82 FR 39923 - Order Granting Limited Exemptions From Exchange Act Rule 10b-17 and Rules 101 and 102 of Regulation M to IQ Real Return ETF Pursuant to Exchange Act Rule 10b-17(b)(2) and Rules 101(d) and 102(e) of Regulation M

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 161 (August 22, 2017)

[Federal Register Volume 82, Number 161 (Tuesday, August 22, 2017)]
[Notices]
[Pages 39923-39925]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-17688]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81410; File No. TP 17-10]


Order Granting Limited Exemptions From Exchange Act Rule 10b-17 
and Rules 101 and 102 of Regulation M to IQ Real Return ETF Pursuant to 
Exchange Act Rule 10b-17(b)(2) and Rules 101(d) and 102(e) of 
Regulation M

August 16, 2017.
    By letter dated August 16, 2017 (the ``Letter''), as supplemented 
by conversations with the staff of the Division of Trading and Markets, 
counsel for IndexIQ ETF Trust (the ``Trust''), on behalf of the Trust 
and one of its investment portfolios, the IQ Real Return ETF (the 
``Fund''), NYSE Arca, Inc. (``NYSE Arca'') or other national securities 
exchanges on or through which shares issued by the Fund (``Shares'') 
may subsequently trade, ALPS Distributors, Inc. (the ``Distributor''), 
and persons or entities engaging in transactions in Shares 
(collectively, the ``Requestors''), requested exemptions, or 
interpretive or no-action relief, from Rule 10b-17 of the Securities 
Exchange Act of 1934, as amended (``Exchange Act''), and Rules 101 and 
102 of Regulation M, in connection with secondary market transactions 
in Shares and the creation or redemption of aggregations of Shares of 
at least 50,000 shares (``Creation Units'').
    The Trust is registered with the Securities and Exchange Commission 
(``Commission'') under the Investment Company Act of 1940, as amended 
(``1940 Act''), as an open-end management investment company. The Fund 
is a ``fund of funds'' that is passively managed according to an index. 
The Fund is designed to track the performance of the IQ Real Return 
Index (``Index''), which seeks to provide investors with a hedge 
against the U.S. inflation rate by providing a ``real return,'' or a 
return above the rate of inflation, as represented by the Consumer 
Price Index (``CPI'').
    At least 80% of the Fund's portfolio holdings are, and will be, 
shares of some or all of the exchange-traded products (``ETPs'') that 
constitute the Index. The Fund operates in a manner very similar to 
that of the ETPs held in its portfolio. Some or all of the remaining 
20% may be invested in securities that are not Index constituents that 
the Fund's adviser believes will help the Fund track the Index, as well 
as cash, cash equivalents and various types of financial instruments 
including, but not

[[Page 39924]]

limited to, futures contracts, swap agreements, forward contracts, 
reverse repurchase agreements, and options on securities, indices, and 
futures contracts. In no case will the Fund hold any non-ETP equity 
security issued by a single issuer in excess of 20% of the Fund's 
portfolio holdings.
    The Letter states that the Fund is relying on Class Relief Letters 
(as defined in the Letter), but is seeking individual relief for the 
same reasons as did nine other investment portfolios of the Trust \1\--
that is, to manage a portfolio with less than twenty ``Component 
Securities'' that, from time to time, might also hold also hold a 
Component Security in excess of 25% of the total value of such 
portfolio.\2\
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    \1\ See Order Granting Limited Exemptions from Exchange Act Rule 
10b-17 and Rules 101 and 102 of Regulation M, Exchange Act Rel. No. 
77779 (May 6, 2016); Letter from Josephine J. Tao, Esq., Assistant 
Director, Division of Trading and Markets, to Kathleen H. Moriarty, 
Esq., Katten Muchin Rosenman LLP (Mar. 25, 2009) (revised Apr. 2, 
2009).
    \2\ Cf. Letter from James A. Brigagliano, Esq., Acting Associate 
Director, Division of Market Regulation, to Stuart M. Strauss, Esq., 
Clifford Chance US LLP (Oct. 24, 2006) (granting relief to exchange-
traded funds (``ETFs'') that, among other things, consist of a 
basket of twenty or more ``Component Securities'' with no one 
``Component Security'' constituting more than 25% of the total value 
of the exchange-traded fund).
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    The Requestors represent, among other things, the following:
     Shares of the Fund will be issued by the Trust, an open-
end management investment company that is registered with the 
Commission;
     The Trust will continuously redeem Creation Units at net 
asset value (``NAV''), and the secondary market price of the Shares 
should not vary substantially from the NAV of such Shares;
     Shares of the Fund will be listed and traded on the NYSE 
Arca (the ``Exchange'') or other exchange in accordance with exchange 
listing standards that are, or will become, effective pursuant to 
Section 19(b) of the Exchange Act;
     Each ETP in which the Fund is invested will meet all 
conditions set forth in a relevant class relief letter,\3\ or will have 
received individual relief from the Commission;
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    \3\ Letter from Josephine Tao, Assistant Director, Division of 
Trading and Markets, to Domenick Pugliese, Esq., Paul, Hastings, 
Janofsky and Walker LLP (June 27, 2007); Letter from James A. 
Brigagliano, Associate Director, Division of Market Regulation, to 
Benjamin Haskin, Esq., Willkie, Farr & Gallagher LLP (Apr. 9, 2007); 
Letter from James A. Brigagliano, Acting Associate Director, 
Division of Market Regulation, to Stuart M. Strauss, Esq., Clifford 
Chance US LLP (Oct. 24, 2006); Letter from Racquel L. Russell, 
Branch Chief, Division of Market Regulation, to George T. Simon, 
Esq., Foley & Lardner LLP (June 21, 2006); Letter from Catherine 
McGuire, Esq., Chief Counsel, Division of Market Regulation, to the 
Securities Industry Association Derivative Products Committee (Nov. 
21, 2005); see also Staff Legal Bulletin No. 9, ``Frequently Asked 
Questions About Regulation M'' (Apr. 12, 2002) (regarding actively 
managed ETFs).
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     The value of the Index will be publicly disseminated by a 
major market data vendor throughout the trading day, and all of the 
components of the Index will have publicly available last sale trade 
information;
     On each business day before the opening of business on the 
Exchange, the Fund's custodian, through the National Securities 
Clearing Corporation, will make available the list of the names and the 
numbers of securities and other assets of the Fund's portfolio that 
will be applicable that day to creation and redemption requests;
     The Exchange or other market information provider will 
disseminate every 15 seconds throughout the trading day through the 
facilities of the Consolidated Tape Association an amount representing 
the current value of the cash and securities held in the portfolio of 
the Fund (not including corporate actions, expenses, and other 
adjustments made to such portfolio throughout the day) (``Estimated 
NAV'');
     At least 80% of the Fund's portfolio holdings are, and 
will be, shares of some or all of the ETPs that are the Index 
constituents;
     The Fund will invest in securities that will facilitate an 
effective and efficient arbitrage mechanism and the ability to create 
workable hedges;
     The Requestors believe that arbitrageurs can be expected 
to take advantage of price variations between the Fund's market price 
and its NAV;
     The arbitrage mechanism will be facilitated by the 
transparency of the Fund's portfolio and the availability of the 
Estimated NAV, the liquidity of securities and other assets held by the 
Fund, and the ability to acquire such securities, as well as 
arbitrageurs' ability to create workable hedges; and
     A close alignment between the market price of Shares and 
the Fund's NAV is expected.

Regulation M

    While redeemable securities issued by an open-end management 
investment company are excepted from the provisions of Rule 101 and 102 
of Regulation M, the Requestors may not rely upon that exception for 
the Shares.\4\ However, we find that it is appropriate in the public 
interest, and is consistent with the protection of investors, to grant 
a limited exemption from Rules 101 and 102 to persons who may be deemed 
to be participating in a distribution of Shares and the Fund as 
described in more detail below.
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    \4\ While ETFs operate under exemptions from the definitions of 
``open-end company'' under section 5(a)(1) of the 1940 Act and 
``redeemable security'' under section 2(a)(32) of the 1940 Act, the 
Fund and its securities do not meet those definitions.
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Rule 101 of Regulation M

    Generally, Rule 101 of Regulation M is an anti-manipulation rule 
that, subject to certain exceptions, prohibits any ``distribution 
participant'' and its ``affiliated purchasers'' from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase, 
any security which is the subject of a distribution until after the 
applicable restricted period, except as specifically permitted in the 
rule. Rule 100 of Regulation M defines ``distribution'' to mean any 
offering of securities that is distinguished from ordinary trading 
transactions by the magnitude of the offering and the presence of 
special selling efforts and selling methods. The provisions of Rule 101 
of Regulation M apply to underwriters, prospective underwriters, 
brokers, dealers, or other persons who have agreed to participate or 
are participating in a distribution of securities. The Shares are in a 
continuous distribution and, as such, the restricted period in which 
distribution participants and their affiliated purchasers are 
prohibited from bidding for, purchasing, or attempting to induce others 
to bid for or purchase extends indefinitely.
    Based on the representations and facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company that will continuously redeem at the NAV Creation 
Unit size aggregations of the Shares of the Fund and that a close 
alignment between the market price of Shares and the Fund's NAV is 
expected, the Commission finds that it is appropriate in the public 
interest, and consistent with the protection of investors, to grant the 
Trust an exemption under paragraph (d) of Rule 101 of Regulation M with 
respect to Shares of the Fund, thus permitting persons participating in 
a distribution of Shares of the Fund to bid for or purchase such Shares 
during their participation in such distribution.\5\
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    \5\ Additionally, we confirm the interpretation that a 
redemption of Creation Unit size aggregations of Shares of the Fund 
and the receipt of securities in exchange by a participant in a 
distribution of Shares of the Fund would not constitute an ``attempt 
to induce any person to bid for or purchase, a covered security 
during the applicable restricted period'' within the meaning of Rule 
101 of Regulation M and, therefore, would not violate that rule.

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[[Page 39925]]

Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security 
holders, or any affiliated purchaser of such person from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase a 
covered security during the applicable restricted period in connection 
with a distribution of securities effected by or on behalf of an issuer 
or selling security holder.
    Based on the representations and facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company that will redeem at the NAV Creation Units of Shares 
of the Fund and that a close alignment between the market price of 
Shares and the Fund's NAV is expected, the Commission finds that it is 
appropriate in the public interest, and consistent with the protection 
of investors, to grant the Trust an exemption under paragraph (e) of 
Rule 102 of Regulation M with respect to Shares of the Fund, thus 
permitting the Fund to redeem Shares of the Fund during the continuous 
offering of such Shares.

Rule 10b-17

    Rule 10b-17, with certain exceptions, requires an issuer of a class 
of publicly traded securities to give notice of certain specified 
actions (for example, a dividend distribution) relating to such class 
of securities in accordance with Rule 10b-17(b). Based on the 
representations and facts presented in the Letter, and subject to the 
conditions below, we find that it is appropriate in the public 
interest, and consistent with the protection of investors, to grant the 
Trust a conditional exemption from Rule 10b-17 because market 
participants will receive timely notification of the existence and 
timing of a pending distribution, and thus the concerns that the 
Commission raised in adopting Rule 10b-17 will not be implicated.\6\
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    \6\ We also note that timely compliance with Rule 10b-
17(b)(1)(v)(a) and (b) would be impractical because it is not 
possible for the Fund to accurately project ten days in advance what 
dividend, if any, would be paid on a particular record date. 
Further, the Commission finds, based upon the representations in the 
Letter, that the provision of the notices as described in the Letter 
would not constitute a manipulative or deceptive device or 
contrivance comprehended within the purpose of Rule 10b-17.
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Conclusion

    It is hereby ordered, pursuant to Rule 101(d) of Regulation M, that 
the Trust, based on the representations and the facts presented in the 
Letter, is exempt from the requirements of Rule 101 with respect to 
Shares of the Fund, thus permitting persons who may be deemed to be 
participating in a distribution of Shares of the Fund to bid for or 
purchase such Shares during their participation in such distribution.
    It is further ordered, pursuant to Rule 102(e) of Regulation M, 
that the Trust, based on the representations and the facts presented in 
the Letter, is exempt from the requirements of Rule 102 with respect to 
Shares of the Fund, thus permitting the Fund to redeem Shares of the 
Fund during the continuous offering of such Shares.
    It is further ordered, pursuant to Rule 10b-17(b)(2), that the 
Trust, based on the representations and the facts presented in the 
Letter, and subject to the conditions below, is exempt from the 
requirements of Rule 10b-17 with respect to transactions in the Shares 
of the Fund.
    This exemptive relief is subject to the following conditions:
     The Trust will comply with Rule 10b-17 except for Rule 
10b-17(b)(1)(v)(a) and (b); and
     The Trust will provide the information required by Rule 
10b-17(b)(1)(v)(a) and (b) to the Exchange as soon as practicable 
before trading begins on the ex-dividend date, but in no event later 
than the time when the Exchange last accepts information relating to 
distributions on the day before the ex-dividend date.
    This exemptive relief is subject to modification or revocation at 
any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act. This 
exemption is based on the facts presented and the representations made 
in the Letter. Any different facts or representations may require a 
different response. Persons relying upon this exemptive relief shall 
discontinue transactions involving the Shares of the Fund, pending 
presentation of the facts for the Commission's consideration, in the 
event that any material change occurs with respect to any of the facts 
or representations made by the Requestors and, as is the case with all 
preceding letters, particularly with respect to the close alignment 
between the market price of Shares and the Fund's NAV. In addition, 
persons relying on this exemptive relief are directed to the anti-fraud 
and anti-manipulation provisions of the Exchange Act, particularly 
Sections 9(a) and 10(b), and Rule 10b-5 thereunder. Responsibility for 
compliance with these and any other applicable provisions of the 
federal securities laws must rest with the persons relying on this 
exemptive relief.
    This Order should not be considered a view with respect to any 
other question that the proposed transactions may raise, including, but 
not limited to the adequacy of the disclosure concerning, and the 
applicability of other federal or state laws to, the proposed 
transactions.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(6) and (9).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-17688 Filed 8-21-17; 8:45 am]
BILLING CODE 8011-01-P