82 FR 20932 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To Adopt a New NYSE Arca Equities Rule 8.900 and To List and Trade Shares of the Royce Pennsylvania ETF; Royce Premier ETF; and Royce Total Return ETF Under Proposed NYSE Arca Equities Rule 8.900
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 85 (May 4, 2017)
Federal Register Volume 82, Issue 85 (May 4, 2017)
| Page Range | 20932-20945 | |
| FR Document | 2017-08980 |
[Federal Register Volume 82, Number 85 (Thursday, May 4, 2017)] [Notices] [Pages 20932-20945] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-08980] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80553; File No. SR-NYSEArca-2017-36] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To Adopt a New NYSE Arca Equities Rule 8.900 and To List and Trade Shares of the Royce Pennsylvania ETF; Royce Premier ETF; and Royce Total Return ETF Under Proposed NYSE Arca Equities Rule 8.900 April 28, 2017. Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that, on April 14, 2017, NYSE Arca, Inc. (the ``Exchange,'' ``NYSE Arca,'' or the ``Corporation'') filed with the Securities and Exchange Commission (the ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 15 U.S.C. 78a. \3\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to adopt a new NYSE Arca Equities Rule 8.900 to permit it to list and trade Managed Portfolio Shares, which are shares of actively managed exchange-traded funds (``ETFs'') for which the portfolio is disclosed in accordance with standard mutual fund disclosure rules. In addition, the Exchange proposes to list and trade shares of the following under proposed NYSE Arca Equities Rule 8.900: Royce Pennsylvania ETF; Royce Premier ETF; and Royce Total Return ETF. The proposed change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to add new NYSE Arca Equities Rule 8.900 for the purpose of permitting the listing and trading, or trading pursuant to unlisted trading privileges (``UTP''), of Managed Portfolio Shares, which are securities issued by an actively managed open-end investment management company.\4\ --------------------------------------------------------------------------- \4\ A Managed Portfolio Share is a security that represents an interest in an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an open-end investment company or similar entity that invests in a portfolio of securities selected by its investment adviser consistent with its investment objectives and policies. In contrast, an open-end investment company that issues Investment Company Units, listed and traded on the Exchange under NYSE Arca Equities Rule 5.2(j)(3) (``Index ETFs''), seeks to provide investment results that correspond generally to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index or combination thereof. --------------------------------------------------------------------------- In addition to the above-mentioned proposed rule changes, the Exchange proposes to list and trade shares (``Shares'') of the following under proposed NYSE Arca Equities Rule 8.900: Royce Pennsylvania ETF; Royce Premier ETF; and Royce Total Return ETF (each, a ``Fund'' and, collectively, the ``Funds''). Proposed Listing Rules Proposed Rule 8.900(a) provides that the Corporation will consider for trading, whether by listing or pursuant to UTP, Managed Portfolio Shares that meet the criteria of Rule 8.900. Proposed Rule 8.900(b) provides that Rule 8.900 is applicable only to Managed Portfolio Shares and that, except to the extent inconsistent with Rule 8.900, or unless the context otherwise requires, the rules and procedures of the Corporation's Board of Directors shall be applicable to the trading on the Corporation of such securities. Proposed Rule 8.900(b) provides further that Managed Portfolio Shares are included within the definition of ``security'' or ``securities'' as such terms are used in the Rules of the Corporation. Proposed Definitions Proposed Rule 8.900(c)(1) defines the term ``Managed Portfolio Share'' as a security that (a) is issued by a registered investment company (``Investment Company'') organized as an open-end management investment company or similar entity, that invests in a portfolio of securities selected by the Investment Company's investment adviser consistent with the Investment Company's investment objectives and policies; and (b) when aggregated in a number of shares equal to a Redemption Unit 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 SEC), which Authorized Participant will be paid, through its own separate 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''). Proposed Rule 8.900(c)(2) defines the term ``Verified Intraday Indicative Value (``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. Proposed Rule 8.900(c)(3) defines the term ``Redemption Unit'' as a specified number of Managed Portfolio Shares. Proposed Rule 8.900(c)(4) defines the term ``Reporting Authority'' in respect of a particular series of Managed Portfolio Shares as a reporting service designated by the issuer as the official source for calculating and reporting information relating to such series, including, but not limited to, the VIIV, NAV, or other information relating to the issuance, redemption or trading of Managed Portfolio Shares. A series of Managed Portfolio Shares may have more than one Reporting Authority, each having different functions. Proposed Rule 8.900(d) sets forth initial and continued listing criteria applicable to Managed Portfolio Shares. Proposed Rule 8.900(d)(1)(A) provides that, for each series of Managed Portfolio Shares, the Corporation will [[Page 20933]] establish a minimum number of Managed Portfolio Shares required to be outstanding at the time of commencement of trading on the Corporation. In addition, proposed Rule 8.900(d)(1)(B) provides that the Corporation will obtain a representation from the issuer of each series of Managed Portfolio Shares that the NAV per share for the series will be calculated daily and that the NAV will be made available to all market participants at the same time.\5\ --------------------------------------------------------------------------- \5\ NYSE Arca Equities Rule 7.18(d)(2) (``Halts of Derivative Securities Products Listed on the NYSE Arca Marketplace)'' provides that, with respect to Derivative Securities Products listed on the NYSE Arca Marketplace for which a net asset value is disseminated, if the Exchange becomes aware that the net asset value is not being disseminated to all market participants at the same time, it will halt trading in the affected Derivative Securities Product on the NYSE Arca Marketplace until such time as the net asset value is available to all market participants. --------------------------------------------------------------------------- Proposed Rule 8.900(d)(2) provides that each series of Managed Portfolio Shares will be listed and traded subject to application of the following continued listing criteria:Proposed Rule 8.900(d)(2)(A) provides that the VIIV for Managed Portfolio Shares will be widely disseminated by one or more major market data vendors every second during the Exchange's Core Trading Session (as defined in NYSE Arca Equities Rule 7.34). Proposed Rule 8.900(d)(2)(B) provides that the Corporation will maintain surveillance procedures for securities listed under Rule 8.900 and will consider the suspension of trading in, and will commence delisting proceedings under Rule 5.5(m) of, a series of Managed Portfolio Shares under any of the following circumstances: (i) If, following the initial twelve-month period after commencement of trading on the Exchange of a series of Managed Portfolio Shares, there are fewer than 50 beneficial holders of the series of Managed Portfolio Shares; (ii) if the value of the VIIV is no longer calculated or made available to all market participants at the same time; (iii) if the Investment Company issuing the Managed Portfolio Shares has failed to file any filings required by the Commission or if the Corporation is aware that the Investment Company is not in compliance with the conditions of any exemptive order or no-action relief granted by the Securities and Exchange Commission to the Investment Company with respect to the series of Managed Portfolio Shares; (iv) if any of the continued listing requirements set forth in Rule 8.900 are not continuously maintained; (v) if the Corporation submits a rule filing pursuant to Section 19(b) of the Act to permit the listing and trading of a series of Managed Portfolio Shares and any of the statements or representations regarding (a) the description of the portfolio or reference asset, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in such rule filing are not continuously maintained; or (vi) if such other event shall occur or condition exists which, in the opinion of the Corporation, makes further dealings on the Corporation inadvisable. 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 shall halt trading in the Managed Portfolio Shares as soon as practicable. Such halt in trading shall 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 shall 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. With respect to series of Managed Portfolio Shares trading on the Corporation pursuant to unlisted trading privileges, if a temporary interruption occurs in the pricing or dissemination of the applicable Verified Intraday Indicative Value and the listing market halts trading in such series, the Corporation, upon notification by the listing market of such halt due to such temporary interruption, will halt trading in such series. In addition, if the Exchange becomes aware that the NAV with respect to a series of Managed Portfolio Shares is not disseminated to all market participants at the same time, it will halt trading in such series until such time as the NAV is available to all market participants. Proposed Rule 8.900(d)(2)(D) provides that, upon termination of an Investment Company, the Corporation requires that Managed Portfolio Shares issued in connection with such entity be removed from Corporation listing. Proposed Rule 8.900(d)(2)(E) provides that voting rights shall be as set forth in the applicable Investment Company prospectus. Proposed Rule 8.900(e), which relates to limitation of Corporation liability, provides that neither the Corporation, the Reporting Authority, nor any agent of the Corporation shall have any liability for damages, claims, losses or expenses caused by any errors, omissions, or delays in calculating or disseminating any current portfolio value; the VIIV; the current value of the portfolio of securities required to be deposited to the open-end management investment company in connection with issuance of Managed Portfolio Shares; the amount of any dividend equivalent payment or cash distribution to holders of Managed Portfolio Shares; NAV; or other information relating to the purchase, redemption, or trading of Managed Portfolio Shares, resulting from any negligent act or omission by the Corporation, the Reporting Authority or any agent of the Corporation, or any act, condition, or cause beyond the reasonable control of the Corporation, its agent, or the Reporting Authority, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission, or delay in the reports of transactions in one or more underlying securities. Proposed Commentary .01 to NYSE Arca Equities Rule 8.900 provides that the Corporation will file separate proposals under Section 19(b) of the Act before the listing and trading of Managed Portfolio Shares. All statements or representations contained in such rule filing regarding (a) the description of the portfolio or reference asset, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in such rule filing will constitute continued listing requirements. An issuer of such securities must notify the Exchange of any failure to comply with such continued listing requirements. Proposed Commentary .02 to NYSE Arca Equities Rule 8.900 provides that transactions in Managed Portfolio Shares will occur only during the Core Trading Session as specified in NYSE Arca Equities Rule 7.34(a)(2). Proposed Commentary .03 to NYSE Arca Equities Rule 8.900 provides that [[Page 20934]] the Exchange will implement written surveillance procedures for Managed Portfolio Shares. Proposed Commentary .04 to NYSE Arca Equities Rule 8.900 provides that Authorized Participants (as defined in the Investment Company's Form N-1A filed with the SEC) or non-Authorized Participant market makers redeeming Managed Portfolio Shares will sign an agreement with an agent (``Trusted Agent'') to establish a 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 Proposed Commentary .05 to NYSE Arca Equities Rule 8.900 provides that, if the investment adviser to the Investment Company issuing Managed Portfolio Shares is affiliated with a broker-dealer, or if any Trusted Agent is registered as a broker-dealer or is affiliated with a broker-dealer, such investment adviser or Trusted Agent will erect and maintain a ``fire wall'' between the investment adviser or Trusted Agent and (i) personnel of the broker-dealer or broker-dealer affiliate, as applicable, or (ii) the Authorized Participant or non- Authorized Participant market maker, as applicable, with respect to access to information concerning the composition and/or changes to such Investment Company portfolio. Personnel who make decisions on the Investment Company's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the applicable Investment Company portfolio.\6\ --------------------------------------------------------------------------- \6\ The Exchange will propose applicable NYSE Arca Equities listing fees for Managed Portfolio Shares in the NYSE Arca Equities Schedule of Fees and Charges via a separate proposed rule change. --------------------------------------------------------------------------- Key Features of Managed Portfolio Shares While funds issuing Managed Portfolio Shares will be actively- managed and, to that extent, will be similar to Managed Fund Shares, Managed Portfolio Shares differ from Managed Fund Shares in the following important respects. First, in contrast to Managed Fund Shares, which are actively-managed funds listed and traded under NYSE Arca Equities Rule 8.600 \7\ and for which a ``Disclosed Portfolio'' is required to be disseminated at least once daily,\8\ the portfolio for an issue of Managed Portfolio Shares will be disclosed quarterly in accordance with normal disclosure requirements otherwise applicable to open-end investment companies registered under the 1940 Act.\9\ Second, in connection with the redemption of shares in ``Redemption Unit'' size (as described below), the delivery of any portfolio securities in kind will generally be effected through a ``Confidential Account'' (as described below) for the benefit of the redeeming ``Authorized Participant'' (as described below in ``Creation and Redemption of Shares'') without disclosing the identity of such securities to the Authorized Participant. --------------------------------------------------------------------------- \7\ The Commission has previously approved listing and trading on the Exchange of a number of issues of Managed Fund Shares under Rule 8.600. See, e.g., Securities Exchange Act Release Nos. 57801 (May 8, 2008), 73 FR 27878 (May 14, 2008) (SR-NYSEArca-2008-31) (order approving Exchange listing and trading of twelve actively- managed funds of the WisdomTree Trust); 60460 (August 7, 2009), 74 FR 41468 (August 17, 2009) (SR-NYSEArca-2009-55) (order approving listing of Dent Tactical ETF); 63076 (October 12, 2010), 75 FR 63874 (October 18, 2010) (SR-NYSEArca-2010-79) (order approving Exchange listing and trading of Cambria Global Tactical ETF); 63802 (January 31, 2011), 76 FR 6503 (February 4, 2011) (SR-NYSEArca-2010-118) (order approving Exchange listing and trading of the SiM Dynamic Allocation Diversified Income ETF and SiM Dynamic Allocation Growth Income ETF). More recently, the Commission approved a proposed rule change to adopt generic listing standards for Managed Fund Shares. Securities Exchange Act Release No. 78397 (July 22, 2016), 81 FR 49320 (July 27, 2016 (SR-NYSEArca-2015-110) ( amending NYSE Arca Equities Rule 8.600 to adopt generic listing standards for Managed Fund Shares). \8\ NYSE Arca Equities Rule 8.600(c)(2) defines the term ``Disclosed Portfolio'' as the identities and quantities of the securities and other assets held by the Investment Company that will form the basis for the Investment Company's calculation of net asset value at the end of the business day. NYSE Arca Equities Rule 8.600(d)(2)(B)(i) requires that the Disclosed Portfolio will be disseminated at least once daily and will be made available to all market participants at the same time. \9\ A mutual fund is required to file with the Commission its complete portfolio schedules for the second and fourth fiscal quarters on Form N-CSR under the 1940 Act, and is required to file its complete portfolio schedules for the first and third fiscal quarters on Form N-Q under the 1940 Act, within 60 days of the end of the quarter. Form N-Q requires funds to file the same schedules of investments that are required in annual and semi-annual reports to shareholders. These forms are available to the public on the Commission's Web site at www.sec.gov. --------------------------------------------------------------------------- For each series of Managed Portfolio Shares, an estimated value-- the VIIV--that reflects an estimated intraday value of a fund's portfolio will be disseminated. With respect to the Funds, the VIIV will be based upon all of a Fund's holdings as of the close of the prior business day and will be widely 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.'')). The dissemination of the VIIV will allow investors to determine the estimated intra-day value of the underlying portfolio of a series of Managed Portfolio Shares on a daily basis and will provide a close estimate of that value throughout the trading day. 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. Unlike the VIIV, which will be based on consolidated midpoint of the bid ask spread, the NAV per Share will be based on the closing price on the primary market for each portfolio security. If there is no closing price for a particular portfolio security, such as when it the [sic] subject of a trading halt, a Fund will use fair value pricing. That fair value pricing will be carried over to the next day's VIIV until the first trade in that stock is reported unless the ``Adviser'' (defined below) deems a particular portfolio security to be illiquid and/or the available ongoing pricing information unlikely to be reliable. In such case, that fact will be immediately disclosed on each Fund's Web site, including the identity and weighting of that security in a Fund's portfolio, and the impact of that security on VIIV calculation, including the fair value price for that security being used for the calculation of that day's VIIV. The Exchange, after consulting with various Lead Market Makers that trade exchange-traded funds (``ETFs'') on the Exchange, believes that market makers will be able to make efficient and liquid markets priced near the VIIV as long as a VIIV is disseminated every second, market makers have knowledge of a Fund's means of achieving its investment objective, and market makers are permitted to engage in ``Bona Fide Arbitrage,'' as described below. The Exchange believes that market makers will employ Bona Fide Arbitrage in addition to risk-management techniques such as ``statistical arbitrage,'' which is currently used throughout the financial services industry, to make efficient markets in exchange-traded products.\10\ This ability [[Page 20935]] should permit market makers to make efficient markets in an issue of Managed Portfolio Shares without precise knowledge of a Fund's underlying portfolio.\11\ --------------------------------------------------------------------------- \10\ Statistical arbitrage enables a trader to construct an accurate proxy for another instrument, allowing it to hedge the other instrument or buy or sell the instrument when it is cheap or expensive in relation to the proxy. 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 have 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. \11\ Authorized Participants and other broker-dealers that enter into their own separate Confidential Accounts shall have enough information to ensure that they are able to comply with applicable regulatory requirements. For example, for purposes of net capital requirements, the maximum Securities Haircut applicable to the securities in a Creation Basket, as determined under Rule 15c3-1, will be disclosed daily on each Fund's Web site. --------------------------------------------------------------------------- To enable market makers to engage in Bona Fide Arbitrage, on each ``Business Day'' (as defined below), before commencement of trading in Shares on the Exchange, the Funds will provide to a ``Trusted Agent'' (as described below) of each Authorized Participant or ``Non-Authorized Participant Market Maker'' \12\ the identities and quantities of portfolio securities that will form the basis for a Fund's calculation of NAV per Share at the end of the Business Day, as well as the names and quantities of the instruments comprising a ``Creation Basket'' and the estimated ``Balancing Amount'' (if any) (as described below), for that day. This information will permit Authorized Participants to purchase ``Creation Units'' through an in-kind transaction with a Fund, as described below. --------------------------------------------------------------------------- \12\ A Non-Authorized Participant Market Maker is a market participant that makes a market in Shares, but is not an Authorized Participant. --------------------------------------------------------------------------- In addition, Authorized Participants will be able to instruct the Trusted Agent to buy or sell portfolio securities during the day and thereby engage in Bona Fide Arbitrage throughout the trading day. For example, if an Authorized Participant believes that Shares of a Fund are trading at a price that is higher than the value of its underlying portfolio based on the VIIV, the Authorized Participant may sell Shares short and instruct the Trusted Agent to buy portfolio securities for its Confidential Account. When the market price of a Fund's 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. 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. Similarly, 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. 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 Adviser represents that it understands that, other than the confidential nature of the account, this process is identical to how many Authorized Participants currently arbitrage existing traditional ETFs. Because other market participants can also engage in arbitrage activity without using the creation or redemption processes described above, the Confidential Account structure will be made available to any Non-Authorized Participant Market Maker that is willing to establish a Confidential Account. In that case, if a market participant believes that a Fund is overvalued relative to its underlying assets, the market participant may sell short Shares and instruct its Trusted Agent to buy portfolio securities in its Confidential Account, wait for the trading prices to move toward parity, and then 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, a market participant 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. Any investor that is willing to transact through a broker- dealer that has established a Confidential Account with a Trusted Agent will have the same opportunity to engage in arbitrage activity. As discussed above, the trading of a Fund's Shares and the Fund's portfolio securities may bring the prices of a Fund's Shares and its portfolio assets closer together through market pressure. This type of arbitrage is referred to herein as ``Bona Fide Arbitrage.'' The Exchange understands that traders use statistical analysis to derive correlations between different sets of instruments to identify opportunities to buy or sell one set of instruments when it is mispriced relative to the others. For Managed Portfolio Shares, market makers, in addition to employing Bona Fide Arbitrage, may use the knowledge of a Fund's means of achieving its investment objective, as described in the applicable Fund registration statement, to construct a hedging proxy for a Fund to manage a market maker's quoting risk in connection with trading Fund Shares. Market makers can then conduct statistical arbitrage between their hedging proxy (for example, the Russell 1000 Index) and Shares of a Fund, buying and selling one against the other over the course of the trading day. They will evaluate how their proxy performed in comparison to the price of a Fund's Shares, and use that analysis as well as knowledge of risk metrics, such as volatility and turnover, to enhance their proxy calculation to make it a more efficient hedge. Market makers not intending to utilize Bona Fide Arbitrage have indicated to the Exchange that there will be sufficient data to run a statistical analysis which will lead to spreads being tightened substantially around the VIIV. This is similar to certain other existing exchange traded products (for example, ETFs that invest in foreign securities that do not trade during U.S. trading hours), in which spreads may be generally wider in the early days of trading and then narrow as market makers gain more confidence in their real-time hedges. Description of the Funds and the Trust The Shares of each Fund will be issued by Precidian ETFs Trust [sic] (``Trust''), a statutory trust organized under the laws of the State of Delaware and registered with the Commission as an open-end management investment company.\13\ The investment adviser to the Trust will be Precidian Funds LLC (the ``Adviser''). Foreside Fund [[Page 20936]] Services, LLC (``Distributor'') will serve as the distributor of the Fund's Shares. --------------------------------------------------------------------------- \13\ The Trust will be registered under the 1940 Act. On April 5, 2017, the Trust filed a registration statement on Form N-1A under the Securities Act of 1933 (the ``1933 Act'') (15 U.S.C. 77a), and under the 1940 Act relating to the Funds (File Nos. 333-171987 and 811-22524) [sic] (the ``Registration Statement''). The Trust filed an amended Application for an Order under Section 6(c) of the 1940 Act for exemptions from various provisions of the 1940 Act and rules thereunder (File No. 812-14405), dated September 21, 2015 [sic] (``Exemptive Application''). The Shares will not be listed on the Exchange until an order (``Exemptive Order'') under the 1940 Act has been issued by the Commission with respect to the Exemptive Application. Investments made by the Funds will comply with the conditions set forth in the Exemptive Order. The description of the operation of the Trust and the Funds herein is based, in part, on the Registration Statement and the Exemptive Application. --------------------------------------------------------------------------- As noted above, proposed Commentary .05 to NYSE Arca Equities Rule 8.900 provides that, if the investment adviser to the Investment Company issuing Managed Portfolio Shares is affiliated with a broker- dealer, or if any Trusted Agent is registered as a broker-dealer or is affiliated with a broker-dealer, such investment adviser or Trusted Agent will erect and maintain a ``fire wall'' between the investment adviser or Trusted Agent and (i) personnel of the broker-dealer or broker-dealer affiliate, as applicable, or (ii) the Authorized Participant or non-Authorized Participant market maker, as applicable, with respect to access to information concerning the composition and/or changes to such Investment Company portfolio. Personnel who make decisions on the Investment Company's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the applicable Investment Company portfolio.\14\ In addition, proposed Commentary .05 further requires that personnel who make decisions on the open-end fund's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the open-end fund's portfolio. Proposed Commentary .05 to Rule 8.900 is similar to Commentary .03(a)(i) and (iii) to NYSE Arca Equities Rule 5.2(j)(3); however, Commentary .05 in connection with the establishment of a ``fire wall'' between the investment adviser and the broker-dealer reflects the applicable open-end fund's portfolio, not an underlying benchmark index, as is the case with index-based funds. The Adviser is not registered as a broker-dealer or affiliated with a broker-dealer. --------------------------------------------------------------------------- \14\ An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ``Advisers Act''). As a result, the Adviser and its related personnel will be subject to the provisions of Rule 204A-1 under the Advisers Act relating to codes of ethics. This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of non-public information by an investment adviser must be consistent with Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violations, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. --------------------------------------------------------------------------- In the event (a) the Adviser or any sub-adviser becomes registered as a broker-dealer or becomes newly affiliated with a broker-dealer, or (b) any new adviser or sub-adviser is a registered broker-dealer, or becomes affiliated with a broker-dealer, it will implement a fire wall with respect to its relevant personnel or its broker-dealer affiliate regarding access to information concerning the composition and/or changes to the portfolio, and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding such portfolio. The portfolio for each Fund will consist of long and/or short positions in U.S.-listed securities and shares issued by other U.S.- listed ETFs \15\ All exchange-listed equity securities in which the Funds will invest will be listed and traded on U.S. national securities exchanges. --------------------------------------------------------------------------- \15\ For purposes of this filing, ETFs include Investment Company Units (as described in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio Depository Receipts (as described in NYSE Arca Equities Rule 8.100); and Managed Fund Shares (as described in NYSE Arca Equities Rule 8.600). The ETFs in which a Fund will invest all will be listed and traded on national securities exchanges. While the Funds may invest in inverse ETFs, the Funds will not invest in leveraged (e.g., 2X, -2X, 3X or -3X) ETFs. --------------------------------------------------------------------------- Description of the Funds Royce Pennsylvania ETF The Royce Pennsylvania ETF will invest primarily in US- listed equity securities of small-cap companies with stock market capitalizations up to $3 billion that Royce & Associates, LP (``Royce''), the Fund's investment sub-adviser, believes are trading below its estimate of their current worth. The Fund may invest in other investment companies that invest in equity securities. The Fund may sell securities to, among other things, secure gains, limit losses, redeploy assets into what Royce deems to be more promising opportunities, and/or manage cash levels in the Fund's portfolio. Royce Premier ETF The Royce Premier ETF will invest in a limited number of US- listed equity securities of primarily small-cap companies with stock market capitalizations from $1 billion to $3 billion at the time of investment. The Fund may invest in other investment companies that invest in equity securities. The Fund may sell securities to, among other things, secure gains, limit losses, redeploy assets into what Royce deems to be more promising opportunities, and/or manage cash levels in the Fund's portfolio. Royce Total Return ETF The Royce Total Return ETF will invest primarily in dividend-paying US- listed securities of small-cap companies with stock market capitalizations up to $3 billion that it believes are trading below its estimate of their current worth. The Fund may invest in other investment companies that invest in equity securities. The Fund may sell securities to, among other things, secure gains, limit losses, redeploy assets into what Royce deems to be more promising opportunities, and/or manage cash levels in the Fund's portfolio. Other Investments While each Fund, under normal market conditions, will invest primarily in U.S.-listed securities, as described above, each Fund may invest its remaining assets in other securities and financial instruments, as described below. According to the Registration Statement, each Fund may enter into repurchase agreements. It will be the policy of the Trust to enter into repurchase agreements only with recognized securities dealers, banks and Fixed Income Clearing Corporation, a securities clearing agency registered with the Commission. Each Fund may invest up to 5% of its total assets in warrants, rights and options. Each Fund may invest a portion of its assets in cash or cash equivalents.\16\ --------------------------------------------------------------------------- \16\ For purposes of this filing, cash equivalents include short-term instruments (instruments with maturities of less than 3 months) of the following types: (i) U.S. Government securities, including bills, notes and bonds differing as to maturity and rates of interest, which are either issued or guaranteed by the U.S. Treasury or by U.S. Government agencies or instrumentalities; (ii) certificates of deposit issued against funds deposited in a bank or savings and loan association; (iii) bankers' acceptances, which are short-term credit instruments used to finance commercial transactions; (iv) repurchase agreements and reverse repurchase agreements; (v) bank time deposits, which are monies kept on deposit with banks or savings and loan associations for a stated period of time at a fixed rate of interest; (vi) commercial paper, which are short-term unsecured promissory notes; and (vii) money market funds. --------------------------------------------------------------------------- Each Fund may invest in the securities of other investment companies (including money market funds) to the extent allowed by law. Investment Restrictions Each Fund may invest up to an aggregate amount of 15% of its net assets in illiquid assets (calculated at [[Page 20937]] the time of investment),\17\ consistent with Commission guidance. Each Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if, through a change in values, net assets, or other circumstances, more than 15% of a Fund's net assets are invested in illiquid assets. Illiquid assets include securities subject to contractual or other restrictions on resale and other instruments that lack readily available markets as determined in accordance with Commission staff guidance.\18\ --------------------------------------------------------------------------- \17\ In reaching liquidity decisions, the Adviser may consider the following factors: The frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature of the security and the nature of the marketplace in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). \18\ The Commission has stated that long-standing Commission guidelines have required open-end funds to hold no more than 15% of their net assets in illiquid securities and other illiquid assets. See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 14618 (March 18, 2008), footnote 34. See also, Investment Company Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 1970) (Statement Regarding ``Restricted Securities''); Investment Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio security is illiquid if it cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the fund. See Investment Company Act Release No. 14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting amendments to Rule 2a-7 under the 1940 Act); Investment Company Act Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) (adopting Rule 144A under the Securities Act of 1933). The Commission recently codified this long standing position in Rule 22e-4. See Investment Company Act Release No. 32315 (October 13, 2016), 81 FR 82142 (November 18, 2016) (adopting requirements for investment company liquidity risk management programs). --------------------------------------------------------------------------- According to the Registration Statement, each Fund will seek to qualify for treatment as a Regulated Investment Company (``RIC'') under the Internal Revenue Code.\19\ --------------------------------------------------------------------------- \19\ 26 U.S.C. 851. --------------------------------------------------------------------------- The Shares of each Fund will conform to the initial and continued listing criteria under proposed Rule 8.900. The Funds will not invest in futures, forwards or swaps. Each Fund's investments will be consistent with its investment objective and will not be used to enhance leverage. While a Fund may invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -3X) ETFs. The Funds will not invest in non-U.S.-listed securities. Creations and Redemptions of Shares In connection with the creation and redemption of Creation Units (defined below), the delivery or receipt of any portfolio securities in-kind will be required to be effected through a separate confidential brokerage account (i.e., a Confidential Account) with a Trusted Agent,\20\ which will be a bank or broker-dealer such as JP Morgan Chase, State Street Bank and Trust, or Bank of New York Mellon, for the benefit of an Authorized Participant.\21\ An Authorized Participant will generally be a Depository Trust Company (``DTC'') Participant that has executed a ``Participant Agreement'' with the Distributor with respect to the creation and redemption of Creation Units and formed a Confidential Account for its benefit in accordance with the terms of the Participant Agreement. For purposes of creations or redemptions, all transactions will be effected through the respective Authorized Participant's Confidential Account, for the benefit of the Authorized Participant without disclosing the identity of such securities to the Authorized Participant. Each Trusted Agent will be given, before the commencement of trading each Business Day (defined below), both the holdings of a Fund and their relative weightings for that day. This information will permit an Authorized Participant, or other market participant that has established a Confidential Account with a Trusted Agent, to instruct the Trusted Agent to buy and sell positions in the portfolio securities to permit Bona Fide Arbitrage, as defined above. --------------------------------------------------------------------------- \20\ Each Authorized Participant shall enter into its own separate Confidential Account with a Trusted Agent. \21\ In the event that a Trusted Agent is a bank, the bank will be required to have an affiliated broker-dealer to accommodate the execution of hedging transactions on behalf of the holder of a Confidential Account. --------------------------------------------------------------------------- Shares of each Fund will be issued in Creation Units of 25,000 or more Shares. The Funds will offer and sell Creation Units through the Distributor on a continuous basis at the NAV per Share next determined after receipt of an order in proper form. The NAV per Share of each Fund will be determined as of the close of regular trading on the New York Stock Exchange (``NYSE'') on each day that the NYSE is open. A ``Business Day'' is defined as any day that the Trust is open for business. The Funds will sell and redeem Creation Units only on Business Days. Applicants anticipate that the initially [sic] price of a Share will range from $20 to $30, and that the price of a Creation Unit initial [sic] will range from $1,000,000 to $5,000,000. In order to keep costs low and permit each Fund to be as fully invested as possible, Shares will be purchased and redeemed in Creation Units and generally on an in-kind basis. Accordingly, except where the purchase or redemption will include cash under the 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'').\22\ 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.'' \23\ --------------------------------------------------------------------------- \22\ The Funds must comply with the federal securities laws in accepting Deposit Instruments and satisfying redemptions with Redemption Instruments, including that the Deposit Instruments and Redemption Instruments are sold in transactions that would be exempt from registration under the 1933 Act. \23\ In determining whether a particular Fund will sell or redeem Creation Units entirely on a cash or in-kind basis, whether for a given day or a given order, the key consideration will be the benefit that would accrue to a Fund and its investors. The Adviser represents that the Funds do not currently anticipate the need to sell or redeem Creation Units entirely on a cash basis. --------------------------------------------------------------------------- As noted above, each Authorized Participant will be required to establish a Confidential Account with a Trusted Agent and transact with each Fund through that Confidential Account.\24\ Therefore, before the commencement of trading on each Business Day, the Trusted Agent of each Authorized Participant will be provided, on a confidential basis, with a list of the names and quantities of the instruments comprising a Creation Basket, as well as the estimated Balancing Amount (if any), for that day. The published Creation Basket will apply until a new Creation Basket is announced on the following Business Day, and there will be no intra-day changes to the Creation Basket except to correct errors in the [[Page 20938]] published Creation Basket. The instruments and cash that the purchaser is required to deliver in exchange for the Creation Units it is purchasing are referred to as the ``Portfolio Deposit.'' --------------------------------------------------------------------------- \24\ The Adviser represents that transacting through a Confidential Account is similar to transacting through any broker- dealer account, except that the Trusted Agent will be bound to keep the names and weights of the portfolio securities confidential. To comply with certain recordkeeping requirements applicable to Authorized Participants, the Trusted Agent will maintain and preserve, and make available to the Commission, certain required records related to the securities held in the Confidential Account. --------------------------------------------------------------------------- Placement of Purchase Orders Each Fund will issue Shares through the Distributor on a continuous basis at NAV. The Exchange represents that the issuance of Shares will operate in a manner substantially similar to that of other ETFs. Each Fund will issue Shares only at the NAV per Share next determined after an order in proper form is received. The Trust will sell and redeem Shares on each such day and will not suspend the right of redemption or postpone the date of payment or satisfaction upon redemption for more than seven days, other than as provided by Section 22(d) of the 1940 Act. Shares may be purchased from a Fund by an Authorized Participant for its own account or for the benefit of a customer. The Distributor will furnish acknowledgements to those placing such orders that the orders have been accepted, but the Distributor may reject any order which is not submitted in proper form, as described in a Fund's prospectus or Statement of Additional Information (``SAI''). Purchases of Shares will be settled in-kind or cash for an amount equal to the applicable NAV per Share purchased plus applicable ``Transaction Fees,'' as discussed below. The NAV of each Fund is expected to be determined once each Business Day at a time determined by the Trust's Board of Directors (``Board''), currently anticipated to be as of the close of the regular trading session on the NYSE (ordinarily 4:00 p.m. E.T.) (the ``Valuation Time''). Each Fund will establish a cut-off time (``Order Cut-Off Time'') for purchase orders in proper form. To initiate a purchase of Shares, an Authorized Participant must submit to the Distributor an irrevocable order to purchase such Shares after the most recent prior Valuation Time but not later than the Order Cut-Off Time. The Order Cut-Off Time for a Fund may be its Valuation Time, or may be prior to the Valuation Time if the Board determines that an earlier Order Cut-Off Time for purchase of Shares is necessary and is in the best interests of Fund shareholders. All orders to purchase Creation Units must be received by the Distributor no later than the scheduled closing time of the regular trading session on the NYSE (ordinarily 4:00 p.m. E.T.) in each case on the date such order is placed (``Transmittal Date'') in order for the purchaser to receive the NAV per Share determined on the Transmittal Date. In the case of custom orders, the order must be received by the Distributor, no later than 3:00 p.m. E.T., or such earlier time as may be designated by the Funds and disclosed to Authorized Participants.\25\ The Distributor will maintain a record of Creation Unit purchases and will send out confirmations of such purchases.\26\ --------------------------------------------------------------------------- \25\ A ``custom order'' is any purchase or redemption of Shares made in whole or in part on a cash basis, as provided in the Registration Statement. \26\ A Trusted Agent will provide information related to creations and redemption of Creation Units to the Financial Industry Regulatory Authority (``FINRA'') upon request. --------------------------------------------------------------------------- Transaction Fees The Trust may impose purchase or redemption transaction fees (``Transaction Fees'') in connection with the purchase or redemption of Shares from the Funds. The exact amounts of any such Transaction Fees will be determined by the Adviser. The purpose of the Transaction Fees is to protect the continuing shareholders against possible dilutive transactional expenses, including operational processing and brokerage costs, associated with establishing and liquidating portfolio positions, including short positions, in connection with the purchase and redemption of Shares. Purchases of Shares--Secondary Market Only Authorized Participants and their customers will be able to acquire Shares at NAV directly from a Fund through the Distributor. The required payment must be transferred in the manner set forth in a Fund's SAI by the specified time on the third DTC settlement day following the day it is transmitted (the ``Transmittal Date''). These investors and others will also be able to purchase Shares in secondary market transactions at prevailing market prices. Each Fund will reserve the right to reject any purchase order at any time. Redemption Beneficial Owners may sell their Shares in the secondary market. Alternatively, investors that own enough Shares to constitute a Redemption Unit (currently, 25,000 Shares) or multiples thereof may redeem those Shares through the Distributor, which will act as the Trust's representative for redemption. The size of a Redemption Unit will be subject to change. Redemption orders for Redemption Units or multiples thereof must be placed by or through an Authorized Participant. Authorized Participant Redemption The Shares may be redeemed to a Fund in Redemption Unit size or multiples thereof as described below. Redemption orders of Redemption Units must be placed by or through an Authorized Participant (``AP Redemption Order''). Each Fund will establish an Order Cut-Off Time for redemption orders of Redemption Units in proper form. Redemption Units of the Fund will be redeemable at their NAV per Share next determined after receipt of a request for redemption by the Trust in the manner specified below before the Order Cut-Off Time. To initiate an AP Redemption Order, an Authorized Participant must submit to the Distributor an irrevocable order to redeem such Redemption Unit after the most recent prior Valuation Time but not later than the Order Cut- Off Time. The Order Cut-Off Time for a Fund may be its Valuation Time, or may be prior to the Valuation Time if the Board determines that an earlier Order Cut-Off Time for redemption of Redemption Units is necessary and is in the best interests of Fund shareholders. Consistent with the provisions of Section 22(e) of the 1940 Act and Rule 22e-2 thereunder, the right to redeem will not be suspended, nor payment upon redemption delayed, except for: (1) Any period during which the NYSE is closed other than customary weekend and holiday closings, (2) any period during which trading on the NYSE is restricted, (3) any period during which an emergency exists as a result of which disposal by a Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for a Fund to determine its NAV, and (4) for such other periods as the Commission may by order permit for the protection of shareholders. Redemptions will occur primarily in-kind, although redemption payments may also be made partly or wholly in cash.\27\ The Participant Agreement signed by each Authorized Participant will require establishment of a Confidential Account to receive distributions of securities in-kind upon redemption.\28\ Each Authorized [[Page 20939]] Participant will be required to open a Confidential Account with a Trusted Agent in order to facilitate orderly processing of redemptions. While a Fund will generally distribute securities in-kind, the Adviser may determine from time to time that it is not in a Fund's best interests to distribute securities in-kind, but rather to sell securities and/or distribute cash. For example, the Adviser may distribute cash to facilitate orderly portfolio management in connection with rebalancing or transitioning a portfolio in line with its investment objective, or if there is substantially more creation than redemption activity during the period immediately preceding a redemption request, or as necessary or appropriate in accordance with applicable laws and regulations. In this manner, a Fund can use in-kind redemptions to reduce the unrealized capital gains that may, at times, exist in a Fund by distributing low cost lots of each security that a Fund needs to dispose of to maintain its desired portfolio exposures. Shareholders of a Fund would benefit from the in-kind redemptions through the reduction of the unrealized capital gains in a Fund that would otherwise have to be realized and, eventually, distributed to shareholders. --------------------------------------------------------------------------- \27\ It is anticipated that any portion of a Fund's NAV attributable to appreciated short positions will be paid in cash, as securities sold short are not susceptible to in-kind settlement. The value of other positions not susceptible to in-kind settlement may also be paid in cash. \28\ The terms of each Confidential Account will be set forth as an exhibit to the applicable Participant Agreement, which will be signed by each Authorized Participant. The terms of the Confidential Account will provide that the trust be formed under applicable state laws; the Custodian may act as Trusted Agent of the Confidential Account; and the Trusted Agent will be paid by the Authorized Participant a fee negotiated directly between the Authorized Participants and the Trusted Agent(s). --------------------------------------------------------------------------- The redemption basket will consist of the same securities for all Authorized Participants on any given day subject to the Adviser's ability to make minor adjustments to address odd lots, fractional shares, tradeable sizes or other situations. After receipt of a Redemption Order, a Fund's custodian (``Custodian'') will typically deliver securities to the Confidential Account on a pro rata basis (which securities are determined by the Adviser) with a value approximately equal to the value of the Shares \29\ 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.\30\ 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.\31\ The redemption securities that the Confidential Account receives are expected to mirror the portfolio holdings of a Fund pro rata. To the extent a Fund distributes portfolio securities through an in-kind distribution to more than one Confidential Account for the benefit of that account's Authorized Participant, each Fund expects to distribute a pro rata portion of the portfolio securities selected for distribution to each redeeming Authorized Participant. --------------------------------------------------------------------------- \29\ If the NAV of the Shares redeemed differs from the value of the securities delivered to the applicable Confidential Account, the Fund will pay a cash balancing amount to compensate for the difference between the value of the securities delivered and the NAV. \30\ 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. \31\ 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, all income, gain or loss realized by the Confidential Account will be directly attributed to the Authorized Participant. 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. --------------------------------------------------------------------------- If the Authorized Participant would receive a security that it is restricted from receiving, a Fund will deliver cash equal to the value of that security. To address odd lots, fractional shares, tradeable sizes or other situations where dividing securities is not practical or possible, the Adviser may make minor adjustments to the pro rata portion of portfolio securities selected for distribution to each redeeming Authorized Participant on such Business Day. The Trust will accept a Redemption Order in proper form. A Redemption Order is subject to acceptance by the Trust and must be preceded or accompanied by an irrevocable commitment to deliver the requisite number of Shares. At the time of settlement, an Authorized Participant will initiate a delivery of the Shares versus subsequent payment against the proceeds, if any, of the sale of portfolio securities distributed to the applicable Confidential Account plus or minus any cash balancing amounts, and less the expenses of liquidation. Net Asset Value The NAV per Share of a Fund will be computed by dividing the value of the net assets of a Fund (i.e., the value of its total assets less total liabilities) by the total number of Shares of a Fund outstanding, rounded to the nearest cent. Expenses and fees, including, without limitation, the management, administration and distribution fees, will be accrued daily and taken into account for purposes of determining NAV. Interest and investment income on the Trust's assets accrue daily and will be included in the Fund's total assets. The NAV per Share for a Fund will be calculated by a Fund's administrator (``Administrator'') and determined as of the close of the regular trading session on the NYSE (ordinarily 4:00 p.m., E.T.) on each day that the NYSE is open. Shares of exchange-listed equity securities and exchange-listed options will be valued at market value, which will generally be determined using the last reported official closing or last trading price on the exchange or market on which the securities are primarily traded at the time of valuation. Repurchase agreements will be valued based on price quotations or other equivalent indications of value provided by a third-party pricing service. Money market funds will be valued based on price quotations or other equivalent indications of value provided by a third-party pricing service. Cash equivalents will generally be valued on the basis of independent pricing services or quotes obtained from brokers and dealers. Options not listed on an exchange, rights and warrants will be valued based on price quotations or other equivalent indications of value provided by a third-party pricing service. When last sale prices and market quotations are not readily available, are deemed unreliable or do not reflect material events occurring between the close of local markets and the time of valuation, investments will be valued using fair value pricing as determined in good faith by the Adviser under procedures established by and under the general supervision and responsibility of the Trust's Board of Trustees. Investments that may be valued using fair value pricing include, but are not limited to: (1) Securities that are not actively traded; (2) securities of an issuer that becomes bankrupt or enters into a restructuring; and (3) securities whose trading has been halted or suspended. The frequency with which each Fund's investments will be valued using fair value pricing will primarily be a function of the types of securities and other assets in which the respective Fund will invest pursuant to its investment objective, strategies and [[Page 20940]] limitations. If the Funds invest in open-end management investment companies registered under the 1940 Act (other than ETFs), they may rely on the NAVs of those companies to value the shares they hold of them. Valuing the Funds' investments using fair value pricing involves the consideration of a number of subjective factors and thus the prices for those investments may differ from current market valuations. Accordingly, fair value pricing could result in a difference between the prices used to calculate NAV and the prices used to determine a Fund's VIIV, which could result in the market prices for Shares deviating from NAV. In cases where the fair value price of the security is materially different from the pricing data provided by the independent pricing sources and the Adviser determined that the ongoing pricing information is not likely to be reliable, the fair value will be used for calculation of the VIIV, and a Fund's Custodian will be instructed to disclose the identity and weight of the fair valued securities, as well as the fair value price being used for the security. Availability of Information The Funds' Web site (www.precidianfunds.com), which will be publicly available prior to the public offering of Shares, will include a form of the prospectus for each Fund that may be downloaded. The Funds' Web site will include additional quantitative information updated on a daily basis, including, for each Fund, (1) daily trading volume, the prior Business Day's reported closing price, NAV and mid- point of the bid/ask spread at the time of calculation of such NAV (the ``Bid/Ask Price''),\32\ and a calculation of the premium and discount of the Bid/Ask Price against the NAV, and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters. The Web site and information will be publicly available at no charge. --------------------------------------------------------------------------- \32\ The Bid/Ask Price of a Fund will be determined using the mid-point of the highest bid and the lowest offer on the Exchange as of the time of calculation of a Fund's NAV. The records relating to Bid/Ask Prices will be retained by each Fund and its service providers. --------------------------------------------------------------------------- As noted above, a mutual fund is required to file with the Commission its complete portfolio schedules for the second and fourth fiscal quarters on Form N-CSR under the 1940 Act, and is required to file its complete portfolio schedules for the first and third fiscal quarters on Form N-Q under the 1940 Act, within 60 days of the end of the quarter. Form N-Q requires funds to file the same schedules of investments that are required in annual and semi-annual reports to shareholders. 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. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers' computer screens and other electronic services. Information regarding the previous day's closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Updated price information for U.S. exchange- listed equity securities is available through major market data vendors or securities exchanges trading such securities. The intraday, closing and settlement prices of money market funds, repurchase agreements, reverse repurchase agreements and cash equivalents will be readily available from published or other public sources, or major market data vendors such as Bloomberg and Thomson Reuters. The NAV of any investment company security investment will be readily available on the Web site of the relevant investment company and from major market data vendors. Quotation and last sale information for the Shares will be available via the Consolidated Tape Association (``CTA'') high-speed line. In addition, the VIIV, as defined in NYSE Arca Equities Rule 8.900(c)(3) and as described further below, will be widely disseminated by one or more major market data vendors at least every second during the Exchange's Core Trading Session. Dissemination of the Verified Intraday Indicative Value 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. The VIIV should not be viewed as a ``real-time'' update of NAV because the VIIV may not be calculated in the same manner as NAV, which is computed once per day. The Exchange will disseminate the VIIV for each Fund in one-second intervals during the Core Trading Session, through the facilities of the CTA. The VIIV is essentially an intraday NAV calculation every second during the Core Trading Session. Each Fund will adopt procedures governing the calculation of the VIIV and will bear responsibility for the accuracy of its calculation. Pursuant to those procedures, 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. The Adviser represents that, 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, 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. 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 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.\33\ 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. Each Fund's Board will review the procedures used to calculate the VIIV and maintain its accuracy as [[Page 20941]] appropriate, but not less than annually. The specific methodology for calculating the VIIV will be disclosed on each Fund's Web site. --------------------------------------------------------------------------- \33\ 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. --------------------------------------------------------------------------- Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Funds.\34\ Trading in Shares of the Funds will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. Trading in the Shares will be subject to NYSE Arca Equities Rule 8.900(d)(2)(C), which sets forth circumstances under which Shares of the Funds will be halted. --------------------------------------------------------------------------- \34\ See NYSE Arca Equities Rule 7.12. --------------------------------------------------------------------------- Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange's existing rules governing the trading of equity securities. Shares will trade on the NYSE Arca Marketplace only during the Core Trading Session in accordance with NYSE Arca Equities Rule 7.34(a)(2). As provided in NYSE Arca Equities Rule 7.6, the minimum price variation (``MPV'') for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for order entry is $0.0001. The Shares will conform to the initial and continued listing criteria under NYSE Arca Equities Rule 8.900. The Exchange represents that, for initial and/or continued listing, each Fund will be in compliance with Rule 10A-3 under the Act,\35\ as provided by NYSE Arca Equities Rule 5.3. A minimum of 100,000 Shares of each Fund will be outstanding at the commencement of trading on the Exchange. The Exchange will obtain a representation from the issuer of the Shares of each Fund that the NAV per Share of each Fund will be calculated daily and will be made available to all market participants at the same time. --------------------------------------------------------------------------- \35\ See 17 CFR 240.10A-3. --------------------------------------------------------------------------- Surveillance The Exchange represents that trading in the Shares will be subject to the existing trading surveillances, administered by the Exchange, as well as cross-market surveillances administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.\36\ The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange. --------------------------------------------------------------------------- \36\ FINRA conducts cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA's performance under this regulatory services agreement. --------------------------------------------------------------------------- The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares, underlying stocks, ETFs and exchange-listed options with other markets and other entities that are members of the Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading such securities from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, underlying stocks, ETFs and exchange-listed options from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement.\37\ --------------------------------------------------------------------------- \37\ For a list of the current members of ISG, see www.isgportal.org. --------------------------------------------------------------------------- The Funds' Adviser will make available daily to FINRA and the Exchange the portfolio holdings of each Fund in order to facilitate the performance of the surveillances referred to above. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Information Bulletin Prior to the commencement of trading, the Exchange will inform its Equity Trading Permit (``ETP'') Holders in an Information Bulletin (``Bulletin'') of the special characteristics and risks associated with trading the Shares. Specifically, the Bulletin will discuss the following: (1) The procedures for purchases and redemptions of Shares; (2) NYSE Arca Equities Rule 9.2(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (4) [sic] how information regarding the VIIV is disseminated; (5) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (6) trading information. In addition, the Bulletin will reference that the Funds are subject to various fees and expenses described in the Registration Statement. The Bulletin will discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Act. The Bulletin will also disclose that the NAV for the Shares will be calculated after 4:00 p.m., E.T. each trading day. 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act,\38\ in general, and furthers the objectives of Section 6(b)(5) of the Act,\39\ in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. --------------------------------------------------------------------------- \38\ 15 U.S.C. 78f(b). \39\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange believes that proposed Rule 8.900 is designed to prevent fraudulent and manipulative acts and practices in that the proposed rules relating to listing and trading of Managed Portfolio Shares provide specific initial and continued listing criteria required to be met by such securities. Proposed Rule 8.900(d) sets forth initial and continued listing criteria applicable to Managed Portfolio Shares. Proposed Rule 8.900(d)(1) provides that, for each series of Managed Portfolio Shares, the Corporation will establish a minimum number of Managed Portfolio Shares required to be outstanding at the time of commencement of trading. In addition, the Corporation will obtain a representation from the issuer of each series of Managed Portfolio Shares that the NAV per share for the series will be calculated daily and that the NAV will be made available to all market participants at the same time. Proposed Rule 8.900(d)(2) provides that each series of Managed Portfolio Shares will be listed and traded subject to application of the specified continued [[Page 20942]] listing criteria, as described above. Proposed Rule 8.900(d)(2)(A) provides that the VIIV for Managed Portfolio Shares will be widely disseminated by one or more major market data vendors every second during the Exchange's Core Trading Session. Proposed Rule 8.900(d)(2)(B) provides that the Corporation will maintain surveillance procedures for securities listed under Rule 8.900 and will consider the suspension of trading in, and will commence delisting proceedings under Rule 5.5(m) of, a series of Managed Portfolio Shares under any of the circumstances set forth in proposed Rules 8.900(d)(2)(B)(i) through (vi), as described above, including if any of the continued listing requirements set forth in Rule 8.900 are not continuously maintained (proposed Rule 8.900(d)(2)(B)(iv)), and if the Corporation submits a rule filing pursuant to Section 19(b) of the Act to permit the listing and trading of a series of Managed Portfolio Shares and any of the statements or representations regarding (a) the description of the portfolio or reference asset, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in such rule filing are not continuously maintained (proposed Rule 8.900(d)(2)(B)(v)). 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 shall halt trading in the Managed Portfolio Shares as soon as practicable. Such halt in trading shall 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. Proposed Commentary .05 to NYSE Arca Equities Rule 8.900 provides that, if the investment adviser to the Investment Company issuing Managed Portfolio Shares is affiliated with a broker-dealer, or if any Trusted Agent is registered as a broker-dealer or is affiliated with a broker-dealer, such investment adviser or Trusted Agent will erect and maintain a ``fire wall'' between the investment adviser or Trusted Agent and (i) personnel of the broker-dealer or broker-dealer affiliate, as applicable, or (ii) the Authorized Participant or non-Authorized Participant market maker, as applicable, with respect to access to information concerning the composition and/or changes to such Investment Company portfolio. Personnel who make decisions on the Investment Company's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the applicable Investment Company portfolio Personnel who make decisions on the Investment Company's portfolio composition must be subject to procedures designed to prevent the use and dissemination of material nonpublic information regarding the applicable Investment Company portfolio. With respect to the proposed listing and trading of Shares of the Funds, the Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Equities Rule 8.900. Price information for the exchange-listed equity securities held by the Funds will be available through major market data vendors or securities exchanges listing and trading such securities. All exchange- listed equity securities held by the Funds will be listed on national securities exchanges. The listing and trading of such securities is subject to rules of the exchanges on which they are listed and traded, as approved by the Commission. The Funds will primarily hold U.S.- listed securities or ETFs. A Fund's investments will be consistent with its respective investment objective and will not be used to enhance leverage. The Funds will not invest in non-U.S.-listed securities. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares and underlying stocks and ETFs with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading such securities from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares, underlying stocks and ETFs from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. A Trusted Agent will provide information related to creations and redemption of Creation Units to FINRA upon request. The Funds' Adviser will make available daily to FINRA and the Exchange the portfolio holdings of each Fund in order to facilitate the performance of the surveillances referred to above. The Exchange, after consulting with various Lead Market Makers that trade ETFs on the Exchange, believes that market makers will be able to make efficient and liquid markets priced near the VIIV, market makers have knowledge of a fund's means of achieving its investment objective even without daily disclosure of a fund's underlying portfolio, and are able to engage in Bona Fide Arbitrage. The Exchange believes that market makers will employ risk-management techniques such as Bona Fide Arbitrage in addition to ``statistical arbitrage,'' which is currently used throughout the financial services industry, to make efficient markets in exchange traded products.\40\ This ability should permit market makers to make efficient markets in shares without knowledge of a fund's underlying portfolio. --------------------------------------------------------------------------- \40\ See note 10, supra. --------------------------------------------------------------------------- The Exchange understands that traders, in addition to employing Bona Fide Arbitrage, use statistical analysis to derive correlations between different sets of instruments to identify opportunities to buy or sell one set of instruments when it is mispriced relative to the others. For Managed Portfolio Shares, market makers utilizing statistical arbitrage use the knowledge of a fund's means of achieving its investment objective, as described in the applicable fund registration statement, to construct a hedging proxy for a fund to manage a market maker's quoting risk in connection with trading fund shares. Market makers will then conduct statistical arbitrage between their hedging proxy (for example, the Russell 1000 Index) and shares of a fund, buying and selling one against the other over the course of the trading day. Eventually, at the end of each day, they will evaluate how their proxy performed in comparison to the price of a fund's shares, and use that analysis as well as knowledge of risk metrics, such as volatility and turnover, to enhance their proxy calculation to make it a more efficient hedge. Market makers who anticipate employing statistical arbitrage more often than Bona Fide Arbitrage, have indicated to the Exchange that, after the first few days of trading, there will be sufficient data to run a statistical [[Page 20943]] analysis which will lead to spreads being tightened substantially around VIIV. This is similar to certain other existing exchange traded products (for example, ETFs that invest in foreign securities that do not trade during U.S. trading hours), in which spreads may be generally wider in the early days of trading and then narrow as market makers gain more confidence in their real-time hedges. The Lead Market Makers also indicated that, as with some other new exchange-traded products, spreads may be generally wider in the early days of trading and would tend to narrow as market makers gain more confidence in the accuracy of their hedges and their ability to adjust these hedges in real-time relative to the published VIIV and gain an understanding of the applicable market risk metrics such as volatility and turnover, and as natural buyers and sellers enter the market. Other relevant factors cited by Lead Market Makers were that a fund's investment objectives are clearly disclosed in the applicable prospectus, the existence of quarterly portfolio disclosure, the capacity to engage in Bona Fide Arbitrage and the ability to create shares in creation unit size. The Commission's concept release regarding ``Actively Managed Exchange-Traded Funds'' highlighted several issues that could impact the Commission's willingness to authorize the operation of an actively- managed ETF, including whether effective arbitrage of the ETF shares exists.\41\ The Concept Release identifies the transparency of a fund's portfolio and the liquidity of the securities in a fund's portfolio as central to effective arbitrage. With respect to the Funds, the Funds' use of U.S.-listed securities and the ability of market makers to engage in Bona Fide Arbitrage provide adequate liquidity as well as the ability to engage in riskless arbitrage. Additionally, certain existing ETFs with portfolios of foreign securities have shown their ability to trade efficiently in the secondary market at approximately their NAV even though they do not provide opportunities for riskless arbitrage transactions during much of the trading day.\42\ Such ETFs have been shown to have pricing characteristics very similar to ETFs that can be arbitraged in this manner. For example, index-based ETFs containing securities that trade during different trading hours than the ETF, such as ETFs that hold Asian stocks, have demonstrated efficient pricing characteristics notwithstanding the inability of market professionals to engage in ``riskless arbitrage'' with respect to the underlying portfolio for most, or even all, of the U.S. trading day when Asian markets are closed. Pricing for shares of such ETFs is efficient because market professionals are still able to hedge their positions with offsetting, correlated positions in derivative instruments during the entire trading day. --------------------------------------------------------------------------- \41\ See Investment Company Act Release No. 25258 (November 8, 2001) (the ``Concept Release''). \42\ The Adviser represents that the mechanics of arbitrage and hedging differ. Prior Rule 10a-1 and Regulation T under the Act both describe arbitrage as either buying and selling the same security in two different markets or buying and selling two different securities, one of which is convertible into the other. This is also known as a ``riskless arbitrage'' transaction in that the transaction is risk free since it generally consists of buying an asset at one price and simultaneously selling that same asset at a higher price, thereby generating a profit on the difference. Hedging, on the other hand, involves managing risk by purchasing or selling a security or instrument that will track or offset the value of another security or instrument. Arbitrage and hedging are both used to manage risk; however, they involve different trading strategies. --------------------------------------------------------------------------- The real-time dissemination of a fund's VIIV, the ability for market makers to engage is [sic] riskless arbitrage through the Bona Fide Arbitrage mechanism, together with the right of Authorized Participants to create and redeem each day at the NAV, will be sufficient for market participants to value and trade shares in a manner that will not lead to significant deviations between the shares' Bid/Ask Price and NAV. The pricing efficiency with respect to trading a series of Managed Portfolio Shares will generally rest on the ability of market participants to arbitrage between the shares and a fund's portfolio, in addition to the ability of market participants to assess a fund's underlying value accurately enough throughout the trading day in order to hedge positions in shares effectively. Professional traders not employing Bona Fide Arbitrage can buy shares that they perceive to be trading at a price less than that which will be available at a subsequent time, and sell shares they perceive to be trading at a price higher than that which will be available at a subsequent time. It is expected that, as part of their normal day-to-day trading activity, market makers assigned to shares by the Exchange, off-exchange market makers, firms that specialize in electronic trading, hedge funds and other professionals specializing in short-term, non-fundamental trading strategies will assume the risk of being ``long'' or ``short'' shares through such trading and will hedge such risk wholly or partly by simultaneously taking positions in correlated assets \43\ or by netting the exposure against other, offsetting trading positions--much as such firms do with existing ETFs and other equities. Disclosure of a fund's investment objective and principal investment strategies in its prospectus and SAI, along with the dissemination of the VIIV every second, should permit professional investors to engage easily in this type of hedging activity.\44\ --------------------------------------------------------------------------- \43\ Price correlation trading is used throughout the financial industry. It is used to discover both trading opportunities to be exploited, such as currency pairs and statistical arbitrage, as well as for risk mitigation such as dispersion trading and beta hedging. These correlations are a function of differentials, over time, between one or multiple securities pricing. Once the nature of these price deviations have been quantified, a universe of securities is searched in an effort to, in the case of a hedging strategy, minimize the differential. Once a suitable hedging basket 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 corrections where warranted. \44\ With respect to trading in Shares of the Funds, market participants would manage risk in a variety of ways. In addition to Bona Fide Arbitrage, it is expected that market participants will be able to determine how to trade Shares at levels approximating the VIIV without taking undue risk by gaining experience with how various market factors (e.g., general market movements, sensitivity of the VIIV to intraday movements in interest rates or commodity prices, etc.) affect VIIV, and by finding hedges for their long or short positions in Shares using instruments correlated with such factors. The Adviser expects that market participants will initially determine the VIIV's correlation to a major large capitalization equity benchmark with active derivative contracts, such as the Russell 1000 Index, and the degree of sensitivity of the VIIV to changes in that benchmark. For example, using hypothetical numbers for illustrative purposes, market participants should be able to determine quickly that price movements in the Russell 1000 Index predict movements in a Fund's VIIV 95% of the time (an acceptably high correlation) but that the VIIV generally moves approximately half as much as the Russell 1000 Index with each price movement. This information is sufficient for market participants to construct a reasonable hedge--buy or sell an amount of futures, swaps or ETFs that track the Russell 1000 equal to half the opposite exposure taken with respect to Shares. Market participants will also continuously compare the intraday performance of their hedge to a Fund's VIIV. If the intraday performance of the hedge is correlated with the VIIV to the expected degree, market participants will feel comfortable they are appropriately hedged and can rely on the VIIV as appropriately indicative of a Fund's performance. --------------------------------------------------------------------------- With respect to trading of Shares of the Funds, the ability of market participants to buy and sell Shares at prices near the VIIV is dependent upon their assessment that the VIIV is a reliable, indicative real-time value for a Fund's underlying holdings. Market participants are expected to accept the VIIV as a reliable, indicative real-time value because (1) the VIIV will be calculated and disseminated based on a Fund's actual portfolio holdings, (2) the securities in which the Funds plan to [[Page 20944]] invest are generally highly liquid and actively traded and therefore generally have accurate real time pricing available, and (3) market participants will have a daily opportunity to evaluate whether the VIIV at or near the close of trading is indeed predictive of the actual NAV. The real-time dissemination of a Fund's VIIV, the ability for market makers to engage is [sic] riskless arbitrage through the Bona Fide Arbitrage mechanism, together with the ability of Authorized Participants to create and redeem each day at the NAV, will be crucial for market participants to value and trade Shares in a manner that will not lead to significant deviations between the Shares' Bid/Ask Price and NAV.\45\ --------------------------------------------------------------------------- \45\ The statements in the Statutory Basis section of this filing relating to pricing efficiency, arbitrage, and activities of market participants, including market makers and Authorized Participants, are based on representations by the Adviser and review by the Exchange. --------------------------------------------------------------------------- In a typical index-based ETF, it is standard for Authorized Participants to know what securities must be delivered in a creation or will be received in a redemption. For Managed Portfolio Shares, however, Authorized Participants do not need to know the securities comprising the portfolio of a Fund since creations and redemptions are handled through the Confidential Account mechanism. The Adviser represents that the in-kind creations and redemptions through a Confidential Account will preserve the integrity of the active investment strategy and eliminate the potential for ``free riding'' or ``front-running,'' while still providing investors with the advantages of the ETF structure. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that the Exchange will obtain a representation from the issuer of an issue of Managed Portfolio Shares that the NAV per share of a fund will be calculated daily and that the NAV and [sic] will be made available to all market participants at the same time. Investors can also obtain a fund's SAI, shareholder reports, and its Form N-CSR, Form N-Q and Form N-SAR. A fund's SAI and shareholder reports will be available free upon request from the applicable fund, and those documents and the Form N-CSR, Form N-Q and Form N-SAR may be viewed on-screen or downloaded from the Commission's Web site. In addition, with respect to the Funds, a large amount of information will be publicly available regarding the Funds and the Shares, thereby promoting market transparency. Quotation and last sale information for the Shares will be available via the CTA high-speed line. Information regarding the intra-day value of the Shares of a Fund, which is the VIIV as defined in proposed NYSE Arca Equities Rule 8.900(c)(3), will be widely disseminated every second throughout the Exchange's Core Trading Session by one or more major market data vendors. The Web site for the Funds will include a form of the prospectus for the Funds that may be downloaded, and additional data relating to NAV and other applicable quantitative information, updated on a daily basis. Moreover, prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Trading in Shares of a Fund will be halted if the circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. Trading in the Shares will be subject to NYSE Arca Equities Rule 8.900(d)(2)(C), which sets forth circumstances under which Shares of the Funds will be halted. In addition, as noted above, investors will have ready access to the VIIV, and quotation and last sale information for the Shares. The Shares will conform to the initial and continued listing criteria under proposed Rule 8.900. The Funds will not invest in futures, forwards or swaps. Each Fund's investments will be consistent with its investment objective and will not be used to enhance leverage. While a Fund may invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X, -2X, 3X or -3X) ETFs. The Funds will not invest in non-U.S. listed securities. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of actively-managed exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, as noted above, investors will have ready access to information regarding the VIIV and quotation and last sale information for the Shares. B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes the proposed rule change would permit listing and trading of another type of actively-managed ETF that has characteristics different from existing actively-managed and index ETFs, and would introduce additional competition among various ETF products to the benefit of investors. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: 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-2017-36 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSEArca-2017-36. This [[Page 20945]] 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 the filing 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-2017-36 and should be submitted on or before May 25, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\46\ --------------------------------------------------------------------------- \46\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-08980 Filed 5-3-17; 8:45 am] BILLING CODE 8011-01-P
![20932 Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices
For the Commission, by the Division of II. Self-Regulatory Organization’s trading on the Corporation of such
Investment Management, pursuant to Statement of the Purpose of, and securities. Proposed Rule 8.900(b)
delegated authority. Statutory Basis for, the Proposed Rule provides further that Managed Portfolio
Eduardo A. Aleman, Change Shares are included within the
Assistant Secretary. In its filing with the Commission, the definition of ‘‘security’’ or ‘‘securities’’
[FR Doc. 2017–08984 Filed 5–3–17; 8:45 am] self-regulatory organization included as such terms are used in the Rules of
statements concerning the purpose of, the Corporation.
BILLING CODE 8011–01–P
and basis for, the proposed rule change Proposed Definitions
and discussed any comments it received Proposed Rule 8.900(c)(1) defines the
SECURITIES AND EXCHANGE on the proposed rule change. The text term ‘‘Managed Portfolio Share’’ as a
COMMISSION of those statements may be examined at security that (a) is issued by a registered
the places specified in Item IV below. investment company (‘‘Investment
[Release No. 34–80553; File No. SR– The Exchange has prepared summaries, Company’’) organized as an open-end
NYSEArca–2017–36] set forth in sections A, B, and C below, management investment company or
of the most significant parts of such similar entity, that invests in a portfolio
Self-Regulatory Organizations; NYSE statements. of securities selected by the Investment
Arca, Inc.; Notice of Filing of Proposed A. Self-Regulatory Organization’s Company’s investment adviser
Rule Change To Adopt a New NYSE Statement of the Purpose of, and the consistent with the Investment
Arca Equities Rule 8.900 and To List Statutory Basis for, the Proposed Rule Company’s investment objectives and
and Trade Shares of the Royce Change policies; and (b) when aggregated in a
Pennsylvania ETF; Royce Premier ETF; number of shares equal to a Redemption
and Royce Total Return ETF Under 1. Purpose Unit or multiples thereof, may be
Proposed NYSE Arca Equities Rule The Exchange proposes to add new redeemed at the request of an
8.900 NYSE Arca Equities Rule 8.900 for the Authorized Participant (as defined in
purpose of permitting the listing and the Investment Company’s Form N–1A
April 28, 2017. trading, or trading pursuant to unlisted filed with the SEC), which Authorized
Pursuant to Section 19(b)(1) 1 of the trading privileges (‘‘UTP’’), of Managed Participant will be paid, through its own
Securities Exchange Act of 1934 (the Portfolio Shares, which are securities separate confidential account
‘‘Act’’) 2 and Rule 19b–4 thereunder,3 issued by an actively managed open-end established for its benefit, a portfolio of
notice is hereby given that, on April 14, investment management company.4 securities and/or cash with a value
2017, NYSE Arca, Inc. (the ‘‘Exchange,’’ In addition to the above-mentioned equal to the next determined net asset
‘‘NYSE Arca,’’ or the ‘‘Corporation’’) proposed rule changes, the Exchange value (‘‘NAV’’).
filed with the Securities and Exchange proposes to list and trade shares Proposed Rule 8.900(c)(2) defines the
Commission (the ‘‘Commission’’) the (‘‘Shares’’) of the following under term ‘‘Verified Intraday Indicative Value
proposed rule change as described in proposed NYSE Arca Equities Rule (‘‘VIIV’’) as the estimated indicative
Items I, II, and III below, which Items 8.900: Royce Pennsylvania ETF; Royce value of a Managed Portfolio Share
have been prepared by the self- Premier ETF; and Royce Total Return based on all of the issuer’s holdings as
regulatory organization. The ETF (each, a ‘‘Fund’’ and, collectively, of the close of business on the prior
Commission is publishing this notice to the ‘‘Funds’’). business day, priced and disseminated
solicit comments on the proposed rule in one second intervals, and subject to
Proposed Listing Rules validation by a pricing verification agent
change from interested persons.
Proposed Rule 8.900(a) provides that of the Investment Company that is
I. Self-Regulatory Organization’s the Corporation will consider for responsible for comparing multiple
Statement of the Terms of Substance of trading, whether by listing or pursuant independent pricing sources to establish
the Proposed Rule Change to UTP, Managed Portfolio Shares that the accuracy of the VIIV.
meet the criteria of Rule 8.900. Proposed Rule 8.900(c)(3) defines the
The Exchange proposes to adopt a Proposed Rule 8.900(b) provides that term ‘‘Redemption Unit’’ as a specified
new NYSE Arca Equities Rule 8.900 to Rule 8.900 is applicable only to number of Managed Portfolio Shares.
permit it to list and trade Managed Managed Portfolio Shares and that, Proposed Rule 8.900(c)(4) defines the
Portfolio Shares, which are shares of except to the extent inconsistent with term ‘‘Reporting Authority’’ in respect
actively managed exchange-traded Rule 8.900, or unless the context of a particular series of Managed
funds (‘‘ETFs’’) for which the portfolio otherwise requires, the rules and Portfolio Shares as a reporting service
is disclosed in accordance with procedures of the Corporation’s Board of designated by the issuer as the official
standard mutual fund disclosure rules. Directors shall be applicable to the source for calculating and reporting
In addition, the Exchange proposes to information relating to such series,
list and trade shares of the following 4 A Managed Portfolio Share is a security that
including, but not limited to, the VIIV,
under proposed NYSE Arca Equities represents an interest in an investment company NAV, or other information relating to
registered under the Investment Company Act of
Rule 8.900: Royce Pennsylvania ETF; 1940 (15 U.S.C. 80a–1) (‘‘1940 Act’’) organized as the issuance, redemption or trading of
Royce Premier ETF; and Royce Total an open-end investment company or similar entity Managed Portfolio Shares. A series of
Return ETF. The proposed change is that invests in a portfolio of securities selected by Managed Portfolio Shares may have
pmangrum on DSK3GDR082PROD with NOTICES
available on the Exchange’s Web site at its investment adviser consistent with its more than one Reporting Authority,
investment objectives and policies. In contrast, an
www.nyse.com, at the principal office of open-end investment company that issues each having different functions.
the Exchange, and at the Commission’s Investment Company Units, listed and traded on Proposed Rule 8.900(d) sets forth
Public Reference Room. the Exchange under NYSE Arca Equities Rule initial and continued listing criteria
5.2(j)(3) (‘‘Index ETFs’’), seeks to provide applicable to Managed Portfolio Shares.
investment results that correspond generally to the
1 15 U.S.C. 78s(b)(1). price and yield performance of a specific foreign or
Proposed Rule 8.900(d)(1)(A) provides
2 15 U.S.C. 78a. domestic stock index, fixed income securities index that, for each series of Managed
3 17 CFR 240.19b–4. or combination thereof. Portfolio Shares, the Corporation will
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the Exchange will implement written Portfolio’’ is required to be disseminated p.m., Eastern Time (‘‘E.T.’’)). The
surveillance procedures for Managed at least once daily,8 the portfolio for an dissemination of the VIIV will allow
Portfolio Shares. issue of Managed Portfolio Shares will investors to determine the estimated
Proposed Commentary .04 to NYSE be disclosed quarterly in accordance intra-day value of the underlying
Arca Equities Rule 8.900 provides that with normal disclosure requirements portfolio of a series of Managed
Authorized Participants (as defined in otherwise applicable to open-end Portfolio Shares on a daily basis and
the Investment Company’s Form N–1A investment companies registered under will provide a close estimate of that
filed with the SEC) or non-Authorized the 1940 Act.9 Second, in connection value throughout the trading day. The
Participant market makers redeeming with the redemption of shares in VIIV should not be viewed as a ‘‘real-
Managed Portfolio Shares will sign an ‘‘Redemption Unit’’ size (as described time’’ update of the NAV per Share of
agreement with an agent (‘‘Trusted below), the delivery of any portfolio each Fund because the VIIV may not be
Agent’’) to establish a confidential securities in kind will generally be calculated in the same manner as the
account for the benefit of such effected through a ‘‘Confidential NAV, which will be computed once a
Authorized Participant or non- Account’’ (as described below) for the day, generally at the end of the business
Authorized Participant market maker benefit of the redeeming ‘‘Authorized day. Unlike the VIIV, which will be
that will receive all consideration from Participant’’ (as described below in based on consolidated midpoint of the
the issuer in a redemption. A Trusted ‘‘Creation and Redemption of Shares’’) bid ask spread, the NAV per Share will
Agent may not disclose the without disclosing the identity of such be based on the closing price on the
consideration received in a redemption securities to the Authorized Participant. primary market for each portfolio
except as required by law or as provided For each series of Managed Portfolio security. If there is no closing price for
in the Investment Company’s Form N– Shares, an estimated value—the VIIV— a particular portfolio security, such as
1A, as applicable that reflects an estimated intraday value when it the [sic] subject of a trading
Proposed Commentary .05 to NYSE of a fund’s portfolio will be halt, a Fund will use fair value pricing.
Arca Equities Rule 8.900 provides that, disseminated. With respect to the That fair value pricing will be carried
if the investment adviser to the Funds, the VIIV will be based upon all over to the next day’s VIIV until the first
Investment Company issuing Managed of a Fund’s holdings as of the close of trade in that stock is reported unless the
Portfolio Shares is affiliated with a the prior business day and will be ‘‘Adviser’’ (defined below) deems a
broker-dealer, or if any Trusted Agent is widely disseminated by one or more particular portfolio security to be
registered as a broker-dealer or is major market data vendors every second illiquid and/or the available ongoing
affiliated with a broker-dealer, such during the Exchange’s Core Trading pricing information unlikely to be
investment adviser or Trusted Agent Session (normally, 9:30 a.m. to 4:00 reliable. In such case, that fact will be
will erect and maintain a ‘‘fire wall’’ immediately disclosed on each Fund’s
between the investment adviser or issues of Managed Fund Shares under Rule 8.600. Web site, including the identity and
Trusted Agent and (i) personnel of the See, e.g., Securities Exchange Act Release Nos. weighting of that security in a Fund’s
57801 (May 8, 2008), 73 FR 27878 (May 14, 2008)
broker-dealer or broker-dealer affiliate, (SR–NYSEArca–2008–31) (order approving portfolio, and the impact of that security
as applicable, or (ii) the Authorized Exchange listing and trading of twelve actively- on VIIV calculation, including the fair
Participant or non-Authorized managed funds of the WisdomTree Trust); 60460 value price for that security being used
Participant market maker, as applicable, (August 7, 2009), 74 FR 41468 (August 17, 2009)
(SR–NYSEArca–2009–55) (order approving listing
for the calculation of that day’s VIIV.
with respect to access to information of Dent Tactical ETF); 63076 (October 12, 2010), 75 The Exchange, after consulting with
concerning the composition and/or FR 63874 (October 18, 2010) (SR–NYSEArca–2010– various Lead Market Makers that trade
changes to such Investment Company 79) (order approving Exchange listing and trading exchange-traded funds (‘‘ETFs’’) on the
portfolio. Personnel who make of Cambria Global Tactical ETF); 63802 (January 31,
2011), 76 FR 6503 (February 4, 2011) (SR–
Exchange, believes that market makers
decisions on the Investment Company’s NYSEArca–2010–118) (order approving Exchange will be able to make efficient and liquid
portfolio composition must be subject to listing and trading of the SiM Dynamic Allocation markets priced near the VIIV as long as
procedures designed to prevent the use Diversified Income ETF and SiM Dynamic a VIIV is disseminated every second,
and dissemination of material Allocation Growth Income ETF). More recently, the
Commission approved a proposed rule change to
market makers have knowledge of a
nonpublic information regarding the adopt generic listing standards for Managed Fund Fund’s means of achieving its
applicable Investment Company Shares. Securities Exchange Act Release No. 78397 investment objective, and market
portfolio.6 (July 22, 2016), 81 FR 49320 (July 27, 2016 (SR– makers are permitted to engage in ‘‘Bona
NYSEArca–2015–110) ( amending NYSE Arca
Key Features of Managed Portfolio Equities Rule 8.600 to adopt generic listing Fide Arbitrage,’’ as described below.
Shares standards for Managed Fund Shares). The Exchange believes that market
8 NYSE Arca Equities Rule 8.600(c)(2) defines the makers will employ Bona Fide Arbitrage
While funds issuing Managed term ‘‘Disclosed Portfolio’’ as the identities and in addition to risk-management
Portfolio Shares will be actively- quantities of the securities and other assets held by
techniques such as ‘‘statistical
managed and, to that extent, will be the Investment Company that will form the basis for
the Investment Company’s calculation of net asset arbitrage,’’ which is currently used
similar to Managed Fund Shares, value at the end of the business day. NYSE Arca throughout the financial services
Managed Portfolio Shares differ from Equities Rule 8.600(d)(2)(B)(i) requires that the industry, to make efficient markets in
Managed Fund Shares in the following Disclosed Portfolio will be disseminated at least
once daily and will be made available to all market exchange-traded products.10 This ability
important respects. First, in contrast to participants at the same time.
Managed Fund Shares, which are 9 A mutual fund is required to file with the 10 Statistical arbitrage enables a trader to
actively-managed funds listed and Commission its complete portfolio schedules for the construct an accurate proxy for another instrument,
pmangrum on DSK3GDR082PROD with NOTICES
traded under NYSE Arca Equities Rule second and fourth fiscal quarters on Form N–CSR allowing it to hedge the other instrument or buy or
under the 1940 Act, and is required to file its sell the instrument when it is cheap or expensive
8.600 7 and for which a ‘‘Disclosed in relation to the proxy. Statistical analysis permits
complete portfolio schedules for the first and third
fiscal quarters on Form N–Q under the 1940 Act, traders to discover correlations based purely on
6 The Exchange will propose applicable NYSE
within 60 days of the end of the quarter. Form N– trading data without regard to other fundamental
Arca Equities listing fees for Managed Portfolio Q requires funds to file the same schedules of drivers. These correlations are a function of
Shares in the NYSE Arca Equities Schedule of Fees investments that are required in annual and semi- differentials, over time, between one instrument or
and Charges via a separate proposed rule change. annual reports to shareholders. These forms are group of instruments and one or more other
7 The Commission has previously approved available to the public on the Commission’s Web instruments. Once the nature of these price
listing and trading on the Exchange of a number of site at www.sec.gov. deviations have been quantified, a universe of
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should permit market makers to make bringing the market price of Shares and it is mispriced relative to the others. For
efficient markets in an issue of Managed the value of a Fund’s portfolio securities Managed Portfolio Shares, market
Portfolio Shares without precise closer together. Similarly, an makers, in addition to employing Bona
knowledge of a Fund’s underlying Authorized Participant could buy Fide Arbitrage, may use the knowledge
portfolio.11 Shares and instruct the Trusted Agent to of a Fund’s means of achieving its
To enable market makers to engage in sell the underlying portfolio securities investment objective, as described in the
Bona Fide Arbitrage, on each ‘‘Business from its Confidential Account in an applicable Fund registration statement,
Day’’ (as defined below), before attempt to profit when a Fund’s Shares to construct a hedging proxy for a Fund
commencement of trading in Shares on are trading at a discount to its portfolio. to manage a market maker’s quoting risk
the Exchange, the Funds will provide to The Authorized Participant’s purchase in connection with trading Fund Shares.
a ‘‘Trusted Agent’’ (as described below) of a Fund’s Shares in the secondary Market makers can then conduct
of each Authorized Participant or ‘‘Non- market, combined with the sale of the statistical arbitrage between their
Authorized Participant Market portfolio securities from its Confidential hedging proxy (for example, the Russell
Maker’’ 12 the identities and quantities Account, may also create upward 1000 Index) and Shares of a Fund,
of portfolio securities that will form the pressure on the price of Shares and/or buying and selling one against the other
basis for a Fund’s calculation of NAV downward pressure on the price of over the course of the trading day. They
per Share at the end of the Business portfolio securities, driving the market will evaluate how their proxy performed
Day, as well as the names and quantities price of Shares and the value of a in comparison to the price of a Fund’s
of the instruments comprising a Fund’s portfolio securities closer Shares, and use that analysis as well as
‘‘Creation Basket’’ and the estimated together. The Adviser represents that it knowledge of risk metrics, such as
‘‘Balancing Amount’’ (if any) (as understands that, other than the volatility and turnover, to enhance their
described below), for that day. This confidential nature of the account, this
proxy calculation to make it a more
information will permit Authorized process is identical to how many
efficient hedge.
Participants to purchase ‘‘Creation Authorized Participants currently
Units’’ through an in-kind transaction arbitrage existing traditional ETFs. Market makers not intending to utilize
with a Fund, as described below. Because other market participants can Bona Fide Arbitrage have indicated to
In addition, Authorized Participants also engage in arbitrage activity without the Exchange that there will be
will be able to instruct the Trusted using the creation or redemption sufficient data to run a statistical
Agent to buy or sell portfolio securities processes described above, the analysis which will lead to spreads
during the day and thereby engage in Confidential Account structure will be being tightened substantially around the
Bona Fide Arbitrage throughout the made available to any Non-Authorized VIIV. This is similar to certain other
trading day. For example, if an Participant Market Maker that is willing existing exchange traded products (for
Authorized Participant believes that to establish a Confidential Account. In example, ETFs that invest in foreign
Shares of a Fund are trading at a price that case, if a market participant securities that do not trade during U.S.
that is higher than the value of its believes that a Fund is overvalued trading hours), in which spreads may be
underlying portfolio based on the VIIV, relative to its underlying assets, the generally wider in the early days of
the Authorized Participant may sell market participant may sell short Shares trading and then narrow as market
Shares short and instruct the Trusted and instruct its Trusted Agent to buy makers gain more confidence in their
Agent to buy portfolio securities for its portfolio securities in its Confidential real-time hedges.
Confidential Account. When the market Account, wait for the trading prices to
move toward parity, and then close out Description of the Funds and the Trust
price of a Fund’s Shares falls in line
with the value of the portfolio, the the positions in both the Shares and the
The Shares of each Fund will be
Authorized Participant can then close portfolio securities to realize a profit
issued by Precidian ETFs Trust [sic]
out its positions in both the Shares and from the relative movement of their
(‘‘Trust’’), a statutory trust organized
the portfolio securities. The Authorized trading prices. Similarly, a market
participant could buy Shares and under the laws of the State of Delaware
Participant’s purchase of the portfolio and registered with the Commission as
securities into its Confidential Account, instruct the Trusted Agent to sell the
underlying portfolio securities in an an open-end management investment
combined with the sale of Shares, may company.13 The investment adviser to
also create downward pressure on the attempt to profit when a Fund’s Shares
are trading at a discount to a Fund’s the Trust will be Precidian Funds LLC
price of Shares and/or upward pressure (the ‘‘Adviser’’). Foreside Fund
on the price of the portfolio securities, underlying or reference assets. Any
investor that is willing to transact
13 The Trust will be registered under the 1940
securities is searched in an effort to, in the case of
through a broker-dealer that has
Act. On April 5, 2017, the Trust filed a registration
a hedging strategy, minimize the differential. Once established a Confidential Account with statement on Form N–1A under the Securities Act
a suitable hedging proxy has been identified, a a Trusted Agent will have the same of 1933 (the ‘‘1933 Act’’) (15 U.S.C. 77a), and under
trader can minimize portfolio risk by executing the opportunity to engage in arbitrage the 1940 Act relating to the Funds (File Nos. 333–
hedging basket. The trader then can monitor the 171987 and 811–22524) [sic] (the ‘‘Registration
performance of this hedge throughout the trade
activity. As discussed above, the trading
Statement’’). The Trust filed an amended
period making correction where warranted. of a Fund’s Shares and the Fund’s Application for an Order under Section 6(c) of the
11 Authorized Participants and other broker- portfolio securities may bring the prices 1940 Act for exemptions from various provisions of
dealers that enter into their own separate of a Fund’s Shares and its portfolio the 1940 Act and rules thereunder (File No. 812–
Confidential Accounts shall have enough assets closer together through market 14405), dated September 21, 2015 [sic] (‘‘Exemptive
information to ensure that they are able to comply
pmangrum on DSK3GDR082PROD with NOTICES
pressure. This type of arbitrage is Application’’). The Shares will not be listed on the
with applicable regulatory requirements. For Exchange until an order (‘‘Exemptive Order’’) under
example, for purposes of net capital requirements, referred to herein as ‘‘Bona Fide the 1940 Act has been issued by the Commission
the maximum Securities Haircut applicable to the Arbitrage.’’ with respect to the Exemptive Application.
securities in a Creation Basket, as determined under The Exchange understands that Investments made by the Funds will comply with
Rule 15c3–1, will be disclosed daily on each Fund’s traders use statistical analysis to derive the conditions set forth in the Exemptive Order.
Web site. The description of the operation of the Trust and
12 A Non-Authorized Participant Market Maker is correlations between different sets of the Funds herein is based, in part, on the
a market participant that makes a market in Shares, instruments to identify opportunities to Registration Statement and the Exemptive
but is not an Authorized Participant. buy or sell one set of instruments when Application.
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![Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices 20937
the time of investment),17 consistent Creations and Redemptions of Shares price of a Creation Unit initial [sic] will
with Commission guidance. Each Fund In connection with the creation and range from $1,000,000 to $5,000,000.
will monitor its portfolio liquidity on an In order to keep costs low and permit
redemption of Creation Units (defined
ongoing basis to determine whether, in each Fund to be as fully invested as
below), the delivery or receipt of any
light of current circumstances, an possible, Shares will be purchased and
portfolio securities in-kind will be
adequate level of liquidity is being redeemed in Creation Units and
required to be effected through a
maintained, and will consider taking generally on an in-kind basis.
separate confidential brokerage account
appropriate steps in order to maintain Accordingly, except where the purchase
(i.e., a Confidential Account) with a or redemption will include cash under
adequate liquidity if, through a change
Trusted Agent,20 which will be a bank the circumstances described in the
in values, net assets, or other
or broker-dealer such as JP Morgan Registration Statement, purchasers will
circumstances, more than 15% of a
Chase, State Street Bank and Trust, or be required to purchase Creation Units
Fund’s net assets are invested in illiquid
Bank of New York Mellon, for the by making an in-kind deposit of
assets. Illiquid assets include securities
benefit of an Authorized Participant.21 specified instruments (‘‘Deposit
subject to contractual or other
An Authorized Participant will Instruments’’), and shareholders
restrictions on resale and other
generally be a Depository Trust redeeming their Shares will receive an
instruments that lack readily available
markets as determined in accordance Company (‘‘DTC’’) Participant that has in-kind transfer of specified instruments
with Commission staff guidance.18 executed a ‘‘Participant Agreement’’ (‘‘Redemption Instruments’’).22 On any
According to the Registration with the Distributor with respect to the given Business Day, the names and
Statement, each Fund will seek to creation and redemption of Creation quantities of the instruments that
qualify for treatment as a Regulated Units and formed a Confidential constitute the Deposit Instruments and
Investment Company (‘‘RIC’’) under the Account for its benefit in accordance the names and quantities of the
Internal Revenue Code.19 with the terms of the Participant instruments that constitute the
The Shares of each Fund will conform Agreement. For purposes of creations or Redemption Instruments will be
to the initial and continued listing redemptions, all transactions will be identical, and these instruments may be
criteria under proposed Rule 8.900. The effected through the respective referred to, in the case of either a
Funds will not invest in futures, Authorized Participant’s Confidential purchase or a redemption, as the
forwards or swaps. Account, for the benefit of the ‘‘Creation Basket.’’ 23
Each Fund’s investments will be Authorized Participant without As noted above, each Authorized
consistent with its investment objective disclosing the identity of such securities Participant will be required to establish
and will not be used to enhance to the Authorized Participant. Each a Confidential Account with a Trusted
leverage. While a Fund may invest in Trusted Agent will be given, before the Agent and transact with each Fund
inverse ETFs, a Fund will not invest in commencement of trading each through that Confidential Account.24
leveraged (e.g., 2X, ¥2X, 3X or ¥3X) Business Day (defined below), both the Therefore, before the commencement of
ETFs. holdings of a Fund and their relative trading on each Business Day, the
The Funds will not invest in non- weightings for that day. This Trusted Agent of each Authorized
U.S.-listed securities. information will permit an Authorized Participant will be provided, on a
Participant, or other market participant confidential basis, with a list of the
17 In reaching liquidity decisions, the Adviser that has established a Confidential names and quantities of the instruments
may consider the following factors: The frequency Account with a Trusted Agent, to comprising a Creation Basket, as well as
of trades and quotes for the security; the number of
dealers wishing to purchase or sell the security and
instruct the Trusted Agent to buy and the estimated Balancing Amount (if
the number of other potential purchasers; dealer sell positions in the portfolio securities any), for that day. The published
undertakings to make a market in the security; and to permit Bona Fide Arbitrage, as Creation Basket will apply until a new
the nature of the security and the nature of the defined above. Creation Basket is announced on the
marketplace in which it trades (e.g., the time
needed to dispose of the security, the method of
Shares of each Fund will be issued in following Business Day, and there will
soliciting offers and the mechanics of transfer). Creation Units of 25,000 or more Shares. be no intra-day changes to the Creation
18 The Commission has stated that long-standing The Funds will offer and sell Creation Basket except to correct errors in the
Commission guidelines have required open-end Units through the Distributor on a
funds to hold no more than 15% of their net assets continuous basis at the NAV per Share 22 The Funds must comply with the federal
in illiquid securities and other illiquid assets. See securities laws in accepting Deposit Instruments
Investment Company Act Release No. 28193 (March next determined after receipt of an order
and satisfying redemptions with Redemption
11, 2008), 73 FR 14618 (March 18, 2008), footnote in proper form. The NAV per Share of Instruments, including that the Deposit Instruments
34. See also, Investment Company Act Release No. each Fund will be determined as of the and Redemption Instruments are sold in
5847 (October 21, 1969), 35 FR 19989 (December close of regular trading on the New York transactions that would be exempt from registration
31, 1970) (Statement Regarding ‘‘Restricted under the 1933 Act.
Securities’’); Investment Company Act Release No. Stock Exchange (‘‘NYSE’’) on each day 23 In determining whether a particular Fund will
18612 (March 12, 1992), 57 FR 9828 (March 20, that the NYSE is open. A ‘‘Business sell or redeem Creation Units entirely on a cash or
1992) (Revisions of Guidelines to Form N–1A). A Day’’ is defined as any day that the in-kind basis, whether for a given day or a given
fund’s portfolio security is illiquid if it cannot be Trust is open for business. The Funds order, the key consideration will be the benefit that
disposed of in the ordinary course of business would accrue to a Fund and its investors. The
within seven days at approximately the value will sell and redeem Creation Units only Adviser represents that the Funds do not currently
ascribed to it by the fund. See Investment Company on Business Days. Applicants anticipate anticipate the need to sell or redeem Creation Units
Act Release No. 14983 (March 12, 1986), 51 FR that the initially [sic] price of a Share entirely on a cash basis.
9773 (March 21, 1986) (adopting amendments to will range from $20 to $30, and that the 24 The Adviser represents that transacting through
Rule 2a–7 under the 1940 Act); Investment
pmangrum on DSK3GDR082PROD with NOTICES
a Confidential Account is similar to transacting
Company Act Release No. 17452 (April 23, 1990), through any broker-dealer account, except that the
55 FR 17933 (April 30, 1990) (adopting Rule 144A 20 Each Authorized Participant shall enter into its
Trusted Agent will be bound to keep the names and
under the Securities Act of 1933). The Commission own separate Confidential Account with a Trusted weights of the portfolio securities confidential. To
recently codified this long standing position in Rule Agent. comply with certain recordkeeping requirements
22e–4. See Investment Company Act Release No. 21 In the event that a Trusted Agent is a bank, the applicable to Authorized Participants, the Trusted
32315 (October 13, 2016), 81 FR 82142 (November bank will be required to have an affiliated broker- Agent will maintain and preserve, and make
18, 2016) (adopting requirements for investment dealer to accommodate the execution of hedging available to the Commission, certain required
company liquidity risk management programs). transactions on behalf of the holder of a records related to the securities held in the
19 26 U.S.C. 851. Confidential Account. Confidential Account.
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![Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices 20941
appropriate, but not less than annually. violations of Exchange rules and which imposes a duty of due diligence
The specific methodology for applicable federal securities laws.36 The on its ETP Holders to learn the essential
calculating the VIIV will be disclosed on Exchange represents that these facts relating to every customer prior to
each Fund’s Web site. procedures are adequate to properly trading the Shares; (4) [sic] how
monitor Exchange trading of the Shares information regarding the VIIV is
Trading Halts
in all trading sessions and to deter and disseminated; (5) the requirement that
With respect to trading halts, the detect violations of Exchange rules and ETP Holders deliver a prospectus to
Exchange may consider all relevant federal securities laws applicable to investors purchasing newly issued
factors in exercising its discretion to trading on the Exchange. Shares prior to or concurrently with the
halt or suspend trading in the Shares of The surveillances referred to above confirmation of a transaction; and (6)
the Funds.34 Trading in Shares of the generally focus on detecting securities trading information.
Funds will be halted if the circuit trading outside their normal patterns, In addition, the Bulletin will
breaker parameters in NYSE Arca which could be indicative of reference that the Funds are subject to
Equities Rule 7.12 have been reached. manipulative or other violative activity. various fees and expenses described in
Trading also may be halted because of When such situations are detected, the Registration Statement. The Bulletin
market conditions or for reasons that, in surveillance analysis follows and will discuss any exemptive, no-action,
the view of the Exchange, make trading investigations are opened, where and interpretive relief granted by the
in the Shares inadvisable. Trading in the appropriate, to review the behavior of Commission from any rules under the
Shares will be subject to NYSE Arca all relevant parties for all relevant Act. The Bulletin will also disclose that
Equities Rule 8.900(d)(2)(C), which sets trading violations. the NAV for the Shares will be
forth circumstances under which Shares The Exchange or FINRA, on behalf of calculated after 4:00 p.m., E.T. each
of the Funds will be halted. the Exchange, or both, will trading day.
communicate as needed regarding
Trading Rules 2. Statutory Basis
trading in the Shares, underlying stocks,
The Exchange deems the Shares to be ETFs and exchange-listed options with The Exchange believes that the
equity securities, thus rendering trading other markets and other entities that are proposed rule change is consistent with
in the Shares subject to the Exchange’s members of the Intermarket Section 6(b) of the Act,38 in general, and
existing rules governing the trading of Surveillance Group (‘‘ISG’’), and the furthers the objectives of Section 6(b)(5)
equity securities. Shares will trade on Exchange or FINRA, on behalf of the of the Act,39 in particular, in that it is
the NYSE Arca Marketplace only during Exchange, or both, may obtain trading designed to prevent fraudulent and
the Core Trading Session in accordance information regarding trading such manipulative acts and practices, to
with NYSE Arca Equities Rule securities from such markets and other promote just and equitable principles of
7.34(a)(2). As provided in NYSE Arca entities. In addition, the Exchange may trade, to remove impediments to and
Equities Rule 7.6, the minimum price obtain information regarding trading in perfect the mechanism of a free and
variation (‘‘MPV’’) for quoting and entry the Shares, underlying stocks, ETFs and open market and a national market
of orders in equity securities traded on exchange-listed options from markets system, and, in general, to protect
the NYSE Arca Marketplace is $0.01, and other entities that are members of investors and the public interest.
with the exception of securities that are ISG or with which the Exchange has in The Exchange believes that proposed
priced less than $1.00 for which the place a comprehensive surveillance Rule 8.900 is designed to prevent
MPV for order entry is $0.0001. sharing agreement.37 fraudulent and manipulative acts and
The Shares will conform to the initial The Funds’ Adviser will make practices in that the proposed rules
and continued listing criteria under available daily to FINRA and the relating to listing and trading of
NYSE Arca Equities Rule 8.900. The Exchange the portfolio holdings of each Managed Portfolio Shares provide
Exchange represents that, for initial Fund in order to facilitate the specific initial and continued listing
and/or continued listing, each Fund will performance of the surveillances criteria required to be met by such
be in compliance with Rule 10A–3 referred to above. securities. Proposed Rule 8.900(d) sets
under the Act,35 as provided by NYSE In addition, the Exchange also has a forth initial and continued listing
Arca Equities Rule 5.3. A minimum of general policy prohibiting the criteria applicable to Managed Portfolio
100,000 Shares of each Fund will be distribution of material, non-public Shares. Proposed Rule 8.900(d)(1)
outstanding at the commencement of information by its employees. provides that, for each series of
trading on the Exchange. The Exchange Managed Portfolio Shares, the
Information Bulletin Corporation will establish a minimum
will obtain a representation from the
issuer of the Shares of each Fund that Prior to the commencement of number of Managed Portfolio Shares
the NAV per Share of each Fund will be trading, the Exchange will inform its required to be outstanding at the time of
calculated daily and will be made Equity Trading Permit (‘‘ETP’’) Holders commencement of trading. In addition,
available to all market participants at in an Information Bulletin (‘‘Bulletin’’) the Corporation will obtain a
the same time. of the special characteristics and risks representation from the issuer of each
associated with trading the Shares. series of Managed Portfolio Shares that
Surveillance Specifically, the Bulletin will discuss the NAV per share for the series will be
The Exchange represents that trading the following: (1) The procedures for calculated daily and that the NAV will
in the Shares will be subject to the purchases and redemptions of Shares; be made available to all market
pmangrum on DSK3GDR082PROD with NOTICES
existing trading surveillances, (2) NYSE Arca Equities Rule 9.2(a), participants at the same time. Proposed
administered by the Exchange, as well Rule 8.900(d)(2) provides that each
as cross-market surveillances 36 FINRA conducts cross-market surveillances on
series of Managed Portfolio Shares will
administered by FINRA on behalf of the behalf of the Exchange pursuant to a regulatory be listed and traded subject to
services agreement. The Exchange is responsible for
Exchange, which are designed to detect FINRA’s performance under this regulatory services application of the specified continued
agreement.
34 See NYSE Arca Equities Rule 7.12. 37 For a list of the current members of ISG, see 38 15 U.S.C. 78f(b).
35 See 17 CFR 240.10A–3. www.isgportal.org. 39 15 U.S.C. 78f(b)(5).
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![Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices 20943
analysis which will lead to spreads have pricing characteristics very similar positions in correlated assets 43 or by
being tightened substantially around to ETFs that can be arbitraged in this netting the exposure against other,
VIIV. This is similar to certain other manner. For example, index-based ETFs offsetting trading positions—much as
existing exchange traded products (for containing securities that trade during such firms do with existing ETFs and
example, ETFs that invest in foreign different trading hours than the ETF, other equities. Disclosure of a fund’s
securities that do not trade during U.S. such as ETFs that hold Asian stocks, investment objective and principal
trading hours), in which spreads may be have demonstrated efficient pricing investment strategies in its prospectus
generally wider in the early days of characteristics notwithstanding the and SAI, along with the dissemination
trading and then narrow as market inability of market professionals to of the VIIV every second, should permit
makers gain more confidence in their engage in ‘‘riskless arbitrage’’ with professional investors to engage easily
real-time hedges. respect to the underlying portfolio for in this type of hedging activity.44
The Lead Market Makers also most, or even all, of the U.S. trading day With respect to trading of Shares of
indicated that, as with some other new when Asian markets are closed. Pricing the Funds, the ability of market
exchange-traded products, spreads may for shares of such ETFs is efficient participants to buy and sell Shares at
be generally wider in the early days of because market professionals are still prices near the VIIV is dependent upon
trading and would tend to narrow as their assessment that the VIIV is a
able to hedge their positions with
market makers gain more confidence in reliable, indicative real-time value for a
offsetting, correlated positions in
the accuracy of their hedges and their Fund’s underlying holdings. Market
derivative instruments during the entire
ability to adjust these hedges in real- participants are expected to accept the
trading day.
time relative to the published VIIV and VIIV as a reliable, indicative real-time
gain an understanding of the applicable The real-time dissemination of a value because (1) the VIIV will be
market risk metrics such as volatility fund’s VIIV, the ability for market calculated and disseminated based on a
and turnover, and as natural buyers and makers to engage is [sic] riskless Fund’s actual portfolio holdings, (2) the
sellers enter the market. Other relevant arbitrage through the Bona Fide securities in which the Funds plan to
factors cited by Lead Market Makers Arbitrage mechanism, together with the
were that a fund’s investment objectives right of Authorized Participants to 43 Price correlation trading is used throughout the
are clearly disclosed in the applicable create and redeem each day at the NAV, financial industry. It is used to discover both
trading opportunities to be exploited, such as
prospectus, the existence of quarterly will be sufficient for market participants currency pairs and statistical arbitrage, as well as
portfolio disclosure, the capacity to to value and trade shares in a manner for risk mitigation such as dispersion trading and
engage in Bona Fide Arbitrage and the that will not lead to significant beta hedging. These correlations are a function of
ability to create shares in creation unit deviations between the shares’ Bid/Ask differentials, over time, between one or multiple
size. securities pricing. Once the nature of these price
Price and NAV. deviations have been quantified, a universe of
The Commission’s concept release
The pricing efficiency with respect to securities is searched in an effort to, in the case of
regarding ‘‘Actively Managed Exchange- a hedging strategy, minimize the differential. Once
trading a series of Managed Portfolio
Traded Funds’’ highlighted several a suitable hedging basket has been identified, a
Shares will generally rest on the ability trader can minimize portfolio risk by executing the
issues that could impact the
of market participants to arbitrage hedging basket. The trader then can monitor the
Commission’s willingness to authorize performance of this hedge throughout the trade
the operation of an actively-managed between the shares and a fund’s
period, making corrections where warranted.
ETF, including whether effective portfolio, in addition to the ability of 44 With respect to trading in Shares of the Funds,
arbitrage of the ETF shares exists.41 The market participants to assess a fund’s market participants would manage risk in a variety
Concept Release identifies the underlying value accurately enough of ways. In addition to Bona Fide Arbitrage, it is
transparency of a fund’s portfolio and throughout the trading day in order to expected that market participants will be able to
hedge positions in shares effectively. determine how to trade Shares at levels
the liquidity of the securities in a fund’s approximating the VIIV without taking undue risk
portfolio as central to effective arbitrage. Professional traders not employing Bona by gaining experience with how various market
With respect to the Funds, the Funds’ Fide Arbitrage can buy shares that they factors (e.g., general market movements, sensitivity
use of U.S.-listed securities and the perceive to be trading at a price less of the VIIV to intraday movements in interest rates
or commodity prices, etc.) affect VIIV, and by
ability of market makers to engage in than that which will be available at a finding hedges for their long or short positions in
Bona Fide Arbitrage provide adequate subsequent time, and sell shares they Shares using instruments correlated with such
liquidity as well as the ability to engage perceive to be trading at a price higher factors. The Adviser expects that market
than that which will be available at a participants will initially determine the VIIV’s
in riskless arbitrage. Additionally, correlation to a major large capitalization equity
certain existing ETFs with portfolios of subsequent time. It is expected that, as benchmark with active derivative contracts, such as
foreign securities have shown their part of their normal day-to-day trading the Russell 1000 Index, and the degree of sensitivity
ability to trade efficiently in the activity, market makers assigned to of the VIIV to changes in that benchmark. For
shares by the Exchange, off-exchange example, using hypothetical numbers for
secondary market at approximately their illustrative purposes, market participants should be
NAV even though they do not provide market makers, firms that specialize in able to determine quickly that price movements in
opportunities for riskless arbitrage electronic trading, hedge funds and the Russell 1000 Index predict movements in a
transactions during much of the trading other professionals specializing in short- Fund’s VIIV 95% of the time (an acceptably high
term, non-fundamental trading correlation) but that the VIIV generally moves
day.42 Such ETFs have been shown to approximately half as much as the Russell 1000
strategies will assume the risk of being Index with each price movement. This information
41 See Investment Company Act Release No. ‘‘long’’ or ‘‘short’’ shares through such is sufficient for market participants to construct a
25258 (November 8, 2001) (the ‘‘Concept Release’’). trading and will hedge such risk wholly reasonable hedge—buy or sell an amount of futures,
pmangrum on DSK3GDR082PROD with NOTICES
42 The Adviser represents that the mechanics of swaps or ETFs that track the Russell 1000 equal to
or partly by simultaneously taking
arbitrage and hedging differ. Prior Rule 10a–1 and half the opposite exposure taken with respect to
Regulation T under the Act both describe arbitrage Shares. Market participants will also continuously
as either buying and selling the same security in asset at a higher price, thereby generating a profit compare the intraday performance of their hedge to
two different markets or buying and selling two on the difference. Hedging, on the other hand, a Fund’s VIIV. If the intraday performance of the
different securities, one of which is convertible into involves managing risk by purchasing or selling a hedge is correlated with the VIIV to the expected
the other. This is also known as a ‘‘riskless security or instrument that will track or offset the degree, market participants will feel comfortable
arbitrage’’ transaction in that the transaction is risk value of another security or instrument. Arbitrage they are appropriately hedged and can rely on the
free since it generally consists of buying an asset at and hedging are both used to manage risk; however, VIIV as appropriately indicative of a Fund’s
one price and simultaneously selling that same they involve different trading strategies. performance.
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![20944 Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices
invest are generally highly liquid and Quotation and last sale information for quotation and last sale information for
actively traded and therefore generally the Shares will be available via the CTA the Shares.
have accurate real time pricing high-speed line. Information regarding B. Self-Regulatory Organization’s
available, and (3) market participants the intra-day value of the Shares of a Statement on Burden on Competition
will have a daily opportunity to Fund, which is the VIIV as defined in
evaluate whether the VIIV at or near the proposed NYSE Arca Equities Rule The Exchange does not believe that
close of trading is indeed predictive of 8.900(c)(3), will be widely disseminated the proposed rule change will impose
the actual NAV. every second throughout the Exchange’s any burden on competition that is not
The real-time dissemination of a Core Trading Session by one or more necessary or appropriate in furtherance
Fund’s VIIV, the ability for market major market data vendors. The Web of the purposes of the Act. The
makers to engage is [sic] riskless site for the Funds will include a form of Exchange believes the proposed rule
arbitrage through the Bona Fide the prospectus for the Funds that may change would permit listing and trading
Arbitrage mechanism, together with the be downloaded, and additional data of another type of actively-managed ETF
ability of Authorized Participants to that has characteristics different from
relating to NAV and other applicable
create and redeem each day at the NAV, existing actively-managed and index
quantitative information, updated on a
will be crucial for market participants to ETFs, and would introduce additional
daily basis. Moreover, prior to the
value and trade Shares in a manner that competition among various ETF
will not lead to significant deviations commencement of trading, the Exchange
products to the benefit of investors.
between the Shares’ Bid/Ask Price and will inform its ETP Holders in an
NAV.45 Information Bulletin of the special C. Self-Regulatory Organization’s
In a typical index-based ETF, it is characteristics and risks associated with Statement on Comments on the
standard for Authorized Participants to trading the Shares. Trading in Shares of Proposed Rule Change Received From
know what securities must be delivered a Fund will be halted if the circuit Members, Participants, or Others
in a creation or will be received in a breaker parameters in NYSE Arca No written comments were solicited
redemption. For Managed Portfolio Equities Rule 7.12 have been reached or or received with respect to the proposed
Shares, however, Authorized because of market conditions or for rule change.
Participants do not need to know the reasons that, in the view of the
securities comprising the portfolio of a Exchange, make trading in the Shares III. Date of Effectiveness of the
Fund since creations and redemptions inadvisable. Trading in the Shares will Proposed Rule Change and Timing for
are handled through the Confidential be subject to NYSE Arca Equities Rule Commission Action
Account mechanism. The Adviser 8.900(d)(2)(C), which sets forth Within 45 days of the date of
represents that the in-kind creations and circumstances under which Shares of publication of this notice in the Federal
redemptions through a Confidential the Funds will be halted. In addition, as Register or up to 90 days (i) as the
Account will preserve the integrity of noted above, investors will have ready Commission may designate if it finds
the active investment strategy and access to the VIIV, and quotation and such longer period to be appropriate
eliminate the potential for ‘‘free riding’’ last sale information for the Shares. The and publishes its reasons for so finding
or ‘‘front-running,’’ while still providing Shares will conform to the initial and or (ii) as to which the self-regulatory
investors with the advantages of the ETF continued listing criteria under organization consents, the Commission
structure. proposed Rule 8.900. The Funds will will:
The proposed rule change is designed not invest in futures, forwards or swaps. (A) By order approve or disapprove
to promote just and equitable principles Each Fund’s investments will be the proposed rule change, or
of trade and to protect investors and the consistent with its investment objective (B) institute proceedings to determine
public interest in that the Exchange will and will not be used to enhance whether the proposed rule change
obtain a representation from the issuer leverage. While a Fund may invest in should be disapproved.
of an issue of Managed Portfolio Shares inverse ETFs, a Fund will not invest in
that the NAV per share of a fund will IV. Solicitation of Comments
leveraged (e.g., 2X, ¥2X, 3X or ¥3X)
be calculated daily and that the NAV ETFs. The Funds will not invest in non- Interested persons are invited to
and [sic] will be made available to all U.S. listed securities. submit written data, views, and
market participants at the same time. arguments concerning the foregoing,
Investors can also obtain a fund’s SAI, The proposed rule change is designed including whether the proposed rule
shareholder reports, and its Form N– to perfect the mechanism of a free and change is consistent with the Act.
CSR, Form N–Q and Form N–SAR. A open market and, in general, to protect Comments may be submitted by any of
fund’s SAI and shareholder reports will investors and the public interest in that the following methods:
be available free upon request from the it will facilitate the listing and trading
applicable fund, and those documents of an additional type of actively- Electronic Comments
and the Form N–CSR, Form N–Q and managed exchange-traded product that • Use the Commission’s Internet
Form N–SAR may be viewed on-screen will enhance competition among market comment form (http://www.sec.gov/
or downloaded from the Commission’s participants, to the benefit of investors rules/sro.shtml); or
Web site. In addition, with respect to and the marketplace. As noted above, • Send an email to rule-comments@
the Funds, a large amount of the Exchange has in place surveillance sec.gov. Please include File Number SR–
information will be publicly available procedures relating to trading in the NYSEArca–2017–36 on the subject line.
pmangrum on DSK3GDR082PROD with NOTICES
regarding the Funds and the Shares, Shares and may obtain information via
Paper Comments
thereby promoting market transparency. ISG from other exchanges that are
members of ISG or with which the • Send paper comments in triplicate
45 The statements in the Statutory Basis section of Exchange has entered into a to Secretary, Securities and Exchange
this filing relating to pricing efficiency, arbitrage, comprehensive surveillance sharing Commission, 100 F Street NE.,
and activities of market participants, including Washington, DC 20549–1090.
market makers and Authorized Participants, are
agreement. In addition, as noted above,
based on representations by the Adviser and review investors will have ready access to All submissions should refer to File
by the Exchange. information regarding the VIIV and Number SR–NYSEArca–2017–36. This
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![Federal Register / Vol. 82, No. 85 / Thursday, May 4, 2017 / Notices 20945
file number should be included on the (‘‘Act’’),1 and Rule 19b–4 thereunder.2 governing those Programs.9 First, to
subject line if email is used. To help the The proposed rule change was improve trade certainty and
Commission process and review your published for comment in the Federal transparency concerning clearing
comments more efficiently, please use Register on March 14, 2017.3 The member exposures, OCC proposes
only one method. The Commission will Commission did not receive any amendments to its rules governing the
post all comments on the Commission’s comment letters on the proposed rule Stock Loan Programs to do the
Internet Web site (http://www.sec.gov/ change. This order approves the following: (1) Require clearing members
rules/sro.shtml). Copies of the proposed rule change. to have policies and procedures to
submission, all subsequent I. Description of the Proposed Rule reconcile stock loan positions each
amendments, all written statements Change business day; (2) state explicitly that the
with respect to the proposed rule controlling record for stock loan
change that are filed with the OCC operates two Stock Loan positions for margin and other purposes
Commission, and all written Programs—the Hedge Program and is OCC’s ‘‘golden’’ record; and (3)
communications relating to the Market Loan Program—in which a provide that stock loan positions remain
proposed rule change between the participating clearing member can lend in effect until OCC’s records reflect
Commission and any person, other than an agreed-upon number of shares of stock loan terminations. Second, to
those that may be withheld from the eligible stock 4 to another clearing mitigate risks that may arise in the event
public in accordance with the member in exchange for an agreed-upon of a clearing member suspension, OCC
provisions of 5 U.S.C. 552, will be value of U.S. dollar cash collateral and proposes amendments to its rules
available for Web site viewing and then novate the loan to OCC for governing the Stock Loan Programs to
printing in the Commission’s Public clearing.5 The Hedge Program permits do the following: (1) Provide a two-day
Reference Room, 100 F Street NE., clearing members to bilaterally execute trading window in which clearing
Washington, DC 20549, on official stock loans and negotiate members must execute close-out
business days between the hours of collateralization and other terms before transactions, also known as ‘‘buy-in’’ or
10:00 a.m. and 3:00 p.m. Copies of the submitting such stock loans to OCC for ‘‘sell-out’’ transactions; (2) provide
filing also will be available for novation and clearing.6 The Market broad authority for OCC to use
inspection and copying at the principal Loan Program is operationally similar to reasonable prices to settle close-out
office of the Exchange. All comments the Hedge Program, but it permits transactions; and (3) permit OCC to
received will be posted without change; clearing members to execute stock loans close out and re-establish the matched-
through a multilateral loan market.7 In
the Commission does not edit personal book stock loan positions of a
each case, upon completion of the
identifying information from suspended Hedge Program clearing
novation process, OCC, in its capacity as
submissions. You should submit only member through termination by offset
a central counterparty, guarantees return
information that you wish to make and ‘‘re-matching’’ with other clearing
of (i) loaned stock, or that stock’s value,
available publicly. All submissions members. Each of these proposals is
to the lending clearing member, and (ii)
should refer to File Number SR– discussed in more detail below.
the value of cash collateral to the
NYSEArca–2017–36 and should be
borrowing clearing member.8 In A. Proposed Measures To Improve
submitted on or before May 25, 2017.
addition, OCC makes mark-to-market Trade Certainty and Transparency
For the Commission, by the Division of margin payments on a daily basis to
Trading and Markets, pursuant to delegated OCC proposes three amendments to
ensure stock loans remain fully the rules governing its Stock Loan
authority.46 collateralized.
Eduardo A. Aleman, Programs that are intended to improve
OCC proposes a number of changes to
trade certainty and transparency for
Assistant Secretary. the Stock Loan Programs and its Rules
clearing members and OCC.
[FR Doc. 2017–08980 Filed 5–3–17; 8:45 am]
BILLING CODE 8011–01–P
1 15 U.S.C. 78s(b)(1). 1. Daily Reconciliation of Stock Loan
2 17 CFR 240.19b–4. Positions
3 Securities Exchange Act Release No. 34–80323
(March 8, 2017), 82 FR 13690 (March 14, 2017) (File Clearing members that participate in
SECURITIES AND EXCHANGE No. SR–OCC–2017–004) (‘‘Notice’’). the Hedge Program and the Market Loan
COMMISSION 4 See OCC Rules 2202 and 2202A (providing that
Program execute and terminate stock
stock loans under the Hedge Program and the loans on a bilateral basis. Following
Market Loan Program, respectively, must effect
[Release No. 34–80555; File No. SR–OCC–
transfer only of ‘‘Eligible Stock,’’ as defined in execution or termination of stock loans,
2017–004] Article I of OCC’s By-laws). OCC permits clearing OCC requires clearing members to
members to execute stock loans involving 6,191 promptly report stock loans directly to
Self-Regulatory Organizations; The eligible securities as March 29, 2017, available at OCC, or to facilitate such reporting to
Options Clearing Corporation; Order https://www.theocc.com/webapps/stock loan-
OCC through the Depository Trust
Approving Proposed Rule Change eligible-securities.
5 The Hedge Program is governed by Article XXI Corporation (‘‘DTC’’), ensuring OCC
Concerning Enhancements to OCC’s of OCC’s By-Laws and Chapter XXII of OCC’s Rules. accepts stock loans for clearing and
Stock Loan Programs The Market Loan Program is governed by Article records the novation or termination for
XXIA of OCC’s By-Laws and Chapter XXIIA of
April 28, 2017. OCC’s Rules. The Commission understands that
margin and other purposes. Under the
OCC cleared approximately 10–15% of the overall current trade-reporting process, clearing
On February 28, 2017, The Options
U.S.-equities stock loan market through the two members may fail to report (or to have
pmangrum on DSK3GDR082PROD with NOTICES
Clearing Corporation (‘‘OCC’’) filed with programs, as of November 2015. DTC report) stock loans to OCC in a
the Securities and Exchange 6 The Commission understands that the Hedge
timely manner, increasing uncertainty
Commission (‘‘Commission’’) the Program accounts for approximately 95% of cleared
in the novation process and decreasing
proposed rule change SR–OCC–2017– stock loan volume at OCC, as of November 2015.
7 Automated Equity Finance Markets, Inc. is the transparency with respect to OCC’s
004 pursuant to Section 19(b)(1) of the
sole loan market through which clearing members
Securities Exchange Act of 1934 can execute stock loans in the Market Loan 9 For a more detailed description of the specific
Program. rule changes OCC is proposing, see Notice, supra
46 17 CFR 200.30–3(a)(12). 8 See OCC Rules 2202(b) and 2202A(b). note 3.
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Document Created: 2017-05-04 01:48:55
Document Modified: 2017-05-04 01:48:55
| 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 | 82 FR 20932 |
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