Comments should be received by
                                                    comments more efficiently, please use                                                                                and Its NAV
                                                                                                            August 17, 2015.                                          D. The Commission’s Oversight of
                                                    only one method. The Commission will                    ADDRESSES: Comments may be                                   Exchange-Traded Products
                                                    post all comments on the Commission’s                   submitted by any of the following                         1. Exchange Act Exemptive and No-Action
                                                    Internet Web site (http://www.sec.gov/                  methods:                                                     Relief for Existing ETPs
                                                    rules/sro.shtml). Copies of the                                                                                   2. Exchange Listing Standards and the Rule
                                                    submission, all subsequent                              Electronic Comments                                          19b–4 Process
                                                    amendments, all written statements                        • Use the Commission’s Internet                         3. Broker-Dealer Sales Practices
                                                    with respect to the proposed rule                       comment form (http://www.sec.gov/                      II. Request For Comment
                                                    change that are filed with the                          rules/other.shtml);                                       A. Arbitrage and Market Pricing
                                                    Commission, and all written                               • Send an email to rule-comments@                       B. Exchange Act Exemptions and No-
                                                    communications relating to the                          sec.gov, including File Number S7–11–                        Action Positions
                                                    proposed rule change between the                                                                                  C. Exchange Listing Standards
                                                                                                            15 on the subject line; or                                D. Broker-Dealer Sales Practices and
                                                    Commission and any person, other than                     • Use the Federal eRulemaking Portal                       Investor Understanding and Use of ETPs
                                                    those that may be withheld from the                     (http://www.regulations.gov), following                   E. Other
                                                    public in accordance with the                           the instructions for submitting
                                                    provisions of 5 U.S.C. 552, will be                     comments.                                              I. Discussion
                                                    available for Web site viewing and                                                                             A. Introduction
                                                                                                            Paper Comments
                                                    printing in the Commission’s Public
                                                    Reference Room, 100 F Street NE.,                          • Send paper comments to Secretary,                    Exchange-traded products (‘‘ETPs’’)
                                                    Washington, DC 20549, on official                       Securities and Exchange Commission,                    constitute a diverse class of financial
                                                    business days between the hours of                      100 F Street NE., Washington, DC                       products that seek to provide investors
                                                    10:00 a.m. and 3:00 p.m. Copies of such                 20549–1090.                                            with exposure to financial instruments,
                                                    filing will also be available for                       All submissions should refer to File                   financial benchmarks, or investment
                                                    inspection and copying at the principal                 Number S7–11–15. This file number                      strategies across a wide range of asset
                                                    office of FINRA. All comments received                  should be included on the subject line                 classes. ETP trading occurs on national
                                                    will be posted without change; the                      if email is used. To help the                          securities exchanges and other
                                                    Commission does not edit personal                       Commission process and review your                     secondary markets that are regulated by
                                                    identifying information from                            comments more efficiently, please use                  the Commission under the Securities
                                                    submissions. You should submit only                     only one method of submission. The                     Exchange Act of 1934 (‘‘Exchange
                                                    information that you wish to make                       Commission will post all comments on                   Act’’),1 making ETPs widely available to
                                                    available publicly. All submissions                     the Commission’s Web site (http://                     market participants, from individual
                                                    should refer to File Number SR–FINRA–                   www.sec.gov). Comments are also                        investors to institutional investors,
                                                    2015–016 and should be submitted on                     available for Web site viewing and                     including hedge funds and pension
                                                    or before July 8, 2015.                                 printing in the Commission’s Public                    funds.
                                                      For the Commission, by the Division of                Reference Room, 100 F Street NE.,                         The Commission approved the listing
                                                    Trading and Markets, pursuant to delegated              Washington, DC 20549, on official                      and trading of shares of the first ETP—
                                                    authority.18                                            business days between the hours of                     the SPDR S&P 500 ETF (‘‘SPY’’)—in
                                                    Robert W. Errett,                                       10:00 a.m. and 3:00 p.m. All comments                  1992.2 Since the SPY began trading on
                                                    Deputy Secretary.                                       received will be posted without change;                January 22, 1993, there has been
                                                    [FR Doc. 2015–14833 Filed 6–16–15; 8:45 am]
                                                                                                            the Commission does not edit personal                  enormous growth in the number,
                                                    BILLING CODE 8011–01–P
                                                                                                            identifying information from                           aggregate market capitalization, and
                                                                                                            submissions. You should submit only                    variety of ETPs. The chart below depicts
                                                                                                            information that you wish to make                      the growth of ETPs, both in number and
                                                    SECURITIES AND EXCHANGE                                 publicly available.                                    market capitalization, since 1993.
                                                    COMMISSION                                              FOR FURTHER INFORMATION CONTACT:
                                                                                                            Edward Cho, Special Counsel, at (202)                     As reflected in Figure 1 (below), from
                                                    [Release No. 34–75165; File No. S7–11–15]
                                                                                                            551–5508; Christopher Chow, Special                    2006 to 2013, the total number of ETPs
                                                                                                            Counsel, at (202) 551–5622; or Sarah                   listed and traded as of year end rose by
                                                    Request for Comment on Exchange-                                                                               an average of 160 per year, with a net
                                                    Traded Products                                         Schandler, Special Counsel, at (202)
                                                                                                            551–7145, Division of Trading and                      increase of more than 200 in both 2007
                                                    AGENCY:  Securities and Exchange                        Markets, Securities and Exchange                       and 2011. By comparison, from 1993 to
                                                    Commission.                                             Commission, 100 F Street NE.,                          2005, the total number of ETPs listed
                                                    ACTION: Request for comment.                            Washington, DC 20549–7010.                             and traded as of year end rose by an
                                                                                                                                                                   average of just 17 per year, with a net
                                                    SUMMARY:   The Securities and Exchange                  Table of Contents                                      increase of 60 in 2000. The total market
                                                    Commission (‘‘Commission’’) is seeking                  I. Discussion                                          capitalization of ETPs has also grown
                                                    public comment on topics related to the                    A. Introduction                                     substantially, nearly doubling since the
asabaliauskas on DSK5VPTVN1PROD with NOTICES




                                                    listing and trading of exchange-traded                     B. The Types of ETPs                                end of 2009. Much of this growth has
                                                    products on national securities                            C. How Existing ETPs Function                       been in index-based ETPs.



                                                      18 17 CFR 200.30–3(a)(12).                            300 of Regulation ATS, 17 CFR 242.300) or in other     Amex–92–18) (order approving the adoption of
                                                      1 15 U.S.C. 78a et seq. Once listed on a national     over-the-counter transactions.                         listing standards for Portfolio Depositary Receipts
                                                    securities exchange, ETP shares also can be traded        2 See Securities Exchange Act Release No. 31591      and the listing and trading of shares of SPY
                                                    on Alternative Trading Systems (as defined in Rule      (Dec. 11, 1992), 57 FR 60253 (Dec. 18, 1992) (SR–      pursuant to those listing standards).



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                                                    34730                        Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices




                                                       As of December 31, 2014, there were                     There has also been significant growth              and inverse leveraged ETPs; 7 and (iv)
                                                    1,664 U.S.-listed ETPs, and they had an                 in the range of investment strategies that
                                                    aggregate market capitalization of just                 ETPs pursue. These strategies have                     Trust); 68390 (Dec. 10, 2012), 77 FR 74540 (Dec. 14,
                                                                                                            expanded from exchange-traded funds                    2012) (SR–BATS–2012–042) (order granting
                                                    over $2 trillion.4 Trading in these ETPs                                                                       approval for the listing and trading of shares of the
                                                    makes up a significant portion of                       (‘‘ETFs’’) that track equity indices (such             Sovereign Screened Global Bond Fund); 68871 (Feb.
                                                    secondary-market equities trading. For                  as the original SPY) to include, among                 8, 2013), 78 FR 11238 (Feb. 15, 2013) (SR–
                                                    example, during 2014, trading in U.S.-                  other things: (i) ETPs that track other                NYSEArca–2012–138) (order granting approval for
                                                                                                            types of indices (such as those based on               the listing and trading of shares of the PIMCO
                                                    listed ETPs made up about 16.7% of                                                                             Foreign Currency Strategy Exchange-Traded Fund);
                                                    U.S. equity trading by share volume and                 fixed-income securities or on                          68972 (Feb. 22, 2013), 78 FR 13721 (Feb. 28, 2013)
                                                                                                            derivatives contracts on commodities                   (SR–NASDAQ–2012–147) (order granting approval
                                                    25.7% of U.S. equity trading by dollar
                                                                                                            and currencies); (ii) actively managed                 for the listing and trading of shares of the First Trust
                                                    volume.5                                                                                                       High Yield Long/Short ETF); 70209 (Aug. 15, 2013),
                                                                                                            ETPs that hold portfolios of equities,
                                                                                                                                                                   78 FR 51769 (Aug. 21, 2013) (SR–NYSEArca–2013–
                                                      3 The figures underlying this chart were produced
                                                                                                            fixed-income instruments, foreign                      60) (order granting approval to list and trade shares
                                                    by an analysis by Commission staff of year-end
                                                                                                            securities, commodities, currencies,                   of the Market Vectors Low Volatility Commodity
                                                    market data obtained through subscriptions to           futures, options, or other over-the-                   ETF and Market Vectors Long/Short Commodity
                                                                                                            counter or exchange-traded                             ETF); and 71378 (Jan. 23, 2014), 79 FR 4786 (Jan.
                                                    Morningstar Direct and Bloomberg Professional
                                                                                                                                                                   29, 2014) (SR–NYSEArca–2013–137) (order granting
                                                    services.                                               derivatives; 6 (iii) leveraged, inverse,               approval to list and trade shares of the Merk Gold
                                                      4 These figures reflect an analysis by Commission
                                                                                                                                                                   Trust).
                                                    staff of market data obtained through subscriptions     share volume in all equity trading that took place        7 Leveraged ETPs seek to achieve performance
                                                    to Morningstar Direct and Bloomberg Professional
asabaliauskas on DSK5VPTVN1PROD with NOTICES




                                                                                                            off an exchange in 2014.                               results, over a specified period, that are a multiple
                                                    services.                                                  6 See, e.g., Securities Exchange Act Release Nos.   or an inverse multiple of the performance of the
                                                      5 These figures reflect an analysis by Commission
                                                                                                            50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004)      index or benchmark they track. Inverse ETPs (also
                                                    staff of market data obtained through the               (SR–NYSE–2004–22) (order approving the adoption        called ‘‘short’’ funds) seek to deliver the opposite
                                                    Commission’s Market Information Data and                of listing standards for Equity Gold Shares and the    of the performance of the index or benchmark they
                                                    Analytics System (‘‘MIDAS’’). The staff’s analysis of   listing and trading of shares of the streetTRACKS      track. Like traditional ETPs, some leveraged and
                                                    MIDAS data also shows that approximately 32.4%          Gold Trust, which was subsequently renamed the         inverse ETPs track broad indices, some are sector-
                                                    of the trading activity (by share volume) in ETPs       SPDR Gold Trust); 60064 (June 8, 2009), 74 FR          specific, and others are linked to commodities,
                                                    during 2014 took place on trading venues other          28315 (June 15, 2009) (SR–NYSEArca–2009–30)            currencies, or some other benchmark. See U.S.
                                                    than national securities exchanges, which is            (order granting approval for the listing and trading   Securities and Exchange Commission, Leveraged
                                                                                                                                                                                                                              EN17JN15.001</GPH>




                                                    roughly comparable to the approximately 35.2% of        of shares of the iShares Diversified Alternatives      and Inverse ETFs: Specialized Products with Extra



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                                                                                           Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                                         34731

                                                    ETPs employing market volatility,                                          investment objective and principal                                  are senior debt instruments issued by
                                                    hedging, or options-based strategies.8                                     investment strategies, and each share of                            financial institutions, and they pay a
                                                       The increasing scope and complexity                                     an ETF represents an undivided interest                             return based on the performance of a
                                                    of ETP investment strategies in recent                                     in the underlying assets of the ETF.                                ‘‘reference asset’’—an asset, market
                                                    years have led to an increase in the                                       However, unlike open-end funds—                                     benchmark, or other investment
                                                    number and complexity of requests by                                       shares of which are purchased or                                    strategy, such as the return on the S&P
                                                    issuers for exemptive relief under the                                     redeemed at the fund’s current net asset                            500 Index, the performance of
                                                    Exchange Act (to allow ETPs to be                                          value (‘‘NAV’’),12 which is typically                               commodities or commodity indices, or
                                                    offered for sale on exchanges) and in the                                  calculated at the end of the trading                                the performance of the common stock of
                                                    number and complexity of proposed                                          day—ETF shares may be bought or sold                                an individual public company. Unlike
                                                    rule changes filed with the Commission                                     by investors throughout the day through
                                                    by exchanges seeking to establish listing                                                                                                      the other two categories of ETPs
                                                                                                                               a broker-dealer at a market-determined                              described above, ETNs are not pooled
                                                    standards for the securities of new ETPs.                                  price.13
                                                    Accordingly, the Commission believes                                                                                                           vehicles, and they do not hold an
                                                    that this is an opportune time to seek                                     Non-1940 Act Pooled Investment                                      underlying portfolio of securities,
                                                    public comment on topics associated                                        Vehicles                                                            futures, over-the-counter derivatives, or
                                                    with its oversight of the listing and                                                                                                          other assets. Offerings of ETNs are
                                                                                                                                 The second category comprises ETPs
                                                    trading of ETPs on national securities                                                                                                         registered under the Securities Act, and
                                                                                                                               that, generally, are trust or partnership
                                                    exchanges.9                                                                                                                                    the performance of the reference assets
                                                                                                                               vehicles that are not registered under
                                                                                                                               the 1940 Act because they do not invest                             generally determines the amount owed
                                                    B. The Types of ETPs
                                                                                                                               primarily in securities. Examples of                                by the issuer of the ETN to the holder
                                                      Although ETPs constitute a diverse                                                                                                           of the ETN at maturity.
                                                    class of financial products, for purposes                                  ETPs in this category include those that
                                                    of this Request for Comment they are                                       physically hold a precious metal or that                            Market Statistics
                                                    classified into three broad categories.10                                  hold a portfolio of futures or other
                                                                                                                               derivatives contracts on certain                                       To provide a general overview of the
                                                    Exchange-Traded Funds (ETFs)                                               commodities or currencies. Offerings of                             distribution of market capitalization and
                                                      The first, and largest, category                                         securities issued by ETPs in this second                            trading volume across broad categories
                                                    comprises ETFs, which are open-end                                         category are registered only under the                              of ETPs, the table below shows the
                                                    fund vehicles or unit investment trusts                                    Securities Act of 1933 (‘‘Securities                                number of ETP products (by underlying
                                                    that are registered as investment                                          Act’’) 14 and are not also registered                               or reference asset and by type of ETP),
                                                    companies under the Investment                                             under the 1940 Act.                                                 their aggregate market capitalization,
                                                    Company Act of 1940 (‘‘1940 Act’’).11                                      Exchange-Traded Notes (ETNs)                                        and the total value traded as of year end
                                                    Like an open-end fund, an ETF pools                                                                                                            2014.
                                                    the assets of multiple investors and                                         The third category comprises
                                                    invests those assets according to its                                      exchange-traded notes (‘‘ETNs’’). ETNs

                                                                                           ETPS BY UNDERLYING OR REFERENCE ASSET TYPE, AS OF YEAR END 2014 15
                                                                                                                                                                                                                                      Total value
                                                                                                                                                                                                             Total market cap
                                                                                      Underlying or reference asset or strategy                                                              Number                                 traded in 2014
                                                                                                                                                                                                                 (millions)            (millions)

                                                    Asset Allocation ...............................................................................................................                   36                $7,435              $14,380
                                                         ETF ...........................................................................................................................               34                 7,402               14,344
                                                         ETN ...........................................................................................................................                2                    33                   36
                                                    Alternative Strategies .......................................................................................................                    330                42,985            1,952,802
                                                         ETF ...........................................................................................................................              209                31,865            1,296,485
                                                         Non-1940 Act Pooled Investment Vehicles ..............................................................                                        25                 4,727              142,465

                                                    Risks for Buy-and-Hold Investors, available at                             2012), 77 FR 67412 (Nov. 9, 2012) (SR–NYSEArca–                     Proposed Rule Change, as Modified by Amendment
                                                    http://www.sec.gov/investor/pubs/leveragedetfs-                            2012–101); and an ETF that seeks to track the                       No. 1 thereto, Relating to the Listing and Trading
                                                    alert.htm; see also Securities Exchange Act Release                        performance of an index of over-the-counter put                     of Exchange-Traded Managed Fund Shares) (‘‘ETMF
                                                    No. 52553 (Oct. 3, 2005), 70 FR 59100 (Oct. 11,                            options on volatile stocks, see Securities Exchange                 Approval Order’’). No ETMFs are currently listed or
                                                    2005) (SR–Amex–2004–62) (order granting approval                           Act Release No. 69373 (Apr. 15, 2013), 78 FR 23601                  traded on an exchange, and this Request for
                                                    for the adoption of listing standards to                                   (Apr. 19, 2013) (SR–NYSEArca–2012–108).                             Comment does not therefore address their listing
                                                    accommodate leveraged ETFs and for the listing                               9 The Commission has previously sought                            and trading.
                                                    and trading of shares of the xtraShares Trust).                            comment on topics related to exchange-traded                           11 15 U.S.C. 80a–1 et seq.
                                                      8 For example, recent ETPs have included an ETF
                                                                                                                               funds, most recently in 2008. See Exchange-Traded                      12 The NAV of an investment company is the net
                                                    that seeks to track the performance of the CBOE                            Funds, Investment Company Act Release No. 28193                     value of all the assets and liabilities in the
                                                    S&P 500 VIX Tail Hedge Index, see Securities                               (Mar. 11, 2008), 73 FR 14618 (Mar. 18, 2008)                        investment company’s portfolio divided by the
                                                    Exchange Act Release No. 67485 (July 23, 2012), 77                         (proposed rule), available at http://www.sec.gov/                   number of the shares issued by the investment
                                                    FR 44291 (July 27, 2012) (SR–NYSEArca–2012–50);
                                                                                                                               rules/proposed/2008/33-8901.pdf. The Commission                     company.
                                                    an ETF that writes covered call options on
                                                                                                                               has not adopted the rule that was proposed in the                      13 Closed-end funds are also registered 1940 Act
asabaliauskas on DSK5VPTVN1PROD with NOTICES




                                                    underlying ETPs that it owns, see Securities
                                                                                                                               2008 release.                                                       investment companies that issue securities that are
                                                    Exchange Act Release No. 67552 (Aug. 1, 2012), 77
                                                    FR 47131 (Aug. 7, 2012) (SR–NYSEArca–2012–55);
                                                                                                                                 10 Recently, the Commission approved an                           traded on an exchange, and they may pursue
                                                    an ETF that holds long and short positions in                              exchange proposal to adopt rules that provide for                   investment strategies similar to those of ETFs. The
                                                    underlying ETFs and ETNs, see Securities Exchange                          the listing and trading of Exchange-Traded                          trading of closed-end funds differs from that of
                                                    Act Release No. 67559 (Aug. 1, 2012), 77 FR 47482                          Managed Fund Shares (‘‘ETMFs’’), which would                        ETFs, however, in that closed-end funds do not
                                                    (Aug. 8, 2012) (SR–NYSEArca–2012–57); an ETF                               operate differently from existing ETPs. See                         operate with the creation and redemption
                                                    that holds a portfolio including equities, equity                          Securities Exchange Act Release No. 73562 (Nov. 7,                  mechanism that, as described below, helps to keep
                                                    futures, and volatility-related instruments, see                           2014), 79 FR 68309 (Nov. 14, 2014) (SR–NASDAQ–                      an ETF’s market price closely tied to the value of
                                                    Securities Exchange Act Release No. 68158 (Nov. 5,                         2014–020) (Notice of Filing of Amendment No. 1                      the assets it holds. See infra at Section I.C.
                                                                                                                               and Order Granting Accelerated Approval of a                           14 15 U.S.C. 77a et seq.




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                                                    34732                                  Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                                               ETPS BY UNDERLYING OR REFERENCE ASSET TYPE, AS OF YEAR END 2014 15—Continued
                                                                                                                                                                                                                                        Total value
                                                                                                                                                                                                              Total market cap
                                                                                      Underlying or reference asset or strategy                                                              Number                                   traded in 2014
                                                                                                                                                                                                                  (millions)             (millions)

                                                         ETN ...........................................................................................................................               96                 6,392                513,852
                                                    Commodities ....................................................................................................................                  118                55,366                406,728
                                                         ETF ...........................................................................................................................                7                   213                    810
                                                         1940 Act Pooled Investment.
                                                    Vehicles ...........................................................................................................................               38                50,880                390,213
                                                         ETN ...........................................................................................................................               73                 4,273                 15,705
                                                    International Equity ..........................................................................................................                   367               380,023              2,497,521
                                                         ETF ...........................................................................................................................              361               376,941              2,495,865
                                                         ETN ...........................................................................................................................                6                 3,082                  1,657
                                                    Municipal Bond ................................................................................................................                    32                14,273                 20,186
                                                         ETF ...........................................................................................................................               32                14,273                 20,186
                                                    Sector Equity ...................................................................................................................                 297               304,588              2,782,522
                                                         ETF ...........................................................................................................................              281               293,673              2,764,385
                                                         ETN ...........................................................................................................................               16                10,915                 18,137
                                                    Taxable Bond ...................................................................................................................                  217               290,245              1,000,086
                                                         ETF ...........................................................................................................................              214               290,219              1,000,037
                                                         ETN ...........................................................................................................................                3                    26                     49
                                                    U.S. Equity .......................................................................................................................               267               909,677              8,581,038
                                                         ETF ...........................................................................................................................              252               907,557              8,579,330
                                                         ETN ...........................................................................................................................               15                 2,119                  1,707

                                                          Grand Total ...............................................................................................................               1,664             2,004,591            17,255,263



                                                    C. How Existing ETPs Function                                              operates in essentially the same                                    of the Creation Unit. After purchasing a
                                                                                                                               manner.18 ETPs generally issue ETP                                  Creation Unit, an Authorized
                                                    1. Purchases, Sales, Creations, and
                                                                                                                               Securities only in large aggregations or                            Participant may hold the ETP Securities
                                                    Redemptions
                                                                                                                               blocks (for example, 50,000 ETP shares)                             or sell (or lend) some or all of them to
                                                       Most investors in an ETP buy and sell                                   called creation units (‘‘Creation Units’’).                         investors in the secondary market.
                                                    the ETP’s securities in the secondary                                      Most ETPs are structured so that an                                    Similarly, for most ETPs, when an
                                                    market, at a market-determined price,                                      Authorized Participant will purchase a                              Authorized Participant wishes to
                                                    with other market participants,                                            Creation Unit with a portfolio deposit                              redeem ETP Securities, it presents a
                                                    including other investors, broker-                                         (‘‘Portfolio Deposit’’), which is a basket                          Creation Unit to the ETP for redemption
                                                    dealers, and market makers, on the other                                   of assets (and sometimes cash) that                                 and receives in return a redemption
                                                    side of the transaction. The ETP                                           generally reflects the composition of the                           basket (‘‘Redemption Basket’’), the
                                                    securities that are listed for trading on                                  ETP’s portfolio.19 The ETP makes public                             contents of which are made public by
                                                    an exchange (‘‘ETP Securities’’) are                                       the contents of the Portfolio Deposit                               the ETP before the beginning of the
                                                    either (i) shares issued by the ETP or (ii)                                before the beginning of the trading                                 trading day. The Redemption Basket
                                                    in the case of ETNs (which are, as noted                                   day.20 Because the purchase price of a                              (which is usually, but not always, the
                                                    above, debt instruments issued by a                                        Creation Unit and its aggregate NAV                                 same as the Portfolio Deposit) typically
                                                    financial institution), the debt                                           must be equal, an amount of cash will                               consists of securities or commodities
                                                    instruments themselves.                                                    be exchanged between the Authorized                                 and a small amount of cash.21 As with
                                                       Although most investors can buy or                                      Participant and the ETP at the time of                              purchases from the ETP, redemptions to
                                                    sell ETP Securities only in the                                            purchase when necessary to balance the                              the ETP are priced at NAV,22 and an
                                                    secondary market through a broker-                                         value of the Portfolio Deposit with that                            amount of cash will be exchanged when
                                                    dealer, certain large market participants,                                                                                                     necessary to balance the value of the
                                                    typically broker-dealers, can become                                       issue and redeem ETN units based on the value or                    Redemption Basket with that of the
                                                    authorized participants (‘‘Authorized                                      performance of the underlying reference asset or                    Creation Unit.
                                                    Participants’’) with respect to most                                       benchmark. The issuance and redemption process                         When creation and redemption
                                                    ETPs.16 Each Authorized Participant                                        for ETNs is generally performed by institutional
                                                                                                                               investors, as issuers require issuance or redemption
                                                                                                                                                                                                   transactions occur wholly or partly ‘‘in
                                                    enters into a contractual relationship                                     to occur in large blocks of ETNs (e.g., 25,000 to                   kind’’—in other words, when securities
                                                    with the ETP issuer that allows it to                                      50,000 ETNs). ETNs are issued and redeemed                          constituting the ETP’s portfolio are
                                                    engage in purchases and redemptions of                                     (where redeemable) solely for cash.                                 exchanged for ETP Securities and vice
                                                                                                                                  18 Some ETPs, however, do not permit regular
                                                    ETP Securities directly with that issuer.                                                                                                      versa—certain benefits can accrue to the
                                                       For almost all ETPs,17 the issuance                                     creations after the initial public offering of the ETP,
                                                                                                                               allowing only ETP redemptions. See, e.g., Securities
                                                                                                                                                                                                   ETP and its investors. In-kind exchanges
                                                    and redemption of ETP Securities                                           Exchange Act Release No. 66930 (May 7, 2012), 77                    generally result in lower trading
                                                                                                                               FR 27817 (May 11, 2012) (SR–NYSEArca 2012–18)                       expenses (because securities received or
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                                                       15 These figures reflect an analysis by                                 (APMEX Physical—1 oz. Gold Redeemable Trust).
                                                    Commission staff of market data obtained through                              19 Some issuers may allow or require Creation                      21 Some issuers may allow or require cash-only
                                                    subscriptions to Morningstar Direct and Bloomberg                          Units to be created for cash only.                                  Redemption Baskets.
                                                    Professional services. Figures are as of the last                             20 In most cases, ETPs publish the contents of                     22 Certain ETPs that hold physical commodities
                                                    trading day of 2014.                                                       their Portfolio Deposit through the National                        and are not ETFs redeem Creation Units, at the
                                                       16 ETNs, as credit instruments issued by a
                                                                                                                               Securities Clearing Corporation (‘‘NSCC’’). The                     Authorized Participant’s option, either for
                                                    financial institution, do not have Authorized                              NSCC provides its members with several methods                      commodities with a value equal to the NAV of the
                                                    Participants.                                                              to access this information. See http://                             Creation Unit or for cash at less than the NAV of
                                                       17 ETNs may or may not be redeemable, and they                          www.dtcc.com/clearing-services/equities-trade-                      the Creation Unit. See, e.g., Securities Exchange Act
                                                    employ different calculations and procedures to                            capture/etf.aspx.                                                   Release No. 66930, supra note 18.



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                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                     34733

                                                    delivered in kind do not need to be                     The IIV is typically calculated and                    ETP Security’s market price closer to the
                                                    purchased or sold in the market by the                  disseminated at least every 15 seconds                 value of the underlying portfolio assets.
                                                    ETP, thus avoiding brokerage fees) and                  during the trading day and is typically                   Similarly, if the shares of this same
                                                    lower taxable gains to shareholders                     disseminated over the Consolidated                     ETP begin to trade at a premium to the
                                                    (because appreciated securities are not                 Tape or via an exchange data feed. The                 value of the underlying portfolio,
                                                    sold but are delivered in kind to                       IIV may or may not be based on the                     arbitrageurs may profit by: (i) Selling
                                                    redeeming Authorized Participants).                     entire portfolio held by an ETP, and it                short the ETP Securities; (ii) purchasing
                                                                                                            may or may not be equal to the per-                    the securities or commodities that make
                                                    2. Arbitrage Between an ETP’s Market
                                                                                                            share value of an ETP’s underlying                     up the Portfolio Deposit; (iii)
                                                    Price and Its NAV
                                                                                                            portfolio or reference assets.27                       exchanging the Portfolio Deposit for a
                                                       Because of the creation and                                                                                 Creation Unit through an Authorized
                                                    redemption mechanisms, most existing                       A simplified example of ‘‘riskless’’
                                                                                                                                                                   Participant; and then (iv) using the ETP
                                                    ETPs present market participants,                       arbitrage will help to clarify how the
                                                                                                                                                                   Securities in the Creation Unit to close
                                                    including Authorized Participants,                      arbitrage process for existing ETPs is
                                                                                                                                                                   out the short position. Again, the sales
                                                    market makers, and institutional                        intended to work. If the shares of an
                                                                                                                                                                   of the ETP Securities and the purchases
                                                    investors, with opportunities to engage                 ETP that uses an in-kind creation and
                                                                                                                                                                   of the contents of the Portfolio Deposit
                                                    in arbitrage, which generally helps to                  redemption process begin to trade at a
                                                                                                                                                                   apply market pressure that tends, all
                                                    prevent the market price of ETP                         discount to the value of the underlying
                                                                                                                                                                   other things being equal, to bring the
                                                    Securities from diverging significantly                 portfolio at any point during the trading              price of the ETP Securities closer to the
                                                    from the value of the ETP’s underlying                  day, arbitrageurs can capture this                     value of the underlying portfolio assets.
                                                    or reference assets.23 Although most                    difference (minus expenses) by: (i)                       Market participants can also engage in
                                                    ETPs calculate and disseminate their                    Purchasing ETP Securities in the                       arbitrage activities that do not
                                                    official NAV only once per day as of the                secondary market in an amount equal to                 necessarily require them to engage in
                                                    close of regular trading hours, market                  a Creation Unit while simultaneously                   creations or redemptions. For example,
                                                    participants can use other methods                      selling short the securities or                        if a market participant believes that an
                                                    during the trading day to calculate or                  commodities in the Redemption Basket;                  ETP is overvalued relative to its
                                                    approximate the value of the assets                     (ii) redeeming the Creation Unit with                  underlying or reference assets, the
                                                    underlying or referenced by a share of                  the ETP at the end-of-day NAV (either                  market participant may sell ETP
                                                    an ETP.24                                               as an Authorized Participant or through                Securities; buy the underlying or
                                                       For example, exchange listing                        a relationship with an Authorized                      reference assets; and, if the trading
                                                    standards require every currently                       Participant), thereby receiving the                    prices move toward parity, close out the
                                                    traded, actively managed ETP to make                    securities or commodities in the                       positions in both the ETP Securities and
                                                    daily disclosure of its entire portfolio.25             Redemption Basket; and (iii) using the                 the underlying or reference assets. The
                                                    Current exchange listing standards do                   contents of the Redemption Basket to                   market participant would thereby
                                                    not require similar disclosures for                     close out the arbitrageur’s short                      realize a profit from the relative
                                                    index-based ETPs, but the make-up and                   position. Purchasing the ETP Securities                movement of those trading prices
                                                    value of the underlying indices are                     and selling short the securities or                    without engaging in an ETP creation.
                                                    widely available, and most index-based                  commodities in the Redemption Basket                   Similarly, a market participant could
                                                    ETPs, as a matter of practice, make daily               also apply market pressure that tends,                 buy ETP Securities and sell the
                                                    disclosure of their portfolios. With this               all other things being equal, to bring the             underlying or reference assets in an
                                                    information, market participants can                                                                           attempt to profit when an ETP Security
                                                    access pricing data about an ETP’s                      ‘‘Indicative Optimized Portfolio Value,’’ ‘‘Intraday   is trading at a discount to its underlying
                                                    portfolio assets and perform their own                  Value,’’ or ‘‘Portfolio Indicative Value.’’ Most ETN
                                                                                                                                                                   or reference assets. As discussed above,
                                                    calculations of the per-share value of                  issuers also make publicly available on their Web
                                                                                                            sites or through third-party vendors a value called    the trading of an ETP Security and its
                                                    that portfolio.                                         the closing indicative value, which is determined      underlying or reference assets applies
                                                       In addition, exchange listing                        as of the close of each trading day. The closing       market pressure that may bring the
                                                    standards require existing ETPs to                      indicative value, in contrast to the intraday
                                                                                                                                                                   prices of the ETP Security and those
                                                    publicly disseminate during the trading                 indicative value, represents the value of the ETN at
                                                                                                            that point in time and is used to calculate the        assets closer together.
                                                    day an intraday indicative value (‘‘IIV’’),
                                                                                                            amounts due to investors at maturity or on
                                                    which is designed to provide investors                  redemption.                                            D. The Commission’s Oversight of
                                                    with information on the value of the                       27 For example, the IIV for some ETPs is based on   Exchange-Traded Products 28
                                                    investments held by the ETP (or, in the                 the current value of the securities or cash required     Before ETP Securities can be listed
                                                    case of an ETN, the reference assets).26                to be deposited in exchange for a creation unit,
                                                                                                            which may differ from the composition of portfolio     and traded on a national securities
                                                       23 Arbitrage for ETNs may operate differently
                                                                                                            holdings on any given day. See, e.g., Securities
                                                                                                            Exchange Act Release No. 67320 (June 29, 2012), 77       28 In addition to the exemptive or no-action relief
                                                    from that for other existing ETPs, because the in-      FR 39763 (July 5, 2012) (SR–NYSEArca-2012–44)          provided with respect to the Exchange Act rules
                                                    kind creation and redemption process for most           (order granting approval for the listing and trading   and regulations described infra, in 1998 and 1999
                                                    ETPs differs from the cash-only issuance and            of shares of the iShares Strategic Beta U.S. Large     the Commission’s staff provided no-action relief
                                                    redemption process for ETNs. The Commission             Cap Fund and iShares Strategic Beta U.S. Small Cap     under Section 13(d) of the Exchange Act, 15 U.S.C.
                                                    seeks comment on the operation of arbitrage for         Fund). The IIV for certain other ETPs is based on      78m(d), and Section 16(a) of the Exchange Act, 15
                                                    ETNs. See infra at Section II.A (Question 8).           the current value of some, but not all, assets held    U.S.C. 78p(a), to certain funds registered under the
                                                       24 ETNs do not calculate a NAV because they do
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                                                                                                            in the investment portfolio. See, e.g., Securities     1940 Act with respect to the required filing of
                                                    not hold an underlying portfolio of assets. See         Exchange Act Release No. 61881 (Apr. 9, 2010), 75      ownership reports by insiders and five percent
                                                    supra Section I.B. See also infra note 26.              FR 20028 (Apr. 16, 2010) (SR–NYSEArca-2010–14)         beneficial owners of the shares of the ETFs. See
                                                       25 See, e.g., NYSE Arca Equities Rule
                                                                                                            (order granting approval to list and trade             Letter from James J. Moloney, Division of
                                                    8.600(d)(2)(B)(i). An actively managed ETP does not     partnership units of the United States Brent Oil       Corporation Finance, and Evan Geldzahler, Division
                                                    seek to track the return of a particular securities     Fund, LP, a commodity pool that seeks to track         of Investment Management, Securities and
                                                    index. Instead, an actively managed ETP’s               changes in Brent crude oil futures traded on the ICE   Exchange Commission, to Sam Scott Miller, Orrick,
                                                    investment adviser selects investments designed to      Futures Exchange and that calculates and               Herrington & Sutcliffe LLP, 1998 SEC No.-Act.
                                                    meet a particular investment objective or policy.       disseminates an IIV based solely on these futures      LEXIS 1050 (Dec. 14, 1998) (providing no-action
                                                       26 See, e.g., NYSE Arca Equities Rule 5.2(j)(3),     contracts, excluding other crude-oil-related           relief under Section 13(d) of the Exchange Act);
                                                    Commentary .01(c). The IIV is also referred to as an    investments held in the portfolio).                                                               Continued




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                                                    34734                        Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                    exchange, those securities and their                     Commission-approved listing standards                    of ETP Securities does not vary
                                                    issuer must comply with, or obtain                       applicable to the ETP Securities being                   substantially from the ETP’s NAV or
                                                    exemptions from, several provisions of                   traded.                                                  underlying index value.34 The relief is
                                                    the securities laws. First, as with other                                                                         based in part on an ETP issuer’s
                                                                                                             1. Exchange Act Exemptive and No-
                                                    securities, the offer and sale of ETP                                                                             representation that the continuing
                                                                                                             Action Relief for Existing ETPs
                                                    Securities must be registered under the                                                                           existence of effective and efficient
                                                    Securities Act.29 In addition, in the case                  The trading of ETP Securities on an
                                                                                                                                                                      arbitrage mechanisms makes it difficult
                                                    of ETFs, certain relief from the                         exchange generally will require that the
                                                                                                                                                                      to manipulate distributions of ETP
                                                    requirements of the 1940 Act is                          issuer obtain exemptive or no-action
                                                                                                             relief from various provisions of, or                    Securities. Relief for classes of ETPs
                                                    necessary,30 because ETFs differ from                                                                             relies on similar bases.35 The
                                                    other open-end investment companies                      rules promulgated under, the Exchange
                                                                                                             Act. As explained more fully below, the                  consideration of effective and efficient
                                                    in that they issue and redeem shares
                                                    only in Creation Units and their shares                  normal operation of an ETP would                         arbitrage mechanisms for purposes of
                                                    trade in the secondary market at market                  usually violate these provisions absent                  Regulation M, and the Commission’s
                                                    prices.                                                  relief.                                                  overall consideration of ETPs, can take
                                                       While ETPs are governed by various                                                                             into account not only the end-of-day
                                                                                                             a. Regulation M                                          differences between an ETP Security’s
                                                    provisions of the securities laws,
                                                    including the Securities Act and, in                        Regulation M proscribes certain                       closing market price and the ETP’s
                                                    certain cases, the 1940 Act, the focus of                activities that may increase a security’s                NAV, but also any intra-day premiums
                                                    this Request for Comment is on the                       offering price (and so increase the                      or discounts between the secondary
                                                    listing of ETP Securities on an exchange                 offering proceeds); stabilize the market                 market price of an ETP Security and the
                                                    and the trading of ETP Securities on                     price of an offered security in order to                 value of its underlying portfolio or
                                                    exchanges and other venues. Therefore,                   avoid a price decline during the sales                   reference assets.
                                                    in issuing this Request for Comment, the                 period or in the immediate aftermarket;
                                                                                                             or induce or attempt to induce                              In granting relief, the Commission
                                                    Commission seeks public comment
                                                                                                             prospective investors to buy in the                      also has relied on representations by
                                                    relating specifically to the oversight of
                                                    ETPs under the provisions of the                         aftermarket.31 Rules 101 and 102 of                      ETP issuers that the characteristics of
                                                    Exchange Act and the rules thereunder,                   Regulation M generally prohibit                          their proposed ETPs will mitigate
                                                    including both (i) the exemptive and no-                 distribution participants, issuers, selling              against the types of abuses that
                                                    action relief granted to ETPs under the                  security holders, and their affiliated                   Regulation M is intended to address.36
                                                    Exchange Act and (ii) the requirement                    purchasers from purchasing, bidding                      In the case of ETFs, for example, this
                                                    that a national securities exchange have                 for, or attempting to induce others to                   includes representations that the shares
                                                                                                             purchase or bid for covered securities                   are issued by an open-end investment
                                                    Letter from Anne M. Krauskopf, Division of               during the restricted period of a                        company or unit investment trust
                                                    Corporation Finance, and Evan Geldzahler, Division       distribution of securities.32 Because                    registered with the Commission under
                                                    of Investment Management, Securities and                 most ETPs are in continuous
                                                    Exchange Commission, to Stuart M. Strauss,
                                                                                                                                                                      the 1940 Act and that the index
                                                    Gordon, Altman, Butowsky, Weitzen, Shalov &              distribution, meaning that they are                      underlying an index-based ETP has at
                                                    Wein, 1999 SEC No-Act. LEXIS 500 (May 6, 1999)           continually creating and distributing                    least 20 different component securities
                                                    (‘‘Select Sector SPDR Trust Letter’’) (providing no-     new securities, this restricted period                   to promote sufficient diversification. It
                                                    action relief under Section 16(a) of the Exchange        usually extends indefinitely.33 Absent
                                                    Act). This no-action relief was based, in large part,                                                             also includes representations that those
                                                    on the representation that the trading prices of the     relief, the purchase of ETP Securities by                components have publicly available
                                                    ETFs did not deviate materially from their NAV.          an Authorized Participant (who would                     trade information, to facilitate the
                                                    See id. Having stated its views on whether insiders      be considered a distribution
                                                    and five percent beneficial owners of ETPs must file     participant), or by the issuer in the                       34 See, e.g., Letter from W. John McGuire, Morgan,
                                                    ownership reports under Sections 16(a) and 13(d)
                                                    of the Exchange Act, the Division staff stated that      redemption process, would violate                        Lewis & Bockius LLP, to Josephine Tao, Division of
                                                    it would not respond to further requests for no-         Rules 101 and 102 of Regulation M.                       Trading and Markets, Securities and Exchange
                                                    action relief in this area unless the request               When it has granted relief with                       Commission, re: AdvisorShares Trust Actively-
                                                    presented a ‘‘novel or unusual issue.’’ See Select       respect to Regulation M, the                             Managed ETF WCM/BNY Mellon Focused Growth
                                                    Sector SPDR Trust Letter, 1999 SEC No-Act. LEXIS                                                                  ADR (June 18, 2010) (representing that a close
                                                    500, *9.                                                 Commission has relied upon                               alignment between market price and NAV is
                                                       29 For ETPs that are not registered under the 1940    representations from ETPs that the                       expected for the relevant ETP due in part to an
                                                    Act, offerings of ETP Securities require the filing of   continuing existence of effective and                    effective and efficient arbitrage mechanism),
                                                    a registration statement on Form S–1 or Form S–3,        efficient arbitrage mechanisms help                      available at http://www.sec.gov/divisions/
                                                    depending on the issuer. Depending on the form                                                                    marketreg/mr-noaction/2010/
                                                    type used to register the offering, the staff of the
                                                                                                             ensure that the secondary market price                   advisorshares061810.pdf. See also Letter from
                                                    Division of Corporation Finance may review the                                                                    Josephine Tao, Division of Trading and Markets,
                                                                                                                31 See Amendments to Regulation M: Anti-              Securities and Exchange Commission, to W. John
                                                    disclosures included in the registration statement
                                                    and may issue comments. ETN offerings in many            Manipulation Rules Concerning Securities                 McGuire, Morgan, Lewis & Bockius LLP, re:
                                                    cases are made through takedowns off of effective        Offerings, Securities Exchange Act Release No.           AdvisorShares Trust Actively-Managed ETF WCM/
                                                    shelf registration statements. For ETFs registered       50831 (Dec. 9, 2004), 69 FR 75774 (Dec. 17, 2004)        BNY Mellon Focused Growth ADR (June 18, 2010),
                                                    under the 1940 Act, offerings require the filing of      (S7–41–04) (proposed rule).                              available at http://www.sec.gov/divisions/
                                                    a registration statement on Form N–1A. The staff of         32 17 CFR 242.101 and 242.102. See also 17 CFR        marketreg/mr-noaction/2010/
                                                    the Division of Investment Management reviews the        242.100 (defining ‘‘distribution participants,’’         advisorshares061810.pdf.
                                                    information disclosed in the Form N–1A and may           ‘‘selling security holder,’’ ‘‘affiliated purchaser,’’      35 See Letter from James A. Brigagliano, Division
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                                                    issue comments requesting that the issuer revise or      and other terms for purposes of Regulation M). In        of Trading and Markets, Securities and Exchange
                                                    expand its disclosures before the registration           addition to being promulgated under the Exchange         Commission, to Stuart M. Strauss, Clifford Chance
                                                    statement becomes effective.                             Act, Rules 101 and 102 of Regulation M are also          US LLP, re: Class Relief for Exchange Traded Index
                                                       30 For an ETF to operate, it must first obtain an     promulgated under the Securities Act and under the       Funds (Oct. 24, 2006) (‘‘Equity Index-Based ETF
                                                    order under Section 6(c) of the 1940 Act for an          1940 Act. See Anti-Manipulation Rules Concerning         Letter’’) (noting that relief is only appropriate when
                                                    exemption from Sections 2(a)(32), 5(a)(1), 22(d), and    Securities Offerings, Securities Exchange Act            the secondary market price of the ETF’s shares does
                                                    22(e) of the 1940 Act and from Rule 22c–1                Release No. 38067 at n. 10 (Dec. 20, 1996), 62 FR        not vary substantially from NAV), available at
                                                    thereunder, and under Sections 6(c) and 17(b) for        520, 521 n. 10 (Jan. 3, 1997) (S7–11–96).                http://www.sec.gov/divisions/marketreg/mr-
                                                    an exemption from Sections 17(a)(1) and 17(a)(2) of         33 See 17 CFR 242.100 (definition of ‘‘Restricted     noaction/etifclassrelief102406-msr.pdf.
                                                    the 1940 Act.                                            Period’’).                                                  36 See supra note 31 and accompanying text.




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                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                    34735

                                                    availability of sufficient information for              portfolio is not composed of securities                issuers have represented that it is
                                                    arbitrage.37                                            at all (e.g., the product is an ETP that               impractical to project, and to provide,
                                                                                                            invests in commodities).42                             some of the information required by
                                                    b. Exchange Act Section 11(d)(1) and
                                                                                                                                                                   Rule 10b–17 ten days in advance.46
                                                    Rule 11d1–2                                             c. Exchange Act Rule 10b–10
                                                                                                                                                                   According to these issuers, particularly
                                                       Section 11(d)(1) of the Exchange Act                    Rule 10b–10 under the Exchange                      difficult are the requirements for the
                                                    generally prohibits a broker-dealer from                Act 43 requires broker-dealers to provide              issuer to disclose (i) in the case of a
                                                    extending or maintaining credit, or                     their customers with certain disclosures               distribution in cash, the amount of cash
                                                    arranging for the extension or                          at or before the completion of a                       to be paid or distributed per share, and
                                                    maintenance of credit, on shares of new-                securities transaction, including the                  (ii) in the case of a distribution in the
                                                    issue securities if the broker-dealer                   identity, price, and number of shares or               same security, the amount of the
                                                    participated in the distribution of the                 units (or principal amount) of the                     securities outstanding immediately
                                                    new-issue securities within the                         security purchased or sold. As described               before and immediately after the
                                                    preceding 30 days.38 The Commission’s                   above, ETP Securities are issued and                   dividend or distribution and the rate of
                                                    view is that, because ETP Securities are                redeemed only in Creation Units of a                   the dividend or distribution.47
                                                    distributed in a continuous manner,                     minimum size, and a Portfolio Deposit                     When the Commission has granted
                                                    broker-dealers that sell these securities               or Redemption Basket may comprise                      exemptions to permit these distributions
                                                    are thereby participating in the                        dozens or hundreds of securities.                      to occur without ETP issuers providing
                                                    ‘‘distribution’’ of a new issue for                     Because it would be administratively                   10-day advance notice of the two items
                                                    purposes of Section 11(d)(1).39 Further,                burdensome for broker-dealers to                       of information noted above, this relief
                                                    if an ETF held a portfolio composed                     provide transaction confirmations for                  has been conditioned on the issuer
                                                    solely or largely of newly issued                       each security in a Portfolio Deposit or                providing the two items of information
                                                    securities, there is a risk that Authorized             Redemption Basket, the Commission                      to the national securities exchange on
                                                    Participants—rather than lending on, or                 has issued exemptive relief from Rule                  which the ETP Securities are registered
                                                    arranging for lending on, the newly                     10b–10 to permit broker-dealers to omit                (pursuant to Section 12 of the Exchange
                                                    issued securities directly—could use the                this information with respect to ETPs,                 Act) as soon as practicable before
                                                    ETF structure to avoid the new-issue                    provided that (i) the Creation Unit is                 trading begins on the ex-dividend date,
                                                    lending restriction.                                    sufficiently large (at least 25,000 shares             but in no event later than the time (on
                                                       The Commission has granted ETP                       and $500,000), (ii) it is probable that                the day before the ex-dividend date) the
                                                    issuers exemptions from, and the staff                  creation and redemption transactions                   exchange last accepts information
                                                    has issued no-action positions                          are entered into only by sophisticated                 relating to distributions.48 The
                                                    regarding, Section 11(d)(1) in                          investors, and (iii) the broker-dealer
                                                    circumstances in which these evasion                                                                           Commission has granted these
                                                                                                            provides the omitted confirmation                      exemptions because, other than
                                                    concerns are reduced because: (i) the                   information to customers upon
                                                    portfolio is sufficiently diversified that                                                                     receiving a delayed notice of these two
                                                                                                            request.44                                             items of information, market
                                                    evasion becomes impractical; 40 (ii) the
                                                                                                            d. Exchange Act Rule 10b–17                            participants will have timely notice of
                                                    portfolio is composed of securities that
                                                                                                              Rule 10b–17 under the Exchange Act                   the existence and timing of a pending
                                                    are not subject to Section 11(d)(1) (e.g.,
                                                                                                            generally requires issuers to give notice              distribution, as required by Rule 10b–
                                                    government securities); 41 or (iii) the
                                                                                                            10 days in advance of certain specified                17.49 Further, under the terms of the
                                                      37 See, e.g., Equity Index-based ETF Letter, supra
                                                                                                            actions (e.g., a dividend distribution,                exemption, the timing of the availability
                                                    note 35. Broadly speaking, ETP sponsors seeking         stock split, or rights offering) relating to           of the two items of information should
                                                    relief make the same representations as those made
                                                                                                            their securities, in accordance with the               allow market participants time to
                                                    by similar products that have previously been                                                                  update their systems to reflect the
                                                    granted relief.                                         procedures laid out in the rule.45
                                                      38 15 U.S.C. 78k(d)(1).                               Generally this rule is relevant to an ETP              accurate price of the ETP Securities
                                                      39 See, e.g., Letter from Catherine McGuire,
                                                                                                            when it must distribute cash—for                       before trading begins on the ex-dividend
                                                    Division of Trading and Markets, Securities and         example, income from fixed-income                      date.50
                                                    Exchange Commission, to Securities Industry
                                                    Association (Nov. 21, 2005), available at http://       holdings or cash from a realized                       e. Exchange Act Rule 14e–5
                                                    www.sec.gov/divisions/marketreg/mr-noaction/            investment gain—to its shareholders.
                                                    sia112105.htm.                                          Because some ETP Securities are                           Rule 14e-5 under the Exchange Act 51
                                                      40 See, e.g., Letter from Catherine McGuire,
                                                                                                            continuously being issued or redeemed,                 is designed to prevent the manipulation
                                                    Division of Trading and Markets, Securities and
                                                    Exchange Commission, to Securities Industry                                                                       46 See e.g., Letter from Jeremy Senderowicz,
                                                    Association (Nov. 21, 2005) (conditionally              Skadden, Arps, Slate, Meagher & Flom LLP, re:
                                                                                                            MACRO Securities Depositor, LLC (Dec. 22, 2006)        Dechert LLP, to Josephine Tao, Division of Trading
                                                    exempting from Section 11(d)(1) an ETF that
                                                                                                            (‘‘MACRO Securities Depositor Letter’’) (providing     and Markets, Securities and Exchange Commission,
                                                    consists of a basket of twenty or more component
                                                                                                            conditional staff no-action relief), available at      re: ALPS ETF Trust, ALPS/GS Momentum Builder
                                                    securities, with no one component security
                                                                                                            http://www.sec.gov/divisions/marketreg/mr-             Growth Markets Equities and U.S. Treasuries Index
                                                    constituting more than 25% of the total value of the
                                                                                                            noaction/macro122206-11d1.pdf.                         ETF, ALPS/GS Momentum Builder Multi-Asset
                                                    ETF), available at http://www.sec.gov/divisions/
                                                                                                               42 See, e.g., Letter from James A. Brigagliano,     Index ETF, and ALPS/GS Momentum Builder Asia
                                                    marketreg/mr-noaction/sia112105.htm; Letter from
                                                                                                            Division of Market Regulation, Securities and          Ex-Japan Equities and U.S. Treasuries Index ETF
                                                    Joseph Furey, Division of Trading and Markets,
                                                                                                            Exchange Commission, to Michael Schmidtberger,         (Dec. 18, 2012), available at http://www.sec.gov/
                                                    Securities and Exchange Commission, to W. John
                                                                                                            Sidley Austin Brown & Wood LLP, re: DB                 rules/exorders/2012/34-68459-letter.pdf.
                                                    McGuire, Morgan, Lewis & Bockius LLP, re:
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                                                                                                                                                                      47 These disclosures are required by 17 CFR
                                                    AdvisorShares Madrona & Meidell ETFs (June 16,          Commodity Index Tracking Fund (Jan. 19, 2006)
                                                    2011) (‘‘Madrona & Meidell Letter’’) (providing         (‘‘DB Commodity Index Tracking Fund Letter’’)          240.10b–17(b)(1)(v)(a) and (b).
                                                    conditional staff no-action relief to ETFs whose        (providing conditional staff no-action relief),           48 See, e.g., Order Granting a Limited Exemption

                                                    portfolios consist of other diversified ETFs),          available at http://www.sec.gov/divisions/             from Exchange Act Rule 10b–17, Securities
                                                    available at http://www.sec.gov/divisions/              marketreg/mr-noaction/                                 Exchange Act Release No. 67215 (June 19, 2012), 77
                                                    marketreg/mr-noaction/2011/                             commodityidxtf011906.htm.                              FR 37941 (June 25, 2012) (TP–11–07) (‘‘10b–17
                                                    advisorsharesmadrona061611.pdf.                            43 17 CFR 240.10b–10.                               Actively Managed ETP Exemption’’).
                                                      41 See, e.g., Letter from James A. Brigagliano,          44 See, e.g., Letter from Catherine McGuire to         49 See id.

                                                    Division of Market Regulation, Securities and           Securities Industry Association, supra note 40.           50 See id.

                                                    Exchange Commission, to Richard F. Kadlick, Esq.,          45 17 CFR 240.10b–17.                                  51 17 CFR 240.14e–5.




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                                                    34736                          Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                    of tender offers. In particular, Rule 14e–                  Securities.56 Moreover, the issuers                      that it will not recommend enforcement
                                                    5 prohibits ‘‘covered persons’’ 52 from                     generally represent that the type of                     action if a broker-dealer executes
                                                    purchasing or arranging to purchase any                     trading described above does not result                  transactions in shares of Qualifying
                                                    securities subject to a tender offer                        in the abuses that Rule 14e–5 was                        ETFs without disclosing its
                                                    except as part of that tender offer.53 This                 designed to prevent.57 As a condition of                 participation or interest in a primary or
                                                    prohibition is in effect from the                           the relief that has been issued, the issuer              secondary distribution of a security
                                                    announcement of the tender offer until                      of ETP Securities generally also                         included within the Portfolio Deposit or
                                                    the expiration of the tender offer. An                      represents that the purchases or                         Redemption Basket.62
                                                    Authorized Participant acting as the                        redemptions would not, in fact, be used
                                                                                                                to facilitate a tender offer.                            g. Class Relief
                                                    dealer-manager of a tender offer for a
                                                    component security is a covered person                                                                                  In connection with the application of
                                                                                                                f. Exchange Act Rules 15c1–5 and
                                                    for purposes of Rule 14e–5.54                                                                                        the Exchange Act provisions described
                                                                                                                15c1–6
                                                                                                                                                                         above, the Commission has issued a
                                                      The Commission has granted relief to                         Rule 15c1–5 under the Exchange                        number of ‘‘class’’ exemptions to the
                                                    various entities with respect to the                        Act 58 requires a broker-dealer to                       trading of ETP Securities.63 Class
                                                    application of Rule 14e–5 so that                           disclose to its customers if it has a                    exemptions for ETPs from the Exchange
                                                    Authorized Participants may redeem                          control relationship with an issuer prior                Act provisions discussed above are
                                                    Creation Units and purchase ETP                             to a customer’s purchase or sale of the                  generally issued only if the Commission
                                                    Securities even though component                            issuer’s securities. Rule 15c1–6 under                   and the staff have had experience with
                                                    securities may be subject to a Rule 14e–                    the Exchange Act 59 requires a broker-                   individual exemptions and no-action
                                                    5 restricted period.55 ETP issuers                          dealer to disclose to its customer, at or                positions and have determined that
                                                    generally seek relief on the basis that: (i)                before the completion of a transaction,                  class relief is appropriate.64 In the case
                                                    Acquiring individual securities held by                     that the broker-dealer is participating in               of exemptions, the Commission must
                                                    an ETP through redemptions of the                           the primary or secondary distribution of                 also determine that a class exemption
                                                    ETP’s securities would be impractical                       the securities that it is selling or                     meets the statutory standard of being
                                                    and inefficient; (ii) facilitating a tender                 purchasing for the customer’s account.                   necessary or appropriate in the public
                                                    offer in a particular security included in                  Because applying these rules to all the                  interest and consistent with the
                                                    a Portfolio Deposit by means of                             securities in a creation or redemption                   protection of investors.65 An ETP
                                                    purchasing all of the specific portfolio                    transaction would be administratively                    relying on a class exemption or no-
                                                    securities constituting the Portfolio                       burdensome for broker-dealers, and                       action position must meet all of the
                                                    Deposit would be inefficient; and (iii)                     because creations and redemptions are                    conditions of the relevant Commission
                                                    applying the Rule 14e–5 prohibition                         consummated at prices that are fixed by                  order or staff letter for the life of the
                                                    would impede the valid and useful                           the ETP, there appears to be little                      product (or until the relief is no longer
                                                    market and arbitrage activity that would                    potential for a broker-dealer to                         necessary), just as if the ETP had
                                                    assist secondary market trading and                         manipulate the price of the securities in                obtained its own individual relief. Class
                                                    improve the pricing efficiency of ETP                       the creation and redemption                              exemptions or no-action positions have
                                                                                                                transactions.60 Therefore, the staff has                 been issued for equity index-based
                                                       52 For purposes of Exchange Act Rule 14e–5, a            stated that it will not recommend
                                                    ‘‘covered person’’ is defined as: (i) The offeror and       enforcement action to the Commission
                                                    its affiliates; (ii) the offeror’s dealer-manager and its                                                            no-action relief to more ETPs with respect to
                                                                                                                with respect to Authorized Participants’                 treatment as Qualifying ETFs. See, e.g., DB
                                                    affiliates; (iii) any advisor to any of the persons
                                                    specified in (i) or (ii) whose compensation is              compliance with Rules 15c1–5 and                         Commodity Index Tracking Fund Letter, supra note
                                                    dependent on the completion of the offer; and (iv)          15c1–6 in creation and redemption                        42 (certain commodity-based exchange-traded
                                                    any person acting, directly or indirectly, in concert       transactions if a broker-dealer executes                 trusts); MACRO Securities Depositor Letter, supra
                                                    with any of the persons specified in (i), (ii), or (iii)                                                             note 41 (an ETP holding government securities);
                                                                                                                transactions in shares of ‘‘Qualifying                   Letter from Brian A. Bussey, Division of Trading
                                                    in connection with any purchase or arrangement to
                                                    purchase the securities or any related securities. See      ETFs’’ without disclosing any control                    and Markets, Securities and Exchange Commission,
                                                    17 CFR 240.14e–5(c)(3).                                     relationship with an issuer of a security                to W. Thomas Conner and Eric C. Freed, Sutherland
                                                       53 Rule 14e–5 is designed to protect investors by        in the Portfolio Deposit or Redemption                   Asbill & Brennan LLP, re: Ameristock ETF Trust
                                                    preventing an offeror from extending greater or                                                                      (June 29, 2007) (certain fixed income ETFs),
                                                                                                                Basket.61 The staff has similarly stated                 available at http://www.sec.gov/divisions/
                                                    different consideration to some security holders
                                                    outside the offer, while other security holders are                                                                  marketreg/mr-noaction/2007/ameristock062907-
                                                                                                                   56 See, e.g., Letter from W. John McGuire,
                                                    limited to the offer’s terms, and by ensuring that                                                                   msr.pdf; Letter from James A. Brigagliano, Division
                                                    large security holders do not demand greater                Bingham McCutchen LLP, to Michele M. Anderson            of Trading and Markets, Securities and Exchange
                                                    consideration. See Securities Exchange Act Release          and David Orlic, Division of Corporation Finance,        Commission, to Kathleen H. Moriarty, Carter,
                                                    No. 8712 (Oct. 8, 1969), 34 FR 15838 (Oct. 15, 1969)        Securities and Exchange Commission, re: SSgA             Ledyard & Milburn, re: Proshares Trust (Jan. 24,
                                                    (order adopting Rule 10b–13, which was later                Active ETF Trust (July 3, 2013), available at            2007) (certain ETFs tracking a multiple, inverse, or
                                                    redesignated as Rule 14e–5 in Securities Exchange           http://www.sec.gov/divisions/corpfin/cf-noaction/        multiple inverse of an index), available at http://
                                                    Act Release No. 42055 (Oct. 22, 1999), 64 FR 61408          2013/ssga-active-etf-trust-14e5.pdf.                     www.sec.gov/divisions/marketreg/mr-noaction/
                                                                                                                   57 See supra note 53.                                 2007/proshares012407-msr.pdf; Letter from
                                                    (Nov. 10, 1999)). In addition, Rule 14e–5 prevents
                                                    purchases outside the offer that, depending on the             58 17 CFR 240.15c1–5.                                 Josephine J. Tao, Division of Trading and Markets,
                                                    conditions in the market and the nature of the                 59 17 CFR 240.15c1–6.                                 Securities and Exchange Commission, to Richard F.
                                                    purchases, may be fraudulent or manipulative in                60 See, e.g., Letter from Catherine McGuire to        Morris, Deputy General Counsel, WisdomTree Asset
                                                    nature, such as purchases that are used to defeat a         Securities Industry Association, supra note 40.          Management, Inc. (May 9, 2008) (certain actively-
                                                    tender offer by driving the market price above the             61 A ‘‘Qualifying ETF’’ was initially limited to an   managed ETFs not tied to an index), available at
                                                    offer price or by otherwise reducing the number of                                                                   http://www.sec.gov/divisions/marketreg/mr-
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                                                                                                                ETF meeting certain conditions, including that it is
                                                    shares tendered below the stated minimum. See id.                                                                    noaction/2008/wisdomtree050908-msr.pdf; and
                                                                                                                issued by an open-end investment company or unit
                                                       54 See 17 CFR 240.14e–5(c)(3)(ii).                                                                                Madrona & Meidell Letter, supra note 40 (certain
                                                                                                                investment trust registered with the Commission
                                                       55 See, e.g., Equity Index-Based ETF Letter, supra                                                                ETFs whose portfolios consist of other diversified
                                                                                                                under the 1940 Act; that it is listed and traded on
                                                                                                                                                                         ETFs).
                                                    note 35, at 6. The entities to which relief has been        a national securities exchange; that it comprises           62 Id.
                                                    granted include open-end investment companies               twenty or more diversified component securities,
                                                                                                                                                                            63 See, e.g., Equity-Index Based ETF Letter, supra
                                                    that issue ETP Securities, the listing exchange and         with no one component security constituting more
                                                    any other national securities exchange on or                than 25% of the total value of the ETF; and that it      note 35.
                                                                                                                                                                            64 See Letter from Catherine McGuire to Securities
                                                    through which the ETP Securities may                        is managed to track a particular index, all
                                                    subsequently trade, and persons or entities engaging        components of which are publicly available. Id.          Industry Association, supra note 40.
                                                    in transactions in ETP Securities.                          Subsequent staff no-action positions have provided          65 See 15 U.S.C. 78mm(a)(1).




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                                                                                   Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                       34737

                                                    ETFs,66 commodity-based investment                        Commission.74 When listing ETP                          potential for manipulation and other
                                                    vehicles that are not registered under                    Securities in this way, however,                        trading abuses, and to help maintain a
                                                    the 1940 Act,67 fixed-income index-                       exchanges are required to file a notice                 fair and orderly market for the ETP
                                                    based ETFs,68 ‘‘combination’’ index-                      with the Commission within five                         Securities, these quantitative criteria are
                                                    based ETFs,69 ETNs,70 and actively-                       business days after trading                             designed to help ensure a minimum
                                                    managed ETFs.71 These orders and no-                      commences.75 Examples of ETP classes                    degree of liquidity and diversification
                                                    action positions cover a number of the                    for which generic listing standards exist               for the underlying or reference
                                                    Exchange Act rules and regulations                        include what are commonly called                        securities, assets, or instruments.
                                                    described above.72                                        index-based ETFs (which the exchanges’                     Non-generic listing standards permit
                                                                                                              rules call Investment Company Units,                    an exchange to list and trade a specific
                                                    2. Exchange Listing Standards and the                     Index-Fund Shares, Portfolio Depositary                 ETP Security (within a class of ETPs)
                                                    Rule 19b–4 Process                                        Receipts, or security-based Trust Issued                only after the exchange has filed and the
                                                       Before ETP Securities can trade on a                   Receipts), and certain ETNs (which the                  Commission has approved a proposed
                                                    national securities exchange, that                        exchanges’ rules call Index-Linked                      rule change that is specific to the new
                                                    exchange must agree to list the ETP                       Securities or Linked Securities).76                     ETP Security.78 Because of their
                                                    Securities for trading on its market, and                    Generic ETP listing standards                        security-specific nature, non-generic
                                                    it must have Commission-approved                          approved by the Commission contain                      listing standards typically do not
                                                    initial and continued listing standards                   quantitative criteria with respect to                   contain generalized quantitative criteria
                                                    that permit listing of that type or ‘‘class’’             components included in the ETP’s                        for the components included in an
                                                                                                              underlying or reference index or                        ETP’s underlying or reference index or
                                                    of ETP Security.73 ETP listing standards
                                                                                                              benchmark. With respect to underlying                   benchmark.
                                                    can be broadly categorized as either
                                                                                                              indices, these quantitative criteria                       Exchanges seeking to adopt listing
                                                    generic or non-generic.
                                                                                                              provide minimum thresholds regarding                    standards applicable to a new ETP
                                                       Generic listing standards permit an                    trading volume, market capitalization,                  product class—or to list and trade
                                                    exchange to list and trade specific ETP                   number of index components, and index                   specific ETP Securities pursuant to
                                                    Securities of a broader class of ETPs                     concentration limits.77 To mitigate the                 existing non-generic listing standards
                                                    without filing a product-specific                                                                                 for an ETP product class—are required
                                                    proposed rule change with the                                74 See 17 CFR 240.19b–4(e)(1). In 1998, the
                                                                                                                                                                      to file proposed rule changes under
                                                                                                              Commission issued a final rule setting forth the        Section 19(b)(1) of the Exchange Act 79
                                                                                                              standards under which exchanges can list and trade
                                                      66 See   Equity Index-Based ETF Letter, supra note
                                                                                                              ‘‘new derivatives securities products’’ (a category     and Rule 19b–4 thereunder.80 Once an
                                                    35.
                                                       67 See Letter from Racquel L. Russell, Division of
                                                                                                              that encompasses ETPs) under ‘‘generic listing
                                                                                                              standards.’’ See Amendments to Rule Filing              weight of the index); (4) that there be a minimum
                                                    Trading and Markets, Securities and Exchange              Requirements for Self-Regulatory Organizations          number of components in the index; and (5) that
                                                    Commission, to George T. Simon, Foley & Lardner           Regarding New Derivative Securities Products,           each component either be an exchange-listed NMS
                                                    LLP, re: CurrencyShares British Pound Sterling            Securities Exchange Act Release No. 40761 (Dec. 8,      stock or, if a non-U.S. stock, be listed and traded
                                                    Trust et al. (June 21, 2006), available at http://www.    1998), 63 FR 70952 (Dec. 22, 1998) (S7–13–98).          on an exchange that has last-sale reporting. See,
                                                    sec.gov/divisions/marketreg/mr-noaction/                     75 See 17 CFR 240.19b–4(e)(2)(ii). The required      e.g., BATS Rule 14.11(c); NASDAQ Rule 5705;
                                                    currencyshares062106-10a1.pdf.                                                                                    NYSE Arca Equities Rule 5.2(j)(3), Commentary .01.
                                                       68 See Letter from James A. Brigagliano, Division
                                                                                                              notice is filed on Form 19b–4(e). 17 CFR 249.820.
                                                                                                                 76 See, e.g., Securities Exchange Act Release Nos.   With respect to ETNs, the generic listing standards
                                                    of Trading and Markets, Securities and Exchange                                                                   also include minimum requirements relating to the
                                                                                                              42787 (May 15, 2000), 65 FR 33598 (May 24, 2000)
                                                    Commission, to Benjamin J. Haskin, Willkie Farr &                                                                 issuer of the securities (e.g., minimum tangible net
                                                                                                              (SR–Amex–2000–14) (approving generic listing
                                                    Gallagher LLP, re: Class Relief for Fixed Income                                                                  worth and minimum amount of assets), which are
                                                                                                              standards for ETFs called Portfolio Depositary
                                                    ETFs (Apr. 9, 2007), available at http://www.sec.                                                                 designed to mitigate issuer credit risk. See, e.g.,
                                                                                                              Receipts and Index Fund Shares); 45718 (Apr. 9,
                                                    gov/divisions/marketreg/mr-noaction/2007/                                                                         BATS Rule 14.11(d); NASDAQ Rule 5710; NYSE
                                                                                                              2002), 67 FR 18965 (Apr. 17, 2002) (SR–NYSE–
                                                    fietfclassrelief040907-msr.pdf.                                                                                   Arca Equities Rule 5.2(j)(6).
                                                       69 See Letter from Josephine Tao, Division of
                                                                                                              2002–07) (approving generic listing standards for
                                                                                                                                                                         78 The ETP product classes that have non-generic
                                                                                                              Trust Issued Receipts); and 55687 (May 1, 2007), 72
                                                    Trading and Markets, Securities and Exchange              FR 25824 (May 7, 2007) (SR–NYSE–2007–27)                listing standards include the following: Trust Issued
                                                    Commission, to Domenick Pugliese, Paul, Hastings,         (approving generic listing standards for Index-         Receipts based on investments in ‘‘investment
                                                    Janofsky and Walker LLP, re: Combination ETFs             Linked Securities). See also, e.g., BATS Rules          shares’’ or ‘‘financial instruments,’’ Commodity-
                                                    (June 27, 2007), available at http://www.sec.gov/         14.11(b) (Portfolio Depositary Receipts), 14.11(c)      Based Trust Shares, Commodity Index Trust Shares,
                                                    Archives/edgar/vprr/07/9999999997-07-047147.              (Index Fund Shares), 14.11(d) (ETNs), and 14.11(f)      Commodity Futures Trust Shares, Partnership
                                                       70 See, e.g., Letter from Josephine Tao, Division of
                                                                                                              (Trust Issued Receipts), available at http://           Units, Paired Trust Shares, Trust Units, Managed
                                                    Trading and Markets, Securities and Exchange              batstrading.com/resources/regulation/rule_book/         Fund Shares, Managed Trust Securities, and Trust
                                                    Commission, to Arthur S. Long, Davis Polk &               BATS_Exchange_Rulebook.pdf; NASDAQ Rules                Certificates. See, e.g., BATS Rules 14.11(e)(3) (Trust
                                                    Wardwell LLP, re: Deutsche Bank AG ETNs (Oct.             5705 (Index Fund Shares and Portfolio Depositary        Certificates), 14.11(e)(4) (Commodity-Based Trust
                                                    12, 2007) (‘‘ETN No-action Letter’’), available at        Receipts), 5710 (ETNs), and 5720 (Trust Issued          Shares), 14.11(e)(6) (Commodity Index Trust
                                                    http://www.sec.gov/divisions/marketreg/mr-                Receipts), available at http://nasdaq.                  Shares), 14.11(e)(7) (Commodity Futures Trust
                                                    noaction/2007/dbab101207.pdf.                             cchwallstreet.com/NASDAQTools/Platform                  Shares), 14.11(e)(8) (Partnership Units), 14.11(e)(9)
                                                       71 See 10b-17 Actively Managed ETP Exemption,                                                                  (Trust Units), 14.11(e)(10) (Managed Trust
                                                                                                              Viewer.asp?selectednode=
                                                    supra note48, and Division of Trading and Markets:        chp%5F1%5F1%5F4%5F3&manual=                             Securities), and 14.11(i) (Managed Fund Shares);
                                                    Staff Legal Bulletin No. 9 ‘‘Frequently Asked             %2Fnasdaq%2Fmain%2Fnasdaq%2Dequityrules                 NASDAQ Rules 5711(c) (Trust Certificates), 5711(d)
                                                    Questions About Regulation M’’ (as revised Sep. 10,       %2F; NYSE Arca Equities Rules 5.2(j)(3)                 (Commodity-Based Trust Shares), 5711(f)
                                                    2010) (regarding Regulation M), available at              (Investment Company Units), 5.2(j)(6) (ETNs), 8.100     (Commodity Index Trust Shares), 5711(g)
                                                    http://www.sec.gov/interps/legal/mrslb9.htm.              (Portfolio Depositary Receipts), and 8.200 (Trust       (Commodity Futures Trust Shares), 5711(h)
                                                       72 See supra Sections I.D.1.a through I.D.1.f.         Issued Receipts), available at http://                  (Partnership Units), 5711(i) (Trust Units), 5711(j)
                                                       73 See 15 U.S.C. 78s(b) and 17 CFR 240.19b–4.          nysearcarules.nyse.com/PCX/.                            (Managed Trust Securities), and 5735 (Managed
                                                                                                                                                                      Fund Shares); NYSE Arca Equities Rules 8.200
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                                                    The Exchange Act also permits an exchange to trade           77 For example, with respect to equity-index-

                                                    a security that is listed on another exchange. The        based ETFs, the generic listing standards generally     (Commentary .02) (Trust Issued Receipts based on
                                                    non-listing exchange that trades the security is said     contain the following requirements with respect to      investment shares or financial instruments), 8.201
                                                    to extend ‘‘unlisted trading privileges’’ (or ‘‘UTP’’)    the underlying index: (1) That each component           (Commodity-Based Trust Shares), 8.203
                                                    to the security. See Section 12(f) of the Exchange        have a minimum market value; (2) that each              (Commodity Index Trust Shares), 8.204
                                                    Act, 15 U.S.C. 78l(f); Exchange Act Rule 12f–5 (17        component have a minimum monthly trading                (Commodity Futures Trust Shares), 8.300
                                                    CFR 240.12f–5) (providing that an exchange shall          volume over the most recent six-month period; (3)       (Partnership Units), 8.400 (Paired Trust Shares),
                                                    not extend UTP to a security unless the exchange          that the index observe certain concentration limits     8.500 (Trust Units), 8.600 (Managed Fund Shares),
                                                    has in effect a rule or rules providing for               (e.g., that no component may exceed 30% of the          8.700 (Managed Trust Securities).
                                                                                                                                                                         79 15 U.S.C. 78s(b).
                                                    transactions in the class or type of security to which    weight of the index and that the five most heavily
                                                    the exchange extends UTP).                                weighted components may not exceed 65% of the              80 17 CFR 240.19b–4.




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                                                    34738                        Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                    exchange files a proposed rule change                   investors and the public interest.87 With                3. Broker-Dealer Sales Practices
                                                    that complies with the Exchange Act,                    respect to the listing standards for ETP                   Broker-dealers, which are registered
                                                    the rules thereunder, and the form                      Securities, most exchange filings in                     with and regulated by the Commission
                                                    governing such filings, statutory                       connection with proposed rule changes                    under the Exchange Act, are also subject
                                                    deadlines apply to Commission                           include a general description of the                     to regulation by the self-regulatory
                                                    consideration of the filing.                            following: (i) the ETP and its permitted                 organizations (‘‘SROs’’) to which they
                                                       Section 19(b)(2) of the Exchange Act,                investments or reference assets; (ii) how
                                                                                                                                                                     belong—e.g., FINRA and the exchanges.
                                                    as amended by the Dodd-Frank Act,81                     the ETP will seek to meet its investment
                                                                                                                                                                     Both federal and SRO regulations
                                                    effectively requires the Commission to                  objective; (iii) whether and to what
                                                    publish notice of a proposed rule                                                                                impose duties on broker-dealers when
                                                                                                            extent information is available to
                                                    change within 15 days of filing.82 In                                                                            dealing with their customers and, in
                                                                                                            investors about the pricing and
                                                    general, for proposals that must be                                                                              particular, when recommending the
                                                                                                            valuation of the ETP Securities, the
                                                    approved by the Commission before                                                                                purchase or sale of securities by their
                                                                                                            ETP’s underlying assets, and the
                                                    they may take effect (such as a filing                                                                           customers.90 These duties include
                                                                                                            relevant index or reference assets; 88 (iv)
                                                    concerning a new ETP), the Commission                                                                            making suitable recommendations,
                                                                                                            how the exchange will monitor trading
                                                    is required to take action within 45 days                                                                        engaging in fair and balanced
                                                                                                            in the ETP Securities; and (v) the
                                                    (which can be extended by the                           information that will be available to                    communications with the public,
                                                    Commission or the exchange for another                  investors about the ETP Securities.89                    disclosing conflicts of interest, and
                                                    45 days) after the date of publication of                                                                        receiving fair compensation both in
                                                    the proposal in the Federal Register.83                    87 15 U.S.C. 78f(b)(5). In addition, the proposed     agency and principal transactions.91
                                                    The Commission may, however,                            rule change must not be designed to permit unfair          In addition, a broker-dealer that
                                                    institute proceedings to determine                      discrimination between customers, issuers, brokers,      recommends buying, holding, or selling
                                                                                                            or dealers or to regulate by virtue of any authority     an ETP, or an investment strategy
                                                    whether to disapprove a proposal, in                    conferred by the Exchange Act matters not related
                                                    which case the Commission is required                   to the purposes of the Exchange Act or the               involving an ETP, may be subject to
                                                    to take final action to approve or                      administration of the exchange. Id.                      additional or heightened scrutiny
                                                    disapprove a proposed rule change no
                                                                                                               88 For index-based ETPs, exchange rules generally     regarding ETPs with respect to
                                                                                                            require that the underlying or reference index or        brokerage customers, as described in
                                                    later than 240 days after the proposal is               benchmark be calculated and disseminated
                                                    published in the Federal Register.84 If                 throughout the trading day. The frequency of
                                                                                                                                                                     FINRA guidance regarding complex
                                                    the Commission fails to meet any of the                 dissemination depends on whether the components          products and non-traditional ETPs.92
                                                    deadlines for final action on a proposed                are U.S. equities, foreign equities, or fixed-income
                                                                                                            securities. See, e.g., Commentary .01(b)(2) to NYSE      requirements; and (f) other information (e.g., fees
                                                    rule change, that proposed rule change                  Arca Equities Rule 5.2(j)(3) (requiring that the         and expenses of the ETP and the time at which the
                                                    is, pursuant to the Exchange Act,                       current index value be widely disseminated every         NAV will be calculated and published daily). See,
                                                    deemed to have been approved by the                     15 seconds during the exchange’s Core Trading            e.g., Securities Exchange Act Release Nos. 65136
                                                    Commission.85                                           Session for investment company units that track a        (Aug. 15, 2011), 76 FR 52037, 52040 (Aug. 19, 2011)
                                                                                                            U.S. equity index and every 60 seconds for               (SR–NYSEArca-2011–24); 68390 (Dec. 10, 2012), 77
                                                       To approve an exchange’s proposed                    investment company units that track an                   FR 74540, 74543 (Dec. 14, 2012) (SR–BATS–2012–
                                                    rule change, the Commission must find                   international or global equity index); Commentary        042); and 70829 (Nov. 7, 2013), 78 FR 68482, 68485
                                                    that the proposed rule change is                        .02(b)(ii) to NYSE Arca Equities Rule 5.2(j)(3)          (Nov. 14, 2013) (SR–NASDAQ–2013–122).
                                                    consistent with the applicable                          (requiring that the current index value for                 90 See e.g., Exchange Act Section 15(c) and FINRA
                                                                                                            investment company units that track a fixed-income
                                                    requirements of the Exchange Act and                    index be disseminated at least once per day). For
                                                                                                                                                                     Rule 2111.
                                                                                                                                                                        91 See, e.g., A Joint Report of the SEC and CFTC
                                                    the rules and regulations thereunder.86                 ETNs, exchange rules generally require that the
                                                                                                                                                                     on Harmonization of Regulation, at 8 (Oct. 16,
                                                    The requirements imposed by the                         value of the reference assets be calculated and
                                                                                                                                                                     2009), http://www.sec.gov/news/press/2009/
                                                    Exchange Act include those set forth in                 disseminated throughout the trading day. See, e.g.,
                                                                                                            NYSE Arca Equities Rule 5.2(j)(6)(B)(II)(1)(b)(ii)       cftcjointreport101609.pdf (‘‘Under the federal
                                                    Section 6(b)(5), which provides that the                (requiring that the value of the commodity reference     securities laws and SRO rules, broker-dealers are
                                                    rules of an exchange must be designed                   asset be calculated and widely disseminated on at        required to deal fairly with their customers. This
                                                    to do the following: (i) Prevent                        least a 15-second basis during the exchange’s Core       includes having a reasonable basis for
                                                                                                            Trading Session for commodity-linked securities).        recommendations given the customer’s financial
                                                    fraudulent and manipulative acts and                                                                             situation (suitability), engaging in fair and balanced
                                                                                                            As noted above, most ETN issuers also make
                                                    practices; (ii) promote just and equitable              publicly available a closing indicative value that is    communications with the public, . . . disclosing
                                                    principles of trade; (iii) foster                       determined as of the close of each trading day. See      conflicts of interest, and receiving fair
                                                    cooperation and coordination with                       supra note 26.                                           compensation both in agency and principal
                                                                                                               89 Exchanges are required by their listing            transactions. In addition, the SEC’s suitability
                                                    persons engaged in regulating, clearing,                                                                         approach requires BDs [i.e., broker-dealers] to
                                                                                                            standards to distribute information circulars or
                                                    settling, processing information with                   bulletins to exchange members relating to the            determine whether a particular investment
                                                    respect to, and facilitating transactions               listing of ETP Securities. See, e.g., NYSE Arca          recommendation is suitable for a customer, based
                                                    in securities; (iv) remove impediments                  Equities Rules 5.1(a)(2), 5.2(j)(3) Commentary .01(g),   on customer-specific factors and factors relating to
                                                                                                            8.100(c), and 8.600 Commentary .05. The                  the securities and investment strategy. A BD must
                                                    to and perfect the mechanism of a free                                                                           investigate and have adequate information
                                                                                                            information to be contained in these circulars is
                                                    and open market and a national market                   generally specified in a Commission order                regarding the security it is recommending and
                                                    system; and (v) in general, to protect                  approving the listing and trading of new ETP             ensure that its recommendations are suitable based
                                                                                                            Securities and typically includes: (a) The special       on the customer’s financial situation and needs.
                                                      81 Dodd-Frank Wall Street Reform and Consumer         characteristics and risks associated with trading        The suitability approach in the securities industry
                                                                                                            ETP Securities; (b) the procedures for creations and     is premised on the notion that securities have
                                                    Protection Act, Pub. L. 111–203, § 916(a), 124 Stat.
                                                                                                            redemptions of ETP Securities; (c) the exchange          varying degrees of risk and serve different
                                                    1376, 1833–34 (2010).
                                                      82 15 U.S.C. 78s(b)(2)(E).                            requirements relating to the members’ obligations to     investment objectives, and that a BD is in the best
                                                                                                                                                                     position to determine the suitability of a securities
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                                                      83 Certain proposed rule changes are entitled to
                                                                                                            learn the essential facts in connection with every
                                                                                                            customer prior to trading ETP Securities and other       transaction for a customer. Disclosure of risks alone
                                                    become ‘‘immediately effective’’ upon filing,                                                                    is not sufficient to satisfy a broker-dealer’s
                                                                                                            suitability requirements, such as information
                                                    without prior Commission approval. See 15 U.S.C.        contained in guidance issued by FINRA with               suitability obligation.’’)
                                                    78s(b)(3)(A) and 17 CFR 240.19b–4(f) (setting forth     respect to the trading and sales of leveraged and           92 See FINRA Notice to Members (‘‘FINRA NTM’’)
                                                    certain limited conditions under which a proposed       inverse-leveraged ETPs and other complex                 12–03 (Jan. 2012) (Heightened Supervision of
                                                    rule change may take effect immediately upon filing     securities products; (d) how information regarding       Complex Products). See also FINRA NTM 10–51
                                                    with the Commission).                                   the IIV is disseminated and the risks involved in        (Oct. 2010) (Sales Practice Obligations for
                                                      84 See 15 U.S.C. 78s(b)(2)(B)(ii).
                                                                                                            trading ETP Securities outside of regular trading        Commodity Futures-Linked Securities); FINRA
                                                      85 15 U.S.C. 78s(b)(2)(D).
                                                                                                            hours when an updated IIV is not calculated or           NTM 09–73 (Dec. 2009) (FINRA Reminds Firms of
                                                      86 15 U.S.C. 78s(b)(2)(C).                            available; (e) applicable prospectus delivery            their Sales Practice Obligations Relating to



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                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                       34739

                                                    II. Request for Comment                                 products—ETPs, rather than just ETFs—                  managed ETPs based on U.S. equities.98
                                                       The Commission is soliciting public                  and the Commission seeks public                        The respective figures for index-based
                                                    comment to help inform its review of                    comment specifically with respect to its               and actively managed ETPs based on
                                                    the listing and trading of new, novel, or               oversight of ETPs under the Exchange                   U.S. fixed-income securities were 0.26%
                                                    complex ETPs, including requests by                     Act. As noted above, ETP trading makes                 and 0.19%.99
                                                    ETPs for exemptive and no-action relief                 up a significant percentage of equity                     Other types of ETPs have had a
                                                    under the Exchange Act and filings by                   trading in the United States.97 And,                   somewhat higher deviation between
                                                    exchanges to adopt listing standards                    while the Commission has gained                        NAV and their closing price. For
                                                    applicable to ETPs. The Commission is                   extensive experience and familiarity                   example, ETPs based on international
                                                    also soliciting comment regarding the                   with the topics discussed in the                       indices had an average absolute value of
                                                    ways in which broker-dealers, which are                 questions below, the Commission                        daily difference of 0.52% between NAV
                                                    regulated under the Exchange Act,                       believes that it would be beneficial to                and the closing price, while actively
                                                    market these products, especially to                    engage broader public comment on                       managed ETPs based on international
                                                    retail investors. Finally, the Commission               these important topics.                                fixed-income securities had an average
                                                    seeks comment on investor                                  To inform the Commission’s review of                absolute value of daily difference of
                                                    understanding of the nature and uses of                 new, novel, or complex ETPs under the                  0.44% between NAV and the closing
                                                    ETPs, particularly by retail investors.                 Exchange Act, commenters are invited                   price during the six-month period
                                                       The Commission periodically has                      to provide their views regarding the                   studied.100 These numbers, however,
                                                    solicited public comment on issues                      listing and trading of ETP Securities,                 represent only broad averages with
                                                    relating to ETFs since their inception                  such as the manner in which ETP                        respect to end-of-day differences, and
                                                    over two decades ago. In 2001, the                      Securities are initially listed on a                   intraday premiums or discounts
                                                    Commission issued a Concept Release                     national securities exchange, the                      between an ETP’s market price and the
                                                    on Actively Managed Exchange-Traded                     manner in which ETP Securities trade                   value of its portfolio or reference assets
                                                    Funds.93 That release sought comment                    in the secondary market, and the                       (or, for certain ETNs, the value of the
                                                    on a number of issues relating to                       exemptive or no-action relief that has                 note according to its terms) can be
                                                    actively managed ETFs, focusing in                      been granted to ETPs under the                         greater under certain circumstances.101
                                                    particular on the operation of actively                 Exchange Act. Commenters are further                   Moreover, these numbers represent
                                                    managed ETFs as open-end investment                     invited to provide their views regarding               broad averages, and the Commission
                                                    companies and on the exemptive relief                   how broker-dealers (which are regulated                seeks public comment and data in
                                                    under the 1940 Act that would be                        under the Exchange Act) recommend                      response to the specific questions
                                                    required for such funds.94 Then, in                     and sell ETPs to investors, how broker-                below.
                                                    2008, the Commission proposed and                       dealers fulfill their obligations to                      The Commission seeks comment with
                                                    sought comment on a rule that would                     investors when they recommend and                      respect to all aspects of the arbitrage
                                                    exempt ETFs from certain provisions of                  sell ETPs, and investors’ understanding                mechanism for ETPs, including the
                                                    the 1940 Act and permit certain ETFs to                 and use of ETPs. Commenters should be                  nature, extent, and potential causes of
                                                    begin operating without the need to                     as specific as possible in their                       premiums and discounts across the
                                                    obtain an exemptive order under the                     responses, explain the reasoning                       wide range of ETP strategies and
                                                    1940 Act.95 Once again, the focus of that               supporting those responses, and provide                holdings. Additionally, in connection
                                                    release was on the operation of ETFs as                 supporting data wherever possible.                     with its review of the listing and trading
                                                    open-end investment companies under                     A. Arbitrage and Market Pricing                        of ETPs, the Commission seeks
                                                    the 1940 Act and on the exemptive                                                                              comment on the trading of ETPs
                                                                                                               As discussed above, existing ETPs
                                                    relief provided to such funds under the                                                                        investing in less-liquid assets,102
                                                                                                            trade at market prices rather than at a
                                                    1940 Act.96
                                                       Here, the Commission seeks comment                   price based on NAV. When providing                        98 The average of the absolute value of these

                                                    on the treatment of a broader group of                  exemptive or no-action relief under the                differences is used because the closing market price
                                                                                                            Exchange Act, the Commission and its                   of an ETP can deviate either above or below its
                                                    Principal-Protected Notes); FINRA NTM 09–31
                                                                                                            staff have analyzed and relied upon the                NAV on any given day, and a calculation that
                                                                                                            representations from ETP issuers                       allowed positive deviations to offset negative
                                                    (June 2009) (FINRA Reminds Firms of Sales                                                                      deviations would understate the extent of the
                                                    Practice Obligations Relating to Leveraged and          regarding the continuing existence of                  deviations.
                                                    Inverse Exchange-Traded Funds); FINRA NTM 08–           effective and efficient arbitrage to help                 99 Figures in this paragraph represent an analysis
                                                    81 (Dec. 2008) (FINRA Reminds Firms of their Sales
                                                    Practice Obligations with Regard to the Sale of         ensure that the secondary market prices                by Commission staff of market data obtained
                                                    Securities in a High Yield Environment); NASD           of ETP Securities do not vary                          through a subscription to Bloomberg Professional
                                                    Notice to Members (‘‘NASD NTM’’) 05–59 (Sept.                                                                  services.
                                                                                                            substantially from the value of their                     100 The figures in this paragraph reflect an
                                                    2005) (NASD Provides Guidance Concerning the
                                                    Sale of Structured Products); and NASD NTM 03–
                                                                                                            underlying portfolio or reference assets.              analysis by the staff of the Office of Analytics and
                                                    71 (Nov. 2003) (NASD Reminds Members of                    In the Commission’s experience, the                 Research in the Division of Trading and Markets of
                                                    Obligations When Selling Non-Conventional               deviation between the daily closing                    market data obtained through a subscription to
                                                    Instruments).                                           price of ETP Securities and their NAV,                 Bloomberg Professional services.
                                                       93 Concept Release: Actively Managed Exchange-                                                                 101 As an extreme example, during the so-called
                                                                                                            averaged across broad categories of ETP                ‘‘Flash Crash’’ of May 6, 2010, many ETP Securities
                                                    Traded Funds, Investment Company Act Release
                                                    No. IC–25258 (Nov. 8, 2001), 66 FR 57614 (Nov. 15,      investment strategies and over time                    temporarily traded at significant discounts to their
                                                    2001) (S7–20–01), available at http://www.sec.gov/      periods of several months, has been                    IIV, even though their prices recovered before the
                                                    rules/concept/ic-25258.htm.                             relatively small. For example, the                     end of the day. See Findings Regarding the Market
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                                                       94 In response, the Commission received 20                                                                  Events of May 6, 2010, Report of the Staffs of the
                                                                                                            average absolute value of the daily                    CFTC and SEC to the Joint Advisory Committee on
                                                    comment letters, which are available on the
                                                    Commission’s Web site at http://www.sec.gov/rules/      difference between the NAV and the                     Emerging Regulatory Issues (Sept. 30, 2010),
                                                    concept/s72001.shtml.                                   closing market price during a six-month                available at http://www.sec.gov/news/studies/2010/
                                                       95 See Exchange-Traded Funds (proposed rule),
                                                                                                            period ending in December 2014 was                     marketevents-report.pdf.
                                                    supra note 9.                                           just 0.21% for ETPs based on U.S.                         102 As used in this release, ‘‘liquidity’’ generally
                                                       96 In response to these proposals, the Commission                                                           refers to the ability of a market participant to buy
                                                    received 25 comment letters, which are available on
                                                                                                            equities indices and 0.38% for actively                or sell an asset immediately without significantly
                                                    the Commission’s Web site at http://www.sec.gov/                                                               affecting the market price for that asset. Although
                                                    comments/s7-07-08/s70708.shtml.                           97 See   supra note 5 and accompanying text.                                                      Continued




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                                                    34740                        Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                    including fixed-income instruments,                     variable cash fees affect efficient market             calculation of IIV vary, if at all, among
                                                    during periods of market stress.                        pricing, and if so, how?                               ETPs? Does the calculation methodology
                                                       1. Arbitrage mechanisms are designed                    4. How closely do investors or other                depend on the class or type of ETP, and
                                                    to keep intraday trading prices of ETP                  market participants expect the intraday                if so, how? Does the calculation
                                                    Securities equal (or nearly equal) to the               trading price of ETP Securities to be                  methodology depend on the nature of
                                                    contemporaneous value of the                            aligned with the contemporaneous                       the underlying portfolio or reference
                                                    underlying portfolio or reference assets.               value of their underlying portfolio or                 assets, and if so, how? Are certain IIV
                                                    Do these mechanisms work better for                     reference assets? Do these expectations                calculation methodologies more or less
                                                    some types or categories of ETPs? To                    differ depending on the type of ETP, the               useful for investors, market makers, or
                                                    what extent do arbitrage mechanisms                     nature of the underlying assets, or                    other market participants?
                                                    help ensure efficient market pricing for                market conditions? What methods, if                       10. To what extent do market
                                                    ETPs throughout periods of market                       any, do investors use to determine                     participants make use of the IIV for an
                                                    volatility, including times of market                   whether the intraday trading price of                  ETP based on less-liquid securities? If
                                                    stress?                                                 ETP Securities closely tracks the value                underlying assets trade infrequently or
                                                       2. Do commenters believe that there                  of their underlying portfolio or reference             are priced only at the end of the trading
                                                    are other mechanisms besides arbitrage                  assets?                                                day for purposes of NAV calculation,
                                                    mechanisms that do, or could, help                         5. Do market participants conduct                   does an IIV that is disseminated every
                                                    ensure efficient market pricing of ETPs?                analyses of how well intraday prices of                15 seconds (as is currently the case)
                                                    Do other factors play a role in efficient               ETP Securities track the value of their                contain useful pricing information?
                                                    market pricing of ETPs? If so, what are                 underlying portfolio or reference assets?              Would a different dissemination
                                                    these mechanisms or factors, and how                    If so, how much weight do market                       frequency be more appropriate, and if
                                                    effective are they? Are these                           participants place on such analyses?                   so, what would that be?
                                                    mechanisms or factors more effective for                   6. Under what circumstances might                      11. Do investors or other market
                                                    certain types or categories of ETPs? To                 the prices of ETP Securities not track                 participants use intraday or closing
                                                    what extent are these mechanisms or                     (on an intraday, temporary end-of-day,                 indicative values for ETNs? If so, for
                                                    factors effective during periods of                     or permanent basis) the value of their                 what purpose? How does the intraday or
                                                    market volatility?                                      underlying portfolio or reference assets?              closing indicative value differ from the
                                                       3. What characteristics of an ETP                    Are there circumstances in which the                   market value of an ETN or its
                                                    facilitate or hinder the alignment of                   price of an ETP’s Securities, though                   redemption amount?
                                                    secondary market share prices with the                  different from its NAV, might be a more                   12. How much disclosure about the
                                                    value of the underlying portfolio or                    accurate measure of the value of the                   contents of an ETP’s underlying
                                                    reference assets? What characteristics of               ETP’s underlying assets? What are the                  portfolio is necessary for arbitrage to
                                                    an ETP’s underlying or reference assets                 implications for investors (both                       function efficiently to keep the market
                                                    facilitate or hinder the alignment of                   individual and institutional) and other                price of an ETP aligned with the
                                                    secondary market share prices with the                  market participants if intraday prices for             contemporaneous value of its
                                                    value of the underlying portfolio or                    ETP Securities do not closely track the                underlying or reference portfolio? Please
                                                    reference assets? Does liquidity in the                 value of their underlying portfolio or                 explain.
                                                    market for an ETP’s underlying or                       reference assets, either on an intraday,                  13. In the absence of daily portfolio
                                                    reference assets affect arbitrage, and if               temporary end-of-day or permanent                      disclosure for an ETP, could other
                                                    so, how and to what extent? Does the                    basis?                                                 mechanisms enable market makers or
                                                    availability of current and historical                     7. To what extent do arbitrage                      other market participants to make
                                                    pricing information, as well as trading                 mechanisms affect trading in an ETP’s                  efficient markets in that ETP? If so, what
                                                    history, for the underlying or reference                underlying or reference assets? Does the               are those mechanisms and how would
                                                    assets affect arbitrage, and if so, how                 answer vary depending on whether the                   they function? What, if any, information
                                                    and to what extent? To what extent does                 underlying or reference assets are                     disclosure, characteristics of the ETP, or
                                                    the availability of correlated hedges for               equities, fixed-income securities,                     other circumstances would be necessary
                                                    the ETP’s underlying or reference assets                commodities, derivatives, or another                   for those mechanisms to function?
                                                    affect arbitrage and pricing efficiency?                type of asset? If so, how?                                14. Under what circumstances would
                                                    To what extent does an ETP’s use of a                      8. To what extent do ETNs offer                     an ETP suspend creations? Under what
                                                    sampling methodology (investing in a                    opportunities for arbitrage? How do                    circumstances could an ETP (other than
                                                    subset of the components of an index)                   market participants engage in arbitrage                a 1940-Act registered ETF) suspend
                                                    to track an index affect arbitrage and                  for ETNs? How is arbitrage affected by                 redemptions? What effect does this or
                                                    pricing efficiency? Does the use of over-               ETN issuers’ ability to suspend and                    could this have on arbitrage
                                                    the-counter instruments by an ETP                       restart issuances of notes at their                    mechanisms or the market value of
                                                    affect the opportunity for market makers                discretion? How are arbitrage                          these products? How might suspension
                                                    or other participants to engage in                      opportunities affected when an issuer                  of creations or redemptions affect the
                                                    arbitrage, and if so, how and to what                   suspends the issuance of its ETNs? Are                 ETP’s continued compliance with the
                                                    extent? Do non-synchronous market                       certain ETNs easier or more difficult to               conditions of its exemptive and no-
                                                    hours between an ETP and its                            arbitrage due to the nature of the ETN’s               action relief under the Exchange Act?
                                                    underlying assets (e.g., international                  reference asset or index, and, if so,                  How would an ETP issuer be likely to
                                                    equities) affect the pricing of an ETP                  which ones?                                            respond to the suspension of creation or
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                                                    and the opportunity for arbitrage, and if                  9. As noted above, the IIV for an ETP               redemption activity by one or more of
                                                    so, how? Does the use of cash-only                      is generally designed to provide                       its Authorized Participants?
                                                    creation or redemption baskets and                      investors information during the trading                  15. How do arbitrage mechanisms
                                                                                                            day on the value of the ETP’s portfolio                work in the case of ETPs with less-
                                                    certain fixed-income instruments, such as on-the-       (or, in the case of an ETN, on the value               liquid underlying or reference assets?
                                                    run U.S. Treasury securities, trade in markets with     of a reference asset or index). The IIV                Are arbitrage mechanisms for ETPs with
                                                    substantial liquidity, fixed-income instruments
                                                    generally trade with less liquidity than equity         may be subject to various calculation                  less-liquid underlying or reference
                                                    securities.                                             methodologies. How does the                            assets effective and efficient in aligning


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                                                                                    Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                           34741

                                                    share prices with the value of the                         index, where there is no limitation on                 more effective at achieving this
                                                    underlying portfolio or reference assets?                  issuances or redemptions, or where an                  purpose?
                                                       16. To what extent do arbitrage                         ETN’s secondary market price does not                     23. How often do ETP investors
                                                    mechanisms help ensure efficient                           vary substantially from the relevant                   request detailed confirmation
                                                    market pricing throughout rising and                       reference index? What effect would                     information, as discussed in Section
                                                    falling markets, including times of                        such a change have? Are there any other                I.D.1.c above, in creation and
                                                    market stress, for ETPs with underlying                    relevant factors in this context? Are                  redemption transactions as provided for
                                                    or reference assets that are less-liquid?                  there any risks in maintaining the                     in the Commission’s exemptions from
                                                    Do periods of market stress affect                         current relief for ETNs? What are the                  Rule 10b-10 and the related staff no-
                                                    arbitrage mechanisms for such ETPs,                        benefits of the relief? How should the                 action positions? What is the cost to
                                                    and if so, how? Could there be a point                     Commission balance the risks against                   broker-dealers of providing this
                                                    at which the amount of ETP Securities                      any benefits resulting from the ability of             information? Has the availability of
                                                    outstanding relative to the amount of                      Authorized Participants to suspend                     modern information technology reduced
                                                    underlying or reference assets                             issuances or redemptions? Should relief                these costs? Who bears those costs? Do
                                                    outstanding results in an imbalance that                   for ETNs contain different conditions                  ETP investors use and benefit from this
                                                    inhibits the redemption process during                     than relief for other ETPs?                            information, and if so, how? What
                                                    periods of market stress?                                     20. Because ETPs are in continuous                  would be the effect of eliminating the
                                                       17. To what extent, if any, does                        distribution, they generally need, on an               exemptions and no-action relief from
                                                    trading activity in ETP Securities affect                  ongoing basis, to meet the conditions of               Rule 10b-10, thereby requiring broker-
                                                    price discovery, price correlation,                                                                               dealers to provide detailed
                                                                                                               the Regulation M relief that has been
                                                    liquidity, or volatility in the ETP’s                                                                             confirmations to ETP purchasers in all
                                                                                                               extended to them and to meet the
                                                    underlying or reference assets? What                                                                              transactions? What would be the effect
                                                                                                               representations made in seeking relief
                                                    role, if any, do ETP Securities that are                                                                          of eliminating the requirement to send
                                                                                                               under Regulation M.104 What would an
                                                    based on less-liquid underlying                                                                                   this information to ETP investors upon
                                                                                                               ETP do if it could no longer meet one
                                                    securities have in providing additional                                                                           request? Could different conditions
                                                                                                               or more of these conditions or
                                                    price discovery for the underlying                                                                                achieve the purposes of Rule 10b–10 at
                                                                                                               representations and could no longer rely
                                                    securities?                                                                                                       less cost or burden to broker-dealers? If
                                                       18. Should the listing exchange for an                  on the relief? In such situations, would
                                                                                                               the ETP halt creations or, for ETPs not                so, what trade-offs would there be, if
                                                    ETP have an obligation to monitor the
                                                                                                               registered under the 1940 Act,                         any?
                                                    effectiveness of that ETP’s arbitrage
                                                    mechanism? If yes, what should be the                      redemptions? What effect would that                       24. Has Rule 14e–5, discussed in
                                                    nature of that obligation?                                 have on the market for that ETP’s                      Section I.D.1.e above, affected the
                                                                                                               securities? What would be the effect if                structure of ETPs and, if so, in what
                                                    B. Exchange Act Exemptions and No-                         this resulted in a halt or suspension of               ways?
                                                    Action Positions                                           trading activity in the ETP Securities, or                25. Authorized Participants generally
                                                       The Commission believes it is useful                    in the ETP Securities being delisted?                  have no-action relief from the
                                                    and timely to examine the application of                   How would investors be affected?                       requirements in Rules 15c1–5 and 15c1–
                                                    Rules 101 and 102 of Regulation M in                          21. What purchasing activities do                   6, as discussed in Section I.D.1.f above,
                                                    the context of ETPs—particularly those                     distribution participants (such as                     to disclose the Authorized Participants’
                                                    ETPs with an underlying trust or other                     Authorized Participants) engage in                     control relationships or interest in the
                                                    collection of underlying assets—given                      during the distribution of ETP                         distribution of securities that compose
                                                    the increasing complexity of ETP                           Securities? Are these activities limited               Portfolio Deposits and Redemption
                                                    investment strategies and the expansion                    to the purchasing of shares to                         Baskets. Given the large number of
                                                    of the types of underlying and reference                   accumulate a redemption unit, or are                   securities included in many ETPs,
                                                    assets and benchmarks. The                                 there other reasons for distribution                   would investors realize any benefit from
                                                    Commission solicits comment on                             participants to engage in purchases of                 receiving this information in creation
                                                    approaches for preventing manipulation                     ETP Securities?                                        and redemption transactions? What
                                                    of an ETP Securities distribution by                          The Commission also invites                         would be the cost of providing this
                                                    persons who may have an incentive to                       comment on the conditions pertaining                   information in all transactions or,
                                                    do so in light of the nature, variety, and                 to ETPs’ exemptions from, and the                      alternatively, upon an ETP investor’s
                                                    complexity of ETP investment strategies                    criteria relied on by the staff in no-                 request, and who would bear those
                                                    and ETP markets.                                           action positions regarding, Section                    costs? Has the availability of modern
                                                       19. The staff has issued no-action                      11(d)(1) of the Exchange Act and                       information technology made it easier or
                                                    relief from Rules 101 and 102 of                           Exchange Act Rules 10b-10, 11d1–2,                     less costly to provide such information?
                                                    Regulation M to ETNs in part on the                        14e-5, 15c1–5, and 15c1–6.                             Could different conditions for
                                                    basis of assumptions that the secondary                       22. How well do the conditions of the               ‘‘Qualifying ETFs’’105 achieve the
                                                    market price for such products should                      ETPs’ exemptions and the staff no-                     purposes of those rules at less cost or
                                                    not vary substantially from the value of                   action relief from Section 11(d)(1) and                burden to broker-dealers? If so, what
                                                    the relevant reference index.103 Given                     Rule 11d1–2 thereunder, as discussed in                trade-offs would there be, if any?
                                                    that the secondary market price of an                      section I.D.1.b above, achieve Section                 C. Exchange Listing Standards
                                                    ETN can substantially deviate from its
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                                                                                                               11(d)(1)’s purpose of prohibiting broker-
                                                    reference assets when the issuer of that                   dealers from using favorable margin                      26. The exchanges (as SROs) and the
                                                    ETN suspends issuances, how should                         arrangements to aid in the distribution                Commission both have responsibilities
                                                    Rules 101 and 102 of Regulation M                          of securities in which they have an                    with respect to determining whether the
                                                    apply to such products? Should relief                      interest? Could different conditions be                proposed listing and trading of ETP
                                                    from these rules be limited to ETNs                                                                               Securities is consistent with the
                                                    where there is a clear, independent                           104 Conditions and representations concerning
                                                                                                                                                                      Exchange Act and the rules and
                                                                                                               relief under Regulation M are discussed in section
                                                      103 See,   e.g., ETN No-action Letter, supra note 70.    I.D.1.a, supra.                                         105 See   note 62, supra.



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                                                    34742                        Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices

                                                    regulations thereunder.106 Do                           holdings, indices, or reference assets of              obligations to customers when
                                                    commenters believe that these                           the ETP and on the public availability                 recommending ETPs. While the
                                                    independent obligations, in practice,                   of information about these underlying or               questions below focus on broker-dealer
                                                    complement each other? Do commenters                    reference assets? Should the                           sales practices, the Commission
                                                    believe that these obligations overlap                  Commission’s evaluation focus on the                   recognizes that investment advisers also
                                                    each other? To the extent that these                    effectiveness or efficiency of the                     play a role in the purchase or sale of
                                                    obligations overlap, how do commenters                  creation and redemption process in                     ETPs by investors. Consequently, the
                                                    believe they should be allocated                        facilitating arbitrage opportunities with              Commission invites commenters to
                                                    between the exchanges and the                           respect to an ETP? What other factors,                 address the role of investment advisers
                                                    Commission?                                             if any, should the Commission consider                 in their responses, where applicable.
                                                       27. Do the business practices of an                  in its evaluation of whether a proposed                   35. Do individual investors tend to
                                                    exchange with respect to attracting,                    rule filing related to an ETP is                       buy and hold ETP Securities? Does the
                                                    listing, and trading ETP Securities differ              consistent with the Exchange Act?                      answer depend on the type of ETP (e.g.,
                                                    from an exchange’s business practices                      31. Exchange listing standards for ETP              investment objective, structure, or type
                                                    with respect to more traditional equity                 Securities often contain both initial                  of underlying asset)? Do investments by
                                                    listing services? If so, how do these                   listing criteria and continuing listing                individual investors tend to be solicited
                                                    business practices align with the                       criteria. The initial listing criteria                 or unsolicited? Please explain and
                                                    existing regulatory framework for                       include requirements that must be met                  provide data where available. If
                                                    exchanges as SROs?                                      when ETP Securities are initially listed               solicited, are solicitations limited to
                                                       28. Are current exchange listing                     on an exchange. The continuing listing                 certain categories of investors (e.g.,
                                                    standards (including standards with                     criteria include requirements that must                retail investors or high-net-worth
                                                    respect to component eligibility,                       be met on an ongoing basis. Should                     individuals) and certain types of ETPs?
                                                    diversification, and pricing) effective,                exchange listing standards always                      If so, which categories of investors
                                                    given the increasing complexity of ETP                  contain both initial and continuing                    receive solicitations and how are the
                                                    investment strategies and the expansion                 listing criteria? Should initial and                   parameters of the category determined—
                                                    of the types of underlying and reference                continuing listing standards for ETP                   e.g., net worth, income, investment
                                                    assets and benchmarks? For example, do                  Securities be substantially identical?                 experience, options trading eligibility?
                                                    existing listing standards adequately                      32. What, if any, is the appropriate                In addition, which types of ETPs are
                                                    address the use by ETPs of non-                         role of an exchange that lists ETP                     recommended and what are the
                                                    exchange-listed derivatives or of                       Securities with respect to monitoring                  parameters being used to determine
                                                    leverage?                                               creation and redemption activity? For                  whether those ETPs should be
                                                       29. Given the increasing complexity                  example, should the exchange be                        recommended? Are individual investors
                                                    of ETP investment strategies and the                    informed of an ETP’s decision to                       purchasing ETPs on the basis of
                                                    expansion of the types of underlying or                 suspend creations or redemptions                       recommendations by brokers?
                                                    reference assets and benchmarks, what                   during the trading day? If so, should the                 36. How effective are the suitability
                                                    types of information do commenters                      exchange be required to alert its                      requirements applicable to brokerage
                                                    believe would assist the Commission in                  members, investors, and other market                   accounts in addressing broker-dealer
                                                    evaluating whether a proposed rule                      participants?                                          sales practices for ETPs in light of the
                                                    filing by an exchange to list and trade                    33. What, if any, is the appropriate                breadth of available ETP options and the
                                                    a specific ETP is consistent with the                   role of an exchange that lists ETP                     growing complexity of ETP investment
                                                    Exchange Act?                                           Securities with respect to monitoring or               strategies?
                                                       30. Should certain characteristics of                overseeing the calculation of IIV or                      37. What methods do, or could,
                                                    an ETP receive particular emphasis in                   NAV?                                                   broker-dealers employ to meet their
                                                    the Commission’s evaluation of whether                     34. Do market participants believe                  sales-practice and suitability obligations
                                                    a proposed rule filing related to that                  that certain types of ETPs are more                    for ETP Securities?
                                                    ETP is consistent with the Exchange                     susceptible to manipulation than                          38. Do investors have access to
                                                    Act? If so, which ones? For example,                    others? If so, please explain. To what                 sufficient information to understand
                                                    should the Commission’s evaluation                      extent, if at all, does the nature,                    ETPs, how ETP Securities trade, the
                                                    focus on the nature, characteristics, or                characteristics, liquidity, or volatility of           costs associated with trading ETP
                                                    liquidity of the specific investments,                  an ETP’s underlying or reference assets                Securities, and how their prices and
                                                                                                            affect the ETP’s susceptibility to                     valuations are determined, particularly
                                                       106 Exchanges seeking to adopt listing standards     manipulation?                                          as ETPs encompass increasingly
                                                    applicable to a new ETP product class—or to list                                                               complex benchmarks, asset classes, and
                                                    and trade specific ETP Securities pursuant to           D. Broker-Dealer Sales Practices and                   investment strategies? What is the
                                                    existing non-generic listing standards for an ETP       Investor Understanding and Use of ETPs                 source of information (e.g., exchanges,
                                                    product class—are required to file proposed rule
                                                    changes on Form 19b-4. See 17 CFR 249.819. The            The Commission seeks comment on                      broker-dealers, market intermediaries,
                                                    instructions to Form 19b-4 state that an exchange       the use of ETPs by investors and the                   prospectuses, SEC releases, or investor
                                                    filing the form must provide ‘‘a statement of the       ways in which ETPs are recommended                     alerts) available to investors? Are there
                                                    purpose of the proposed rule change and its basis
                                                    under the [Exchange] Act and the rules and
                                                                                                            or sold to investors, particularly retail              ways to better enable investors to access
                                                    regulations thereunder applicable to the                investors. In particular, the Commission               information about the listing and
                                                                                                            seeks comment on the extent to which                   trading of ETP Securities? If yes, what
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                                                    [exchange]’’ and this statement ‘‘should be
                                                    sufficiently detailed and specific to support a         individual investors buy or sell ETPs                  are they?
                                                    finding that the proposed rule change is consistent
                                                    with the requirements of the [Exchange] Act and the
                                                                                                            with complex investment strategies                        39. What roles, if any, should the
                                                    rules and regulations thereunder. . . .’’ To approve    based on the recommendation of a                       exchanges have in communicating
                                                    an exchange’s proposed rule change, the                 broker-dealer and the extent to which                  information about ETP Securities to
                                                    Commission must find that the proposed rule             individual investors understand the                    their members, their members’
                                                    change is consistent with the applicable
                                                    requirements of the Exchange Act and the rules and
                                                                                                            nature and operation of such ETPs. The                 customers, and the general public?
                                                    regulations thereunder. 15 U.S.C. 78s(b)(2)(C). See     Commission also seeks comment on                       Should the answer depend on whether
                                                    also supra notes 79–89 and accompanying text.           how broker-dealers meet their                          the exchange is the listing exchange or


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                                                                                 Federal Register / Vol. 80, No. 116 / Wednesday, June 17, 2015 / Notices                                                  34743

                                                    an exchange that trades the ETP                         where? Do investors understand the                        52. As noted above, the total market
                                                    pursuant to unlisted trading privileges?                arbitrage mechanisms of ETPs, and, if                  capitalization of ETPs has grown
                                                       40. How do broker-dealers                            so, do they consider the effectiveness                 significantly, nearly doubling since the
                                                    communicate information about ETP                       and efficiency of these mechanisms                     end of 2009. What do commenters
                                                    Securities to their customers? Are                      when making an investment decision? If                 believe are the main reasons for this
                                                    investors introduced to ETPs through                    so, how?                                               growth? Do commenters expect
                                                    information provided generally by                          46. Do broker-dealers use the term                  significant growth in the number,
                                                    broker-dealers (e.g., posted on a broker-               ‘‘ETF’’ to describe all types of ETPs (as              variety, and market capitalization of
                                                    dealer’s Web site for all investors to                  opposed to only those products                         ETPs to continue? If such growth
                                                    consider)? Do broker-dealers provide                    registered under the 1940 Act)? If so, is              continues, how might that affect the
                                                    information to investors regarding the                  this confusing to investors?
                                                    type of investor for which a specific                                                                          exchanges’ listing and trading of ETP
                                                                                                               47. What use do investors or other                  Securities? How might this growth affect
                                                    product is suitable and what holding                    market participants make of publicly
                                                    periods are appropriate? Are there any                                                                         investors, broker-dealers, or other
                                                                                                            available information such as the index                market participants?
                                                    other ways that broker-dealers should                   value, IIV, NAV, or portfolio holdings of
                                                    communicate information relevant to                     an ETP? Does the answer depend on the                     53. The Commission provides market
                                                    the ETP Securities to their customers?                  type of market participant? If so, why do              structure research, interactive data
                                                    Do broker-dealers restrict or otherwise                 certain market participants use certain                visualization tools, and advanced
                                                    limit access by certain types of investors              information? If market participants do                 market metrics on its Market Structure
                                                    to certain types of ETP Securities? If so,              not use certain information, why not?                  Data and Analysis Web site, http://
                                                    please describe these restrictions.                     Do the answers depend on the type of                   www.sec.gov/marketstructure/
                                                       41. Do broker-dealer communications                  underlying asset?                                      index.html. Users of the Web site and its
                                                    concerning ETPs provide enough
                                                                                                               48. Do investors understand what an                 data can, among other things, compare
                                                    information for a retail investor to
                                                                                                            ETP’s IIV represents and what it does                  quoting and trading characteristics of
                                                    evaluate the facts concerning ETPs? Do
                                                                                                            not? For example, do they understand                   ETPs to those of other equity securities.
                                                    the communications disclose the risks
                                                                                                            that the IIV is not a ‘‘real-time’’ update             Have commenters drawn any
                                                    and benefits potentially associated with
                                                    ETPs? Are those disclosures reasonably                  of the NAV and that it is not the price                observations or conclusions from this
                                                    understandable for retail investors, and                at which they can purchase ETP                         data about the listing and trading of
                                                    are they presented in a balanced                        Securities? Do investors understand                    ETPs? What effects, if any, does market
                                                    manner? What types of broker-dealer                     how the IIV calculation method can                     structure have on the quoting and
                                                    communications about ETPs are most                      differ from the method used to calculate               trading of ETPs? What effects, if any,
                                                    effective?                                              NAV? Do investors understand that IIV                  does the quoting and trading of ETPs
                                                       42. Are there specific aspects of ETP                may be a lagging indicator of actual                   have on the general characteristics of
                                                    trading that should be communicated to                  portfolio values during periods of rapid               current equity market structure? Do any
                                                    investors to better inform their                        price movements? Please describe the
                                                                                                                                                                   specific aspects of current equity market
                                                    investment decisions (e.g., the specific                basis for any views expressed regarding
                                                                                                                                                                   structure facilitate or hinder the fair and
                                                    risks of investing in certain products or               the understanding of investors.
                                                                                                                                                                   efficient quoting and trading of ETPs?
                                                    that certain products may not be                           49. Do investors’ expectations of the
                                                                                                                                                                   What types of additional information or
                                                    suitable for certain types of investors)?               nature of the liquidity, the bid-ask
                                                                                                            spreads, and the market prices of an                   data would commenters like to see
                                                    Are there types of risks in particular                                                                         regarding the quoting and trading
                                                    ETPs that should be highlighted? If so,                 ETP holding less-liquid underlying
                                                                                                            securities differ from their expectations              characteristics of ETPs?
                                                    in what way, and who should have the
                                                    responsibility for communicating that                   of the characteristics of those                           The Commission welcomes all
                                                    information? When should that                           underlying securities? If so, in what                  comments and encourages commenters
                                                    information be communicated (e.g.,                      ways do investors expect ETPs based on                 to discuss any other questions, issues,
                                                    prior to making recommendations or                      less-liquid securities to trade differently            concerns, or data regarding the listing
                                                    prior to accepting a customer order)?                   than the underlying securities                         and trading of ETP Securities on
                                                       43. Should broker-dealers have                       themselves?                                            national securities exchanges.
                                                    additional responsibility to make                       E. Other                                                 By the Commission.
                                                    available or provide information to                                                                              Dated: June 12, 2015.
                                                    investors about the risks of investing in                 50. The Commission notes that, over
                                                                                                            the years, there have been ETPs that                   Brent J. Fields,
                                                    ETPs with complex strategies prior to
                                                    making a recommendation or accepting                    have closed after being listed and traded              Secretary.
                                                    a customer order for such securities?                   for some period of time. What are the                  [FR Doc. 2015–14890 Filed 6–16–15; 8:45 am]
                                                    What costs would broker-dealers incur                   consequences to investors of the closure               BILLING CODE 8011–01–P
                                                    in providing such information? Who                      and liquidation or termination of an
                                                    would bear those costs? What costs do                   ETP?
                                                    broker-dealers currently incur in                         51. How are the types and complexity
                                                    providing information to customers                      of the investment strategies and
                                                                                                            investment objectives of ETPs, and the
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                                                    about ETPs? Who bears those costs?
                                                       44. Do broker-dealer communications                  nature of the market for ETPs, likely to
                                                    to investors about ETPs present any                     develop in the future? How might these
                                                    performance data? If so, how is that data               changes affect the listing and trading of
                                                    presented? What types of disclosures                    ETP Securities? How might these
                                                    accompany the performance data?                         changes affect any underlying securities
                                                       45. Are there aspects of ETP arbitrage               held by an ETP—for example with
                                                    mechanisms that should be prominently                   respect to liquidity, volatility, and
                                                    disclosed to investors? If so, how and                  capital formation?


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Document Created: 2015-12-15 14:22:47
Document Modified: 2015-12-15 14:22:47
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
ActionRequest for comment.
DatesComments should be received by August 17, 2015.
ContactEdward Cho, Special Counsel, at (202) 551-5508; Christopher Chow, Special Counsel, at (202) 551-5622; or Sarah Schandler, Special Counsel, at (202) 551-7145, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-7010.
FR Citation80 FR 34729 

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