81 FR 32376 - Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt NYSE Arca Equities Rule 8.900 To Permit Listing and Trading of Managed Portfolio Shares and To Permit Listing and Trading of Shares of Fifteen Issues of the Precidian ETFs Trust

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 99 (May 23, 2016)

Page Range		32376-32381
FR Document		2016-12028

Federal Register, Volume 81 Issue 99 (Monday, May 23, 2016)

[Federal Register Volume 81, Number 99 (Monday, May 23, 2016)]
[Notices]
[Pages 32376-32381]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2016-12028]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77845; File No. SR-NYSEArca-2016-08]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt NYSE Arca
Equities Rule 8.900 To Permit Listing and Trading of Managed Portfolio
Shares and To Permit Listing and Trading of Shares of Fifteen Issues of
the Precidian ETFs Trust

May 17, 2016.
On January 27, 2016, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to: (1) Adopt NYSE Arca Equities Rule 8.900; and
(2) approve the listing and trading of shares (``Shares'') of fifteen
issues of the Precidian ETFs Trust (``Trust''). The proposed rule
change was published for comment in the Federal Register on February
18, 2016.\3\ On March 9, 2016, the Exchange filed Amendment No. 1 to
the proposed rule change.\4\ The Commission has received four comments
on the proposed rule change.\5\ This order institutes proceedings under
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1
thereto.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 76944 (Feb. 11,
2016), 81 FR 8269 (``Notice'').
\4\ In Amendment No. 1 to the proposed rule change, the Exchange
corrected the citations to the Trust's Form N-1A and Exemptive
Application, which were misstated in the proposal. Because Amendment
No. 1 is technical in nature and does not materially alter the
substance of the proposed rule change or raise any novel regulatory
issues, it is not subject to notice and comment. Amendment No. 1 to
the proposed rule change is available on the Commission's Web site
at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-1.pdf.
\5\ See Letter from Gary L. Gastineau, President, ETF
Consultants.com, Inc., to Brent J. Fields, Secretary, Commission,
dated Mar. 10, 2016 (``Gastineau Letter''); Letter from David Nadig
(Mar. 31, 2016) (``Nadig Letter''); Letter from Andrew M. Gross, Jr.
(Apr. 5, 2016) (``Gross Letter''); Letter from Andrew M. Gross, Jr.
(Apr. 5, 2016) (``Gross Letter''); Letter from Joseph A. Sullivan,
Chairman and Chief Executive Officer, Legg Mason Global Asset
Management, to Mary Jo White, Chair, Commission (Apr. 15, 2016)
(``Sullivan Letter''). The comment letters are available on the
Commission's Web site at: https://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608.shtml.
\6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Exchange's Description of the Proposed Rule Change

The Exchange proposes to adopt new NYSE Arca Equities Rule 8.900,
which would govern the listing and trading of ``Managed Portfolio
Shares.'' \7\ The Exchange also proposes to list and trade the Shares
of the following funds under proposed NYSE Arca Equities Rule 8.900:
(1) Precidian U.S. Managed Volatility Fund; (2) Precidian Strategic
Value; (3) Precidian Large Cap Value; (4) Precidian Focused Dividend
Strategy; (5) Precidian U.S. Large Cap Growth; (6) Precidian U.S. Core
Equity; (7) Precidian U.S. Mid Cap Growth; (8) Precidian Total Return;
(9) Precidian High Dividend Yield; (10) Precidian Small Cap Dividend
Value; (11) Precidian Multi-factor Small Cap Core; (12) Precidian
Multi-factor Small Cap Growth; (13) Precidian Large Cap Core Plus 130/
30; (14) Precidian Mid Cap Core Plus 130/30; and (15) Precidian Small
Cap Core Plus 130/30 (each a ``Fund,'' and collectively the ``Funds'').
In addition, the Exchange proposes to amend NYSE Arca Equities Rule
7.34 (Trading Sessions), which relates to securities traded on the
Exchange during the Core Trading Session, to add a reference to
proposed NYSE Arca Equities Rule 8.900.
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\7\ Proposed NYSE Arca Equities Rule 8.900(c)(1) defines the
term ``Managed Portfolio Share'' as a security that (a) is issued by
a registered investment company organized as an open-end management
investment company (``Investment Company'') or similar entity, that
invests in a portfolio of securities selected by the Investment
Company's investment adviser consistent with the Investment
Company's investment objectives and policies; and (b) when
aggregated in a number of shares equal to a Redemption Unit (as
defined herein) or multiples thereof, may be redeemed at the request
of an authorized participant (as defined in the Investment Company's
Form N-1A filed with the Commission), which authorized participant
will be paid though a confidential account established for its
benefit a portfolio of securities and/or cash with a value equal to
the next determined net asset value (``NAV'').
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A. Key Features of Managed Portfolio Shares

While Investment Companies issuing Managed Portfolio Shares would
be actively-managed, and in that respect would be similar to those
issuing Managed Fund Shares,\8\ Managed Portfolio Shares would differ
from Managed Fund Shares in the following respects.
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\8\ Managed Fund Shares are shares of actively-managed
Investment Companies listed and traded under NYSE Arca Equities Rule
8.600.
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First, issues of Managed Fund Shares are required to
disseminate their ``Disclosed Portfolio'' at least once daily.\9\ By
contrast, the portfolio for an issue of Managed Portfolio Shares would
be disclosed only quarterly.
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\9\ NYSE Arca Equities Rule 8.600(c)(2) defines the term
``Disclosed Portfolio'' as the identities and quantities of the
securities and other assets held by the Investment Company that will
form the basis for the Investment Company's calculation of net asset
value at the end of the business day. NYSE Arca Equities Rule
8.600(d)(2)(B)(i) requires that, for Managed Fund Shares, the
Disclosed Portfolio will be disseminated at least once daily and
will be made available to all market participants at the same time.
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Second, in connection with the redemption of shares in
``Redemption Unit'' size (as described below), the delivery of any
portfolio securities in kind would only be effected through a
``Confidential Account'' (as described below) for the benefit of the
redeeming authorized participant without disclosing the identity of the
securities to the authorized participant.
Third, for each series of Managed Portfolio Shares, a
Verified Intraday Indicative Value (``VIIV'') would be disseminated by
one or more major market-data vendors every second during the
Exchange's Core Trading Session (normally, 9:30 a.m. to 4:00 p.m.,
Eastern Time (``E.T.'')).\10\ The Exchange states that dissemination of
the VIIV will allow investors to determine the estimated intra-day
value of the underlying portfolio of a series of Managed Portfolio
Shares and will provide a close estimate of that value throughout the
trading day.\11\
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\10\ Proposed NYSE Arca Equities Rule 8.900(c)(2) defines the
VIIV as the estimated indicative value of a Managed Portfolio Share
based on all of the issuer's holdings as of the close of business on
the prior business day, priced and disseminated in one second
intervals, and subject to validation by a pricing verification agent
of the Investment Company that is responsible for comparing multiple
independent pricing sources to establish the accuracy of the VIIV.
The specific methodology for calculating the VIIV will be disclosed
on each Fund's Web site.
\11\ According to the Exchange, the VIIV should not be viewed as
a ``real-time'' update of the NAV per Share of each Fund, because
the VIIV may not be calculated in the same manner as the NAV, which
will be computed once a day, generally at the end of the business
day.
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B. Arbitrage of Managed Portfolio Shares

The Exchange asserts that market makers will be able to make
efficient and liquid markets priced near the VIIV even without daily
disclosure of a

[[Page 32377]]

Fund's underlying portfolio, as long as a VIIV is disseminated every
second and market makers have knowledge of a Fund's means of achieving
its investment objective. According to the Exchange, market makers
would have knowledge of a Fund's means of achieving its investment
objective by employing risk-management techniques such as ``statistical
arbitrage.'' \12\ The Exchange also states that market makers will make
efficient markets in Managed Portfolio Shares by establishing a
Confidential Account (as defined herein), monitoring the VIIV for
arbitrage opportunities, and effecting transactions in the Shares and
the Fund's (unknown) portfolio securities, as described below.
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\12\ According to the Exchange, statistical arbitrage enables a
trader to construct an accurate proxy for another instrument,
allowing the trader to hedge the other instrument or buy or sell the
instrument when it is cheap or expensive in relation to the proxy.
Statistical analysis permits traders to discover correlations based
purely on trading data without regard to other fundamental drivers.
These correlations are a function of differentials, over time,
between one instrument or group of instruments and one or more other
instruments. Once the nature of these price deviations has been
quantified, a universe of securities is searched in an effort to, in
the case of a hedging strategy, minimize the differential. Once a
suitable hedging proxy has been identified, a trader can minimize
portfolio risk by executing the hedging basket. The trader then can
monitor the performance of this hedge throughout the trade period
making correction where warranted.
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According to the Exchange, if an authorized participant believes
that Shares of a Fund are trading at a price that is higher than the
value of the underlying portfolio--for example, if the market price for
the Shares is higher than the VIIV--then the authorized participant may
sell Shares of the Fund short and instruct its ``Trusted Agent'' \13\
to buy portfolio securities for its Confidential Account. When the
market price of the Shares falls in line with the value of the
portfolio, the authorized participant can then close out its positions
in both the Shares and the portfolio securities. According to the
Exchange, the authorized participant's purchase of the portfolio
securities into its Confidential Account, combined with the sale of
Shares, may also create downward pressure on the price of Shares and/or
upward pressure on the price of the portfolio securities, bringing the
market price of Shares and the value of a Fund's portfolio securities
closer together.
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\13\ Proposed Commentary .04 to NYSE Arca Equities Rule 8.900
requires that authorized participants and non-authorized participant
market makers redeeming Managed Portfolio Shares sign an agreement
with an agent (``Trusted Agent'') to establish a confidential
account (``Confidential Account''), for the benefit of such
authorized participant or non-authorized participant market maker,
that will receive all consideration from the issuer in a redemption.
A Trusted Agent may not disclose the consideration received in a
redemption except as required by law or as provided in the
Investment Company's Form N-1A, as applicable.
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Similarly, according to the Exchange, an authorized participant
could buy Shares and instruct the Trusted Agent to sell the underlying
portfolio securities from its Confidential Account in an attempt to
profit when a Fund's Shares are trading at a discount to its portfolio.
According to the Exchange, the authorized participant's purchase of a
Fund's Shares in the secondary market, combined with the sale of the
portfolio securities from its Confidential Account, may also create
upward pressure on the price of Shares and/or downward pressure on the
price of portfolio securities, driving the market price of Shares and
the value of a Fund's portfolio securities closer together. The
Exchange states that, Precidian Funds LLC (``Adviser''), the investment
adviser to the Trust, avers that this process is identical to how many
authorized participants currently arbitrage existing traditional ETFs,
except for the use of the Confidential Account.
According to the Exchange, a market maker that is not an authorized
participant would also be able to establish a Confidential Account and
could engage in arbitrage activity without using the creation or
redemption processes described above. If such a market maker believes
that a Fund is overvalued relative to its underlying assets, the
Exchange states, that market maker could sell Shares short and instruct
its Trusted Agent to buy portfolio securities in its Confidential
Account and then wait for the trading prices to move toward parity and
close out the positions in both the Shares and the portfolio securities
to realize a profit from the relative movement of their trading prices.
Similarly, according to the Exchange, this market maker could buy
Shares and instruct the Trusted Agent to sell the underlying portfolio
securities in an attempt to profit when a Fund's Shares are trading at
a discount to a Fund's underlying or reference assets.

C. The Creation and Redemption Procedures

The Exchange states that, generally, Shares will be purchased and
redeemed on an in-kind basis, so that, except where the purchase or
redemption will include cash under the limited circumstances described
in the Registration Statement, purchasers will be required to purchase
Creation Units by making an in-kind deposit of specified instruments
(``Deposit Instruments''), and shareholders redeeming their Shares will
receive an in-kind transfer of specified instruments (``Redemption
Instruments''). On any given Business Day, the names and quantities of
the instruments that constitute the Deposit Instruments and the names
and quantities of the instruments that constitute the Redemption
Instruments will be identical, and these instruments may be referred
to, in the case of either a purchase or a redemption, as the ``Creation
Basket.''
In the case of a redemption, a Fund's custodian (``Custodian'')
will typically deliver securities to the Confidential Account on a pro
rata basis with a value approximately equal to the value of the Shares
tendered for redemption at the Cut-Off time. The Custodian will make
delivery of the securities by appropriate entries on its books and
records transferring ownership of the securities to the authorized
participant's Confidential Account, subject to delivery of the Shares
redeemed. The Trusted Agent of the Confidential Account will in turn
liquidate, hedge, or otherwise manage the securities based on
instructions from the authorized participant.\14\
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\14\ An authorized participant will issue execution instructions
to the Trusted Agent and be responsible for all associated profit or
losses. Like a traditional ETF, the authorized participant has the
ability to sell the basket securities at any point during normal
trading hours.
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If the Trusted Agent is instructed to sell all securities received
at the close on the redemption date, the Trusted Agent will pay the
liquidation proceeds net of expenses, plus or minus any cash balancing
amount, to the authorized participant through DTC.\15\ The redemption
securities that the Confidential Account receives is expected to mirror
the portfolio holdings of a Fund pro rata.
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\15\ According to the Exchange, under applicable provisions of
the Internal Revenue Code, the authorized participant is expected to
be deemed a ``substantial owner'' of the Confidential Account
because it receives distributions from the Confidential Account. As
a result, the Exchange states, all income, gain, or loss realized by
the Confidential Account will be directly attributed to the
authorized participant. The Exchange also states that, in a
redemption, the authorized participant will have a basis in the
distributed securities equal to the fair market value at the time of
the distribution, and any gain or loss realized on the sale of those
Shares will be taxable income to the authorized participant.
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F. Availability of Information

Each Fund will be required to file with the Commission its complete
portfolio schedules for the second and fourth fiscal quarters on Form
N-SAR under the 1940 Act, and to file its complete portfolio schedules
for the first and third fiscal quarters on Form

[[Page 32378]]

N-Q under the 1940 Act, within 60 days of the end of the quarter. Form
N-Q requires funds to file the same schedules of investments that are
required in annual and semi-annual reports to shareholders. The Trust's
SAI and each Fund's shareholder reports will be available free upon
request from the Trust. These documents and forms may be viewed on-
screen or downloaded from the Commission's Web site at www.sec.gov.
In addition, the VIIV, as defined in proposed NYSE Arca Equities
Rule 8.900(c)(3), will be widely disseminated by one or more major
market-data vendors at least every second during the Exchange's Core
Trading Session. The VIIV, which is approximate value of each Fund's
investments on a per Share basis, will be disseminated every second
during the Exchange's Core Trading Session through the facilities of
the CTA. According to the Exchange, the VIIV will include all accrued
income and expenses of a Fund and will assure that any extraordinary
expenses, booked during the day, that would be taken into account in
calculating a Fund's NAV for that day are also taken into account in
calculating the VIIV. For purposes of the VIIV, securities held by a
Fund will be valued throughout the day based on the mid-point between
the disseminated current national best bid and offer. According to the
Exchange, by utilizing the mid-point pricing for purposes of VIIV
calculation, stale prices are eliminated and more accurate
representation of the real-time value of the underlying securities is
provided to the market. Specifically, according to the Exchange,
quotations based on the mid-point of bid/ask spreads more accurately
reflect current market sentiment by providing real time information on
where market participants are willing to buy or sell securities at that
point in time. Using quotations rather than last-sale information
addresses concerns regarding the staleness of pricing information of
less actively traded securities. The Exchange represents that, because
quotations are updated more frequently than last-sale information
especially for inactive securities, the VIIV will be based on more
current and accurate information. The Exchange also represents that the
use of quotations will also dampen the impact of any momentary spikes
in the price of a portfolio security.
Each Fund will utilize two independent pricing sources to provide
two independent sources of pricing information. Each Fund will also
utilize a ``Pricing Verification Agent'' and establish a computer-based
protocol that will permit the Pricing Verification Agent to
continuously compare the two data streams from the independent pricing
agents sources on a real time basis.\16\ A single VIIV will be
disseminated publicly for each Fund; however, the Pricing Verification
Agent will continuously compare the public VIIV against a non-public
alternative intra-day indicative value to which the Pricing
Verification Agent has access. If it becomes apparent that there is a
material discrepancy between the two data streams, the Exchange will be
notified and have the ability to halt trading in a Fund until the
discrepancy is resolved.\17\ Each Fund's Board will review the
procedures used to calculate the VIIV and maintain its accuracy as
appropriate, but not less than annually. The specific methodology for
calculating the VIIV will be disclosed on each Fund's Web site.
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\16\ A Fund's Custodian will provide, on a daily basis, the
constituent basket file comprised of all securities plus any cash to
the independent pricing agent(s) for purposes of pricing.
\17\ Proposed Rule 8.900(d)(2)(C) provides that, upon
notification to the Corporation by the Investment Company or its
agent that (i) the prices from the multiple independent pricing
sources to be validated by the Investment Company's pricing
verification agent differ by more than 25 basis points for 60
seconds in connection with pricing of the VIIV, or (ii) that the
VIIV of a series of Managed Portfolio Shares is not being priced and
disseminated in one-second intervals, as required, the Corporation
will halt trading in the Managed Portfolio Shares as soon as
practicable. The halt in trading would continue until the Investment
Company or its agent notifies the Corporation that the prices from
the independent pricing sources no longer differ by more than 25
basis points for 60 seconds or that the VIIV is being priced and
disseminated as required. The Investment Company or its agent would
be responsible for monitoring that the VIIV is being priced and
disseminated as required and whether the prices to be validated from
multiple independent pricing sources differ by more than 25 basis
points for 60 seconds.
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III. Summary of Comment Letters

The Commission has received four comment letters on the proposed
rule change.\18\
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\18\ See supra note 5.
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A. Gastineau Letter.\19\ The commenter opposes approval of the
proposed rule change and recommends imposition of a number of
requirements in the event the proposed rule change and the Exemptive
Application are approved. Preliminarily, the commenter offers an
opinion regarding the standard of review that should be applied,
stating that, because this would be a new and potentially ground
breaking less-transparent ETF structure, the Commission should apply a
meaningfully higher standard until the Commission is completely
comfortable with the state of the ETF market.
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\19\ The Gastineau Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-2.pdf.
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Generally, the commenter asserts that market makers will face
significant impediments to successfully arbitraging the Shares, and he
predicts that this will lead to the Shares trading at wider bid-ask
spreads and more variable premiums/discounts than actively-managed ETFs
available today.
In evaluating the Exchange's statements regarding VIIVs, the
commenter asserts that their utility should be compared not to the IIVs
of existing ETFs but rather to the independently derived, real-time
estimates of underlying fund value that ETF market makers use to
identify arbitrage opportunities and manage the risk of holding ETF
positions today (``MM IIVs''). The commenter asserts that, because
existing actively managed ETFs (and most index ETFs) provide full daily
disclosure of their current portfolio, their market makers have access
to far better information about the current value of Fund holdings than
the proposed VIIVs would provide and, correspondingly, VIIVs will be
significantly less precise than MM IIVs. The commenter also asserts
that MM IIVs include significant information that would not be
reflected in VIIVs, noting:
In calculating VIIVs, Fund securities would be valued
based on the midpoint between the current national best bid and offer
quotations. The commenter characterizes the bid-ask midpoint as a
``fairly crude valuation metric'' that does not capture important
trading information incorporated into MM IIVs, such as the current bid-
ask spread, the depth of the current order book on the bid and offer
side of the market, and the predominance of current trading between
bid-side and offer-side transactions.
VIIVs would be calculated and disseminated every second
and, while this interval may seem sufficient, MM IIVs are updated in
fractions of a second (milliseconds or microseconds).
The VIIV verification process would leave significant room
for dissemination of erroneous values. For example, a Fund's Pricing
Verification Agent would take no action to address observed
discrepancies in VIIV input prices until the calculated Fund values
differ by at least 25 bps for 60 seconds. The commenter characterizes
that disparity as ``huge,'' asserting that it would be wider than the
customary bid-ask spread of most domestic equity ETFs.
The VIIV process would not address all potential intraday
valuation errors. The commenter describes that corporate actions must
be accurately reflected in the VIIV, which can be challenging, and

[[Page 32379]]

market makers would not be able to verify that corporate actions are
appropriately reflected in a Fund's VIIVs because of the non-
transparent portfolio.
The process for adjusting VIIVs in the event of trading
halts in portfolio securities is cumbersome and likely to result in
errors in disseminated VIIVs. Throughout a halt, which may be
protracted, the Fund would continue to disseminate VIIVs that do not
reflect fair values of the halted security, and therefore may vary
significantly from the Fund's true underlying value at that time. The
commenter asserts that MM IIVs would almost certainly arrive at a fair
estimate of a Fund's current underlying value far faster than the VIIV
specified process.
The commenter asserts that reliance on faulty VIIVs may expose
market makers to unrecoverable losses, noting that: (1) Neither the
Exchange nor its agents nor the Reporting Authority would be liable for
disseminating erroneous VIIVs; and (2) the circumstances under which
the Independent Pricing Agents and the Pricing Verification Agent are
legally liable for such errors are limited.
According to the commenter, market makers' forced reliance on VIIVs
to determine intraday Fund valuations is a source of significant
incremental risk for them versus making markets in existing ETFs, and
he predicts that this will result in the Shares trading at wider bid-
ask spreads and more variable premiums and discounts to NAV than
similar existing ETFs.
The commenter also criticizes the Confidential Accounts structure.
He asserts that, compared to the usual manner in which market makers in
existing ETFs engage in arbitrage and buy and sell Creation Basket
instruments, the Confidential Accounts arrangement exposes market
makers to significant additional costs, risks and lost opportunities,
including:
Less control over trade execution and trade order
management when implementing portfolio hedging and Creation Unit
transactions, which will result in more cost and risk, and less profit
opportunity.
No ability for market makers to use their market knowledge
and market positions to enhance arbitrage profits and minimize costs.
Reduced incentive for third-party service providers to
trade expeditiously and with low market impact.
Little or no ability for market makers to monitor trading
in Confidential Accounts to ensure best execution or to evaluate
trading performance.
Forced pro rata hedging, which, the commenter states, is
very often not the best hedge. Sub-optimal hedging results in less
efficient arbitrage.
Given the more-involved routing of trade instructions and
trade orders that the Confidential Account structure would necessitate,
the commenter states that hedging and Creation Unit instrument
transactions through Confident Accounts will almost certainly take
longer, on average, for a market maker to execute than similar
transactions that the market maker executes internally. According to
the commenter, slower executions may translate into less efficient
arbitrage.
Potentially significant explicit costs to establish and
maintain Confidential Accounts.
Additionally, the commenter discusses the efficiency of statistical
arbitrage. While market makers may be able to gain some useful
information about a Fund's current composition by knowing the Fund's
investment objective and tracking performance correlations over time
versus a known index, the commenter states that the amount of portfolio
information that can be gleaned using this approach is limited. As a
result, any portfolio hedge constructed using this information would be
subject to meaningful basis risk.
The commenter also expresses concern regarding portfolio
information security in light of the dissemination of this data across
a network of Trusted Agents, affiliated broker-dealers and other
Confidential Account service providers, and their use of the provided
information to implement trades on behalf of Confidential Account
holders.
The commenter also raises concerns with the possibility that market
participants could use the VIIV to reverse-engineer the Funds'
portfolio holdings, subjecting the Funds to the dilutive effects of
front-running. The commenter asserts that ``it is far from a settled
question that the Funds would not ever be susceptible to reverse
engineering.''
B. Nadig Letter.\20\ This commenter states his support of the
proposal, noting that, after having been through multiple variations,
the proposal now has the correct VIIV structure.
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\20\ The Nadig Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-3.htm.
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C. Gross Letter.\21\ This commenter first notes the advantages that
ETFs offer to retail investors, and supports the idea of investing in
actively managed funds, stating that live, intra-day pricing of the
underlying portfolio enables the commenter to see how the portfolio
value is performing at all times (as opposed to mutual funds), enables
market participants to provide liquidity for the product (with the
ability to arbitrage price discrepancies by creating and redeeming
shares in the portfolio, as with existing ETFs), and allows for
purchases and sales of shares at any time. With wider intra-day trading
ranges recently, the ability to put in limit buy orders below the
market (or limit sell orders above the market) is critical to the
commenter.
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\21\ The Gross Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-4.htm.
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In addition, the commenter notes that actively managed ETFs provide
benefits to the fund manager and to fund performance. The commenter
states that actively managed ETFs allow fund managers to make
investment decisions they believe in, without being distorted by tax
consequences. In addition, the commenter believes that the proposed
Funds have come up with a way to provide retail and professional
investors with a level playing field in terms of intra-day price feeds
on the value of the underlying portfolio, and through a trusted agent
to allow market makers to create and redeem (and hold) the portfolio of
the actively managed fund without being able to see the individual
share holdings. The commenter finds this proposal to be an ``elegant
solution'' and to be an effective way to both use the well-understood
arbitrage mechanism that has made ETFs liquid and reliable products and
allow market makers to control execution of their fund portfolios while
protecting the confidentiality of the fund manager.
D. Sullivan Letter.\22\ The commenter expresses support for the
proposed rule change. He states that the Precidian structure would
permit his firm's portfolio managers to manage active ETFs using their
proprietary strategies without being susceptible to front running by
other managers or investors and while still offering the following
benefits of active ETFs to clients, which would positively impact
yields and net investor returns: (1) The ability to trade shares
throughout the day at known prices; (2) lower fund operating expenses,
primarily in the form of lower transfer agency costs and overall
portfolio transaction costs; and (3) improved tax efficiency. According
to the commenter, his firm's clients realize only a modest benefit from
daily transparency. The commenter also

[[Page 32380]]

mentioned that his firm is a shareholder in Precidian.
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\22\ The Sullivan Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-5.pdf.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-08 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \23\ to determine whether the proposed rule
change, as modified by Amendment No. 1 thereto, should be approved or
disapproved. Institution of such proceedings is appropriate at this
time in view of the legal and policy issues raised by the proposed rule
change. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described below, the Commission seeks and
encourages interested persons to provide comments on the proposed rule
change.
---------------------------------------------------------------------------

\23\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B) of the Act,\24\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \25\
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\24\ Id.
\25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

V. Procedure: Request for Written Comments

The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\26\
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\26\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------

Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by June 13, 2016. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 27,
2016. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal, which are set
forth in the Notice \27\ and in Amendment No. 1 to the proposed rule
change,\28\ in addition to any other comments they may wish to submit
about the proposed rule change. Specifically, the Commission seeks
comment on the statements of the Exchange contained in the Notice, as
modified by Amendment No. 1 thereto, and any other issues raised by the
proposed rule change. In particular, the Commission seeks comment on
the following:
---------------------------------------------------------------------------

\27\ See supra note 3.
\28\ See supra note 4.
---------------------------------------------------------------------------

1. Do commenters believe that market makers will be able to engage
in effective and efficient arbitrage in the Shares without knowledge of
the contents of the Funds' portfolios? Do commenters believe that
market makers will be able to engage in effective and efficient
arbitrage in the Shares while delegating trading in the portfolio
securities to an intermediary, rather than trading in those securities
directly? Do commenters believe that the Shares of a Fund will trade at
secondary market prices that are closely aligned with the value of the
Fund's portfolio?
2. Do commenters believe that the trading characteristics--such as
bid/ask spread and premium or discount to NAV--of a Fund will be
comparable to the trading characteristics of a fully transparent ETF
with similar assets and a similar strategy?
3. What are commenters' views concerning the proposed use of a VIIV
as opposed to the IIV commonly used by other ETFs? Do commenters
believe that the VIIV will provide sufficient information to market
participants to ensure that the Funds are appropriately priced in
secondary trading? Do commenters believe that the VIIV will provide
sufficient information to market participants in periods of market
volatility, including periods in which securities underlying a Fund's
portfolio encounter trading halts or pauses? Do commenters believe that
the proposed parameters that apply to the accuracy of the VIIV--i.e.,
the requirement that the two independent calculations not disagree by
more than 25 basis points for 60 seconds or more--are appropriate?
4. What are commenters views regarding whether market participants
will be able to use the VIIV--by itself or in conjunction with other
public data--to reverse engineer a Fund's portfolio holdings? What
factors might affect the susceptibility of a Fund to such reverse
engineering? If such reverse engineering were possible, what effect
would it have on the Fund? What effect would reverse engineering have
on shareholders in the Fund?
5. What are commenters views about the selective disclosure of
portfolio holdings to the Trusted Agents, as described above?
6. In light of the non-transparency of the basket of securities
underlying the proposed Funds, the Commission seeks comment on how a
broker-dealer authorized participant engaging in creation and
redemption activity might fulfill its obligation to maintain a minimum
level of net capital in compliance with Rule 15c3-1 under the Act and
how such an authorized participant would comply with the books and
records requirements of Rules 17a-3 and 17a-4 under the Act. For
example, how would an authorized participant that is a broker-dealer
apply an appropriate haircut to positions included in the Creation
Basket when the authorized participant is unaware of the securities
included in the basket? In addition, how would the authorized
participant determine an appropriate price for such securities?
Moreover, how would such an authorized participant make and keep
current the records required under Rule 17a-3, including the daily
blotter and daily stock record required under paragraphs (a)(1) and
(a)(5), respectively, of that rule?
Comments may be submitted by any of the following methods:

Electronic Comments

Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2016-08 on the subject line.

Paper Comments

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

[[Page 32381]]

All submissions should refer to File Numbers SR-NYSEArca-2016-08. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of these filings also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2016-08 and should
be submitted on or before June 13, 2016. Rebuttal comments should be
submitted by June 27, 2016.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

\29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12028 Filed 5-20-16; 8:45 am]
BILLING CODE 8011-01-P

Federal Register / Vol. 81, No. 99 / Monday, May 23, 2016 / Notices 32381

All submissions should refer to File May 17, 2016, notifying the public of BNSF states that the Line does not
Numbers SR–NYSEArca–2016–08. This the new reporting requirement on contain federally granted rights-of-way.
file number should be included on the responsible investment in Burma. The Any documentation in BNSF’s
subject line if email is used. To help the notice contained an incorrect possession will be made available
Commission process and review your investment amount. This document promptly to those requesting it.
comments more efficiently, please use corrects the investment amount to The interest of railroad employees
only one method. The Commission will $5,000,000. will be protected by the conditions set
post all comments on the Commission’s forth in Oregon Short Line Railroad—
FOR FURTHER INFORMATION CONTACT:
Internet Web site (http://www.sec.gov/ Abandonment Portion Goshen Branch
Direct requests for additional Between Firth & Ammon, In Bingham &
rules/sro.shtml). Copies of the information regarding the collection
submission, all subsequent Bonneville Counties, Idaho, 360 I.C.C.
listed in this notice, including requests 91 (1979).
amendments, all written statements for copies of the proposed collection
with respect to the proposed rule By issuing this notice, the Board is
instrument and supporting documents, instituting an exemption proceeding
change that are filed with the to Jennifer Stein, U.S. Department of
Commission, and all written pursuant to 49 U.S.C. 10502(b). A final
State, DRL/MLGA Suite L–430, 2400 decision will be issued by August 19,
communications relating to the Virginia Avenue NW., Washington, DC
proposed rule change between the 2016.
20037, who may be reached on 202– Any offer of financial assistance
Commission and any person, other than 663–3299 or at steinjl@state.gov.
those that may be withheld from the (OFA) under 49 CFR 1152.27(b)(2) will
public in accordance with the Correction be due no later than 10 days after
provisions of 5 U.S.C. 552, will be service of a decision granting the
In the Federal Register of May 17, petition for exemption. Each OFA must
available for Web site viewing and 2016, in FR Doc 2016–3668, on page
printing in the Commission’s Public be accompanied by a $1,600 filing fee.
30597, in the third column, correct the See 49 CFR 1002.2(f)(25).
Reference Room, 100 F Street NE., ‘‘Respondents’’ and ‘‘Frequency’’ All interested persons should be
Washington, DC 20549, on official bulleted entrys to read: aware that, following abandonment, the
business days between the hours of • Respondents: U.S. persons and Line may be suitable for other public
10:00 a.m. and 3:00 p.m. Copies of these entities engaged in new investment in use, including interim trail use. Any
filings also will be available for Burma in an amount over $5,000,000 in request for a public use condition under
inspection and copying at the principal aggregate, per OFAC General License 17, 49 CFR 1152.28 or for trail use/rail
office of the Exchange. All comments which authorizes new investments in banking under 49 CFR 1152.29 will be
received will be posted without change; Burma. due no later than June 10, 2016. Each
the Commission does not edit personal • Frequency: Within 180 days of new trail request must be accompanied by a
identifying information from investment in Burma over $5,000,000, $300 filing fee. See 49 CFR
submissions. You should submit only annually thereafter. 1002.2(f)(27).
information that you wish to make All filings in response to this notice
available publicly. All submissions Dated: May 11, 2016.
Scott Busby, must refer to Docket No. AB 6 (Sub-No.
should refer to File Number SR– 493X) and must be sent to: (1) Surface
NYSEArca–2016–08 and should be Deputy Assistant Secretary. Department of
State. Transportation Board, 395 E Street SW.,
submitted on or before June 13, 2016. Washington, DC 20423–0001; and (2)
Rebuttal comments should be submitted [FR Doc. 2016–12055 Filed 5–20–16; 8:45 am]
Karl Morell, Karl Morell & Associates,
by June 27, 2016. BILLING CODE 4710–18–P
Suite 225, 655 Fifteenth Street NW.,
For the Commission, by the Division of Washington, DC 20005. Replies to the
Trading and Markets, pursuant to delegated petition are due on or before June 10,
authority.29 SURFACE TRANSPORTATION BOARD 2016.
Robert W. Errett, Persons seeking further information
[Docket No. AB 6 (Sub-No. 493X)]
Deputy Secretary. concerning abandonment procedures
[FR Doc. 2016–12028 Filed 5–20–16; 8:45 am] BNSF Railway Company— may contact the Board’s Office of Public
BILLING CODE 8011–01–P Abandonment Exemption—in Cook Assistance, Governmental Affairs and
County, Ill Compliance at (202) 245–0238 or refer
to the full abandonment regulations at
DEPARTMENT OF STATE On May 3, 2016, BNSF Railway 49 CFR part 1152. Questions concerning
Company (BNSF) filed with the Surface environmental issues may be directed to
[Public Notice: 9562] Transportation Board (Board) a petition the Board’s Office of Environmental
under 49 U.S.C. 10502 for exemption Analysis (OEA) at (202) 245–0305.
30-Day Notice of Proposed Information from the provisions of 49 U.S.C. 10903 Assistance for the hearing impaired is
Collection; Reporting Requirements on to abandon an approximately 0.89-mile available through the Federal
Responsible Investment in Burma; rail line on BNSF’s Lumber District Information Relay Service at 1–800–
Correction Lead beginning just west of Laflin Street 877–8339.
AGENCY: Department of State. at Engineering Station 118+00 and An environmental assessment (EA) (or
ACTION: Notice of request for public proceeding east along West Cermak environmental impact statement (EIS), if
Road to the most easterly point at necessary) prepared by OEA will be
sradovich on DSK3TPTVN1PROD with NOTICES

comment and submission to OMB of
proposed collection of information; Engineering Station 157+65 and heading served upon all parties of record and
correction. north along the Sangamon Street Lead at upon any other agencies or persons who
Engineering Station 163+50, including comment during its preparation. Other
SUMMARY: The Department of State both legs of the wye, in Chicago, Cook interested persons may contact OEA to
published a Federal Register Notice on County, Ill. (the Line). The Line obtain a copy of the EA (or EIS). EAs in
traverses United States Postal Zip Code abandonment proceedings normally will
29 17 CFR 200.30–3(a)(12). 60608. be made available within 60 days of the

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Document Created: 2018-02-07 15:07:44
Document Modified: 2018-02-07 15:07:44

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		81 FR 32376