
[Federal Register Volume 78, Number 113 (Wednesday, June 12, 2013)]
[Notices]
[Pages 35330-35333]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-13887]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69707]


Order Granting a Limited Exemption from Rule 102 of Regulation M 
Concerning the NYSE Arca, Inc.'s Exchange Traded Product Incentive 
Program Pilot Pursuant to Regulation M Rule 102(e)

June 6, 2013.
    The Securities and Exchange Commission (``Commission'') approved a 
proposed rule change of the NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') to add new NYSE Arca Equities Rule 8.800 (``New Rule 8.800'') 
which establishes the exchange-traded product (``ETP'') Incentive 
Program (``Incentive Program'' or ``Program'') effective on one year on 
a pilot basis. The Incentive Program is designed to incentivize market 
makers to take Lead Market Maker (``LMM'') assignments in certain lower 
volume ETPs by offering an alternative fee structure for such LMMs that 
would be funded from the Exchange's general revenues. The costs of the 
Incentive Program would be funded by charging participating issuers 
(which may be paid by sponsors on behalf of the issuer) non-refundable 
``Optional Incentive Fees,'' which would be credited to LMMs from the

[[Page 35331]]

Exchange's general revenues.\1\ The Commission believes that payment of 
the Optional Incentive Fee by the issuer (or a sponsor on behalf of the 
issuer) for the purpose of incentivizing market makers to become LMMs 
in the issuer's securities would constitute an indirect attempt by the 
issuer to induce a bid for or a purchase of a covered security during a 
restricted period.\2\ As a result, absent exemptive relief, 
participation in the Incentive Program by an issuer (or sponsor on 
behalf of the issuer) would violate Rule 102 of Regulation M.\3\ This 
order grants a limited exemption from Rule 102 of Regulation M solely 
to permit issuers and sponsors to participate in the Program during the 
pilot, subject to certain conditions described below.
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    \1\ See Securities Exchange Act Release No. 69706 (June 6, 2013) 
(``Approval Order''). The Approval Order contains a detailed 
description of the Program. On March 21, 2013, the Exchange filed 
with the Commission, pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934, as amended (``Act'' or ``Exchange Act'') and 
Rule 19b-4 thereunder, a proposed rule change to establish the 
Program. The proposed rule change, as modified by Amendment No. 1 
thereto, was published for comment in the Federal Register on April 
11, 2013. Securities Exchange Act Release No. 69335 (Apr. 5, 2013), 
78 FR 21681 (Apr. 11, 2013). The Approval Order grants approval of 
the proposed rule change, as modified by Amendments No. 1 and 2.
    Previously, the Exchange filed, but later withdrew, an initial 
proposed rule change to establish the Program. On April 27, 2012, 
NYSE Arca filed with the Commission, pursuant to Section 19(b)(1) of 
the Exchange Act and Rule 19b-4 thereunder, a proposed rule change 
to establish the Program. The proposed rule change was published for 
comment in the Federal Register on May 17, 2012. Securities Exchange 
Act Release No. 66966 (May 11, 2012), 77 FR 29419 (May 17, 2012). On 
June 20, 2012, the Commission extended the time period in which to 
either approve the proposed rule change, disapprove the proposed 
rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change to August 15, 2012. Securities 
Exchange Act Release No. 67222 (June 20, 2012), 77 FR 38116 (June 
26, 2012). On July 11, 2012, the Commission instituted proceedings 
to determine whether to approve or disapprove the proposed rule 
change. Securities Exchange Act Release No. 67411 (July 11, 2012), 
77 FR 42052 (July 17, 2012). On October 2, 2012, the Commission 
issued a notice of designation of a longer period for Commission 
action on proceedings to determine whether to disapprove the 
proposed rule change. Securities Exchange Act Release No. 67962 
(Oct. 2, 2012), 77 FR 61462 (Oct. 9, 2012). On January 9, 2013, the 
Exchange withdrew the proposed rule change. Securities Exchange 
Release No. 68616 (Jan. 10, 2013), 78 FR 3482 (Jan. 16, 2013).
    \2\ See Securities Exchange Act Release No. 67411 (July 11, 
2012), 77 FR 42052 (July 17, 2012) (stating ``[t]he Commission 
believes that issuer payments made under the SRO Proposals would 
constitute an indirect attempt by the issuer of a covered security 
to induce a purchase or bid in a covered security during a 
restricted period in violation of Rule 102 . . . [u]nder the NYSE 
Arca Proposal, the purpose of the Program is `to create a Incentive 
Program for issuers of certain ETPs listed' on NYSE Arca, which . . 
. could induce bids or purchases for the issuer's security during a 
restricted period'').
    \3\ 17 CFR 242.102.
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    NYSE Arca stated that the Incentive Program is designed to 
incentivize market makers to undertake LMM assignments in ETPs.\4\ An 
issuer of an ETP that participates in the Incentive Program would elect 
to pay an ``Optional Incentive Fee'' to NYSE Arca in an amount ranging 
from $10,000 to $40,000 per year with the actual amount to be 
determined by the issuer.\5\ The Optional Incentive Fee is in addition 
to the currently applicable listing and annual fees applicable to the 
ETP and is paid by the issuer to the Exchange's general revenues.\6\ 
Subject to the requirements set forth in New Rule 8.800, a market maker 
accepting an LMM assignment in an ETP in the Incentive Program would 
receive a payment quarterly from NYSE Arca (``LMM Payment'') in an 
amount equal to the Optional Incentive Fee, less a 5% NYSE Arca 
administration fee.\7\ If the LMM does not meet or exceed its Incentive 
Program performance standards for an assigned ETP for a particular 
month or if the ETP is withdrawn from the Program pursuant to the rule, 
the LMM would not receive a LMM Payment for that month.\8\ The 
voluntary Program established by New Rule 8.800 will be effective for 
one year on a pilot basis.\9\
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    \4\ See Approval Order.
    \5\ Id.
    \6\ Id. Under the current fee schedule for listings, an issuer 
of an ETP is required to pay a listing fee that ranges from $5,000 
to $45,000. ETP issuers also pay a graduated annual fee based on the 
number of shares of the ETP that are outstanding, which ranges 
$5,000 to $55,000. See Securities Exchange Act Release No. 67411 
(July 11, 2012), 77 FR 42052 (July 17, 2012).
    \7\ Approval Order.
    \8\ Id.
    \9\ Preamble to New Rule 8.800.
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    Under New Rule 8.800, NYSE Arca will be required to provide 
notification on its Web site regarding: (i) The ETPs participating in 
the Incentive Program, (ii) the date a particular ETP begins 
participating in the Incentive Program, (iii) the date the Exchange 
receives written notice of an issuer's intent to withdraw its ETP from 
the Incentive Program, and the intended withdrawal date, if provided, 
(iv) the date a particular ETP ceases participating in the Incentive 
Program, (v) the LMM assigned to each ETP participating in the 
Incentive Program, (vi) the date the Exchange receives written notice 
of an LMM's intent to withdraw from its ETP assignment(s) in the 
Incentive Program, and the intended withdrawal date, if provided, and 
(vii) the amount of the Optional Incentive Fee for each ETP.\10\ This 
page would also include a fair and balanced description of the 
Incentive Program, including (i) a description of the Incentive 
Program's operation as a pilot, including the effective date thereof, 
(ii) the potential benefits that may be realized by an ETP's 
participation in the Incentive Program, (iii) the potential risks that 
may be attendant with an ETP's participation in the Incentive Program, 
(iv) the potential impact resulting from an ETP's entry into and exit 
from the Incentive Program, and (v) how interested parties can request 
additional information regarding the Incentive Program and/or the ETPs 
participating therein.\11\ Furthermore, an issuer that is approved to 
participate in the Incentive Program shall issue a press release to the 
public, in a form and manner prescribed by the Exchange, when it 
commences participation or ceases to participate in the Incentive 
Program.\12\ Such press release would be issued, if practicable, at 
least two days before the ETP commences or ceases participation in the 
Incentive Program.\13\ The issuer also will be required to dedicate 
space on its Web site, or, if it does not have a Web site, on the Web 
site of the adviser or sponsor of the ETP, to (i) include any such 
press releases and (ii) provide a hyperlink to the dedicated page on 
NYSE Arca's Web site that describes the Program.\14\
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    \10\ New Rule 8.800(b)(6).
    \11\ Id.
    \12\ New Rule 8.800(b)(7).
    \13\ Id.
    \14\ Id.
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    The Approval Order notes commenters' general support of the 
Program's stated goal to increase liquidity and promote efficient 
robust markets for ETPs.\15\ However, certain commenters expressed 
concerns about the Program as originally proposed last year,\16\ 
including the departure from rules precluding market makers from 
directly or indirectly accepting payment from an issuer of a security 
for acting as a market maker.\17\ In particular,

[[Page 35332]]

commenters to that proposal discussed the potential distortive impact 
on the natural market forces of supply and demand.\18\ Commenters also 
discussed what they viewed as the failure of the originally-proposed 
Program requirements to adequately mitigate potential negative impacts 
of that proposal.\19\
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    \15\ See Approval Order Section II.
    \16\ See note 1, supra. Only two comments were received when the 
proposal was re-filed with the Commission, both of which were in 
favor of the proposal. See Letter from John Hyland, CFA, Chief 
Investment Officer, United States Commodity Funds, dated April 10, 
2013 and Letter from Stanislav Dolgopolov, Assistant Adjunct 
Professor and Lowell Milken Institute Law Teaching Fellow, 
University of California, Los Angeles, dated April 26, 2013. The 
Commission believes, however, that the concerns raised by commenters 
regarding the original proposal still are relevant to the proposal 
as re-filed with the Commission.
    \17\ See, e.g., Letter from Gus Sauter, Managing Director and 
Chief Investment Officer, Vanguard, dated June 7, 2012 (citing to 
his comment letter regarding the similar NASDAQ Market Quality 
Program that included a discussion of NASD Notice to Members 75-16 
regarding the reasons for prohibiting issuer payments for market 
making: ``The additional factor of payments by an issuer to a market 
maker would probably be viewed as a conflict of interest since it 
would undoubtedly influence, to some degree, a firm's decision to 
make a market and thereafter, perhaps, the prices it would quote. 
Hence, what might appear to be independent trading activity may well 
be illusory.''). In addition, another commenter noted ``that market 
maker incentive programs, such as the [then-proposed Program], 
represent a departure from the current rules precluding market 
makers from accepting payment from an issuer of a security for 
acting as a market marker'' yet supported the concept of market 
maker incentive programs on a pilot basis. Letter from Ari Burstein, 
Investment Company Institute (``ICI''), dated June 7, 2012. In a 
subsequent letter, however, the same commenter noted that certain of 
its members opposed the Program as originally proposed and stated 
that it ``could create a `pay-to-play' environment.'' Letter from 
Ari Burstein, ICI, dated Aug. 16, 2012. The Approval Order also 
notes that a number of aspects of the Program mitigate the concerns 
that the rule in question, FINRA Rule 5250 (Payments for Market 
Making), were designed to address.
    \18\ See, e.g., Letter from F. William McNabb, Chairman and 
Chief Executive Officer, Vanguard, dated Aug. 16, 2012.
    \19\ See, e.g., Letter from Gus Sauter, Managing Director and 
Chief Investment Officer, Vanguard, dated June 7, 2012.
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    One commenter stated that ``[i]ssuer payments to market makers have 
the potential to distort market forces, resulting in spreads and prices 
that do not reflect actual supply and demand.'' \20\ One commenter 
questioned whether any safeguards could alleviate their concerns 
regarding issuer payments to market makers.\21\ Another commenter 
questioned whether information relating to the similar NASDAQ Market 
Quality Program posted to that exchange's Web site in a similar manner 
as required in New Rule 8.800(b)(6) by NYSE Arca would adequately 
address investor protection and market integrity concerns because 
investors may not search an exchange Web site for important information 
about a particular ETP.\22\
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    \20\ Letter from F. William McNabb, Chairman and Chief Executive 
Officer, Vanguard, dated Aug. 16, 2012.
    \21\ Letter from Ari Burstein, ICI, dated Aug. 16, 2012 (stating 
``ICI members who oppose the Programs believe any fixes to the 
proposed parameters will be insufficient to address their overall 
concerns with market maker incentive programs'').
    \22\ Letter from Gus Sauter, Managing Director and Chief 
Investment Officer, Vanguard, dated (May 3, 2012) (asking ``[f]or 
example, given what we know about investor behavior, is it likely 
that investors would consult Nasdaq's Web site for information about 
which ETFs and market makers are participating in the [NASDAQ Market 
Quality Program] . . . [i]f not, then most investors would not be 
able to distinguish quotations that reflect true market forces from 
quotations that have been influenced by issuer payments'').
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Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security 
holders, or any affiliated purchaser of such persons, directly or 
indirectly, from bidding for, purchasing, or attempting to induce any 
person to bid for or purchase a covered security \23\ during the 
applicable restricted period in connection with a distribution of 
securities effected by or on behalf of an issuer or selling security 
holder, except as specifically permitted in the rule.\24\ As mentioned 
above, the Commission believes that the payment of the Optional 
Incentive Fee would constitute an indirect attempt to induce a bid for 
or purchase of a covered security during the applicable restricted 
period.\25\ As a result, absent exemptive relief, participation in the 
Program by a sponsor or issuer would violate Rule 102.
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    \23\ Covered security is defined as any security that is the 
subject of a distribution, or any reference security. 17 CFR 
242.100(b).
    \24\ 17 CFR 242.102(a).
    \25\ See note 2, supra.
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    On the basis of the conditions set out below and the requirements 
set forth in New Rule 8.800, which in general are designed to help 
inform investors about the potential impact of the Program, the 
Commission finds that it is appropriate in the public interest, and is 
consistent with the protection of investors, to grant a limited 
exemption from Rule 102 of Regulation M solely to permit the payment of 
the Optional Incentive Fee as set forth in New Rule 8.800 during the 
pilot.\26\ This limited exemption is conditioned on a requirement that 
the security participating in the Program is an ETP and the secondary 
market price for shares of the ETP must not vary substantially from the 
net asset value of such ETP shares during the duration of the ETP's 
participation in the Program. This condition is designed to limit the 
Program to ETPs that have a pricing mechanism that is expected to keep 
the price of the ETP shares tracking the net asset value of the ETP 
shares, which should make the shares less susceptible to price 
manipulation.
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    \26\ Rule 102(e) allows the Commission to grant an exemption 
from the provision of Rule 102, either unconditionally or on 
specified terms and conditions, to any transaction or class of 
transactions, or to any security or class of securities.
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    This limited exemption is further conditioned on disclosure 
requirements, as set forth below, which are designed to alert potential 
investors that the trading market for the otherwise less liquid 
securities in the Program may be affected by participation in the 
Program. By making it easier for investors to be able to distinguish 
which quotations may have been influenced by the Optional Incentive Fee 
from those that have not, and by requiring the issuers and sponsors to 
provide information on the potential effect of Program participation on 
the price and liquidity of a security participating in the Program, the 
required enhanced disclosure requirements are designed to inform 
potential investors about the potential distortive impact of the 
Optional Incentive Fee on the natural market forces of supply and 
demand. The general disclosures required by New Rule 8.800, while 
helpful, may not be sufficient to obtain this result.\27\ The required 
enhanced disclosures are expected to promote greater investor 
protection by helping to ensure that investors will have easier access 
to important information about a particular ETP.\28\
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    \27\ New Rule 8.800(b)(7) does not contain any specific content 
requirements for issuer or sponsor disclosure, other than a ``press 
release'' when entering or leaving the Program and a hyperlink on a 
dedicated issuer, advisor, or sponsor's Web page to the Exchange's 
Web site that contains a number of specific disclosures about the 
program. As outlined below, the enhanced disclosures required of the 
issuer or sponsor as conditions to this order require that the 
issuer or sponsor's press release and Web page directly contain a 
number of helpful disclosures for investors, including risks of the 
program.
    \28\ The required Web site and press release disclosures should 
be less burdensome than other methods of notifying investors of a 
security's participation in the Program, such as requiring a ticker 
symbol identifier or flagging participating LMM quotes and trades.
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    As a practical matter, these requirements are not intended to be 
duplicative with the issuer disclosures required by New Rule 8.800. 
These requirements can be satisfied via the press release and dedicated 
Web page required by New Rule 8.800(b)(7), however these materials must 
contain all the required disclosures outlined below, and be in the 
manner stated in the condition, in addition to any requirements of the 
Exchange. Issuers or sponsors of products that are not registered under 
the Investment Company Act of 1940, as amended, (``1940 Act'') may also 
meet the press release requirements of these enhanced disclosures in a 
manner compliant with Regulation FD (other than Web site only 
disclosure).\29\ We also note that, to the extent that information 
about participation in the Program is material, disclosure of this kind 
may already be

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required by the federal securities laws and rules.
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    \29\ See condition (4), infra.
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Conclusion

    It is therefore ordered, that issuers or sponsors who pay an 
Optional Incentive Fee are hereby exempted from Rule 102 of Regulation 
M solely to permit the payment of the Optional Incentive Fee as set 
forth in New Rule 8.800 in connection with a security participating in 
the Program during the pilot, subject to the conditions contained in 
this order and compliance with the requirements of New Rule 8.800.
    This exemption is subject to the following conditions:
    1. The security participating in the Program is an ETP and the 
secondary market price for shares of the ETP must not vary 
substantially from the net asset value of such ETP shares during the 
duration of the security's participation in the Program;
    2. The issuer of the participating ETP, or sponsor on behalf of the 
issuer, must provide prompt notice to the public by broadly 
disseminating a press release prior to entry (or upon re-entry) into 
the Program. This press release must disclose:
    a. The payment of an Optional Incentive Fee is intended to generate 
more quotes and trading than might otherwise exist absent this payment, 
and that the security leaving the Program may adversely impact a 
purchaser's subsequent sale of the security; and
    b. A hyperlink to the Web page described in condition (5) below;
    3. The issuer of the participating ETP, or sponsor on behalf of the 
issuer, must provide prompt notice to the public by broadly 
disseminating a press release prior to a security leaving the Program 
for any reason, including termination of the Program. This press 
release must disclose:
    a. The date that the security is leaving the Program and that 
leaving the Program may have a negative impact on the price and 
liquidity of the security which could adversely impact a purchaser's 
subsequent sale of the security; and
    b. A hyperlink to the Web page described in condition (5) below;
    4. In place of the press releases required by conditions (2) and 
(3) above, an issuer of a participating ETP that is not registered 
under the 1940 Act, or sponsor on behalf of the issuer, may provide 
prompt notice to the public through the use of such other written 
Regulation FD compliant methods (other than Web site disclosure only) 
that is designed to provide broad public dissemination as provided in 
17 CFR 243.101(e) provided, however, that such other methods must 
contain all the information required to be disclosed by conditions (2) 
and (3) above;
    5. The issuer of the participating ETP, or sponsor on behalf of the 
issuer, must provide prompt, prominent and continuous disclosure on its 
Web site in the location generally used to communicate information to 
investors about a particular security participating in the Program, and 
for a security that has a separate Web site, the security's Web site 
of:
    a. The security participating in the Program and ticker, date of 
entry into the Program, and the amount of the Optional Incentive Fee;
    b. Risk factors investors should consider when making an investment 
decision, including that participation in the Program may have 
potential impacts on the price and liquidity of the security; and
    c. Termination date of the pilot, anticipated date (if any) of the 
security leaving the Program for any reason, date of actual exit (if 
applicable), and that the security leaving the Program could adversely 
impact a purchaser's subsequent sale of the security; and
    6. The Web site disclosure in condition (5) above must be promptly 
updated if a material change occurs with respect to any information 
contained in the disclosure.
    This exemptive relief expires when the pilot terminates, and 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 exemptive relief is limited 
solely to the payment of the Optional Incentive Fee as set forth in New 
Rule 8.800 for a security that is an ETP participating in the 
Program,\30\ and does not extend to any other activities, any other 
security of the trust related to the participating ETP, or any other 
issuers.\31\ In addition, persons relying on this exemption 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 exemption. This order does not represent 
Commission views with respect to any other question that the proposed 
activities may raise, including, but not limited to the adequacy of the 
disclosure required by federal securities laws and rules, and the 
applicability of other federal or state laws and rules to, the proposed 
activities.
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    \30\ All ETPs that are allowed to participate in the Program 
have a pool of underlying assets. See New Rule 8.800(a)(2). Should 
the program be modified to include other ETPs, such as exchange-
traded notes, that do not have a pool of underlying assets, the 
Commission would consider this a material change and outside the 
scope of this exemptive relief.
    \31\ Other activities, such as ETP redemptions, are not covered 
by this exemptive relief.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(6).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13887 Filed 6-11-13; 8:45 am]
BILLING CODE 8011-01-P


