
[Federal Register Volume 79, Number 105 (Monday, June 2, 2014)]
[Notices]
[Pages 31362-31368]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12647]



[[Page 31362]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72255; File No. SR- NYSEArca-2014-10]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings to Determine Whether To Approve or Disapprove Proposed Rule 
Change To Adopt NYSE Arca Equities Rule 8.900, Which Permits the 
Listing and Trading of Managed Portfolio Shares, and To List and Trade 
Shares of the ActiveShares\SM\ Large-Cap Fund, ActiveShares\SM\ Mid-Cap 
Fund, and ActiveShares\SM\ Multi-Cap Fund Pursuant to That Rule

May 27, 2014.
    On February 7, 2014, NYSE Arca, Inc. (``Exchange'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to adopt new NYSE 
Arca Equities Rule 8.900, which would govern the listing and trading of 
Managed Portfolio Shares, and to list and trade shares of the 
ActiveShares\SM\ Large-Cap Fund, ActiveShares\SM\ Mid-Cap Fund, and 
ActiveShares\SM\ Multi-Cap Fund (collectively, ``Funds'') under 
proposed NYSE Arca Equities Rule 8.900. The proposed rule change was 
published for comment in the Federal Register on February 26, 2014.\3\ 
The Commission received one comment letter on the proposed rule 
change.\4\ On April 7, 2014, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ The Commission received two additional comment 
letters on the proposed rule change, including a letter from the 
Exchange in support of its proposal.\7\ This Order institutes 
proceedings under Section 19(b)(2)(B) of the Act \8\ to determine 
whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71588 (Feb. 20, 
2014), 79 FR 10848 (``Notice''), available at http://www.sec.gov/rules/sro/nysearca.shtml.
    \4\ See Letter from Gary L. Gastineau, President, ETF 
Consultants.com, Inc., to Elizabeth M. Murphy, Secretary, Commission 
(Mar 18, 2014) (``Gastineau Letter'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 71895, 79 FR 20285 
(Apr. 11, 2014). The Commission designated a longer period within 
which to take action on the proposed rule change and designated May 
27, 2014 as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \7\ See Letter from Dennis J. DeCore, Former Co-Head U.S. Index 
Arbitrage (1997-2007), Nomura Securities, to Elizabeth M. Murphy, 
Secretary, Commission (Apr. 8, 2014) (``DeCore Letter''); and Letter 
from Martha Redding, Chief Counsel and Assistant Corporate 
Secretary, NYSE Euronext, to Secretary, Commission (May 14, 2014) 
(``Response Letter''). All of the comment letters are available at 
http://www.sec.gov/comments/sr-nysearca-2014-10/nysearca201410.shtml.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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I. Description of the Proposal

    As described in the Notice, the Exchange proposes: (1) To adopt new 
NYSE Arca Equities Rule 8.900, which would permit 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; and (2) to list and 
trade shares (``Shares'') of the Funds under proposed NYSE Arca 
Equities Rule 8.900.\9\ The discussion below summarizes the Exchange's 
proposal, details of which are described in the Notice.\10\
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    \9\ The Exchange also proposes to amend NYSE Arca Equities Rule 
7.34(a)(4)(A) (Trading Sessions) to include Managed Portfolio Shares 
in the trading halt provision for shares traded pursuant to UTP 
during the Exchange's Opening Session.
    \10\ See Notice, supra note 3. Additional information regarding 
the Trust and the Shares, including investment strategies, risks, 
creation and redemption procedures, fees, portfolio holdings 
disclosure policies, distributions and taxes is available in the 
registration statement filed by the Trust on January 22, 2014 on 
Form N-1A under the Securities Act of 1933 and under the Investment 
Company Act of 1940 (``1940 Act'') relating to the Funds (File Nos. 
333-171987 and 811-22524) (``Registration Statement'').
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A. Proposed Listing Rules

    The Exchange's proposal 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; (b) is issued in any number of shares for a cash amount equal 
to the next determined net asset value (``NAV''); (c) may be redeemed 
for cash by any Retail Investor (as defined below) in any size less 
than a Redemption Unit (as defined below) for a cash amount equal to 
the next determined NAV; and (d) when aggregated in a number of shares 
equal to a Redemption Unit or multiples thereof, may be redeemed at a 
holder's request, with payment to the holder to be made, through a 
blind trust established for the holder's benefit, in the form of 
securities, cash, or both with a value equal to the next determined 
NAV.
    While funds issuing Managed Portfolio Shares will be actively-
managed and, to that extent, will be similar to Managed Fund Shares 
(which are actively-managed funds listed and traded under NYSE Arca 
Equities Rule 8.600), Managed Portfolio Shares differ from Managed Fund 
Shares in the following important respects. First, in contrast to 
Managed Fund Shares, for which a ``Disclosed Portfolio'' is required to 
be disseminated at least once daily,\11\ the portfolio for an issue of 
Managed Portfolio Shares will be disclosed once quarterly in accordance 
with normal disclosure requirements otherwise applicable to open-end 
investment companies registered under the 1940 Act.\12\ Second, in 
connection with the redemption of shares in Redemption Unit \13\ size, 
the in-kind delivery of any portfolio securities will generally be 
effected through a blind trust for the benefit of the redeeming 
authorized participant, and the blind trust will liquidate the 
portfolio securities pursuant to standing instructions from the 
authorized participant without disclosing the identity of those 
securities to the authorized participant. Third, as with traditional 
open-end investment companies, ``Retail Investors'' \14\ will be able 
to redeem shares for cash directly from a fund on any day and in any 
size

[[Page 31363]]

less than a Redemption Unit at the fund's NAV, as described in more 
detail below. Fourth, investors will be able to purchase shares either 
(a) in the secondary markets (e.g., the Exchange) at market prices or 
(b) for cash directly from a fund in any amount on any day a fund 
determines its NAV, as described in more detail below.
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    \11\ 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 be 
disseminated at least once daily and that it be made available to 
all market participants at the same time.
    \12\ A mutual fund is required to file with the Commission its 
complete portfolio schedules for the second and fourth fiscal 
quarters on Form N-SAR under the 1940 Act, and 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.
    \13\ A ``Redemption Unit'' is a specified number of Managed 
Portfolio Shares used for determining whether a retail investor may 
redeem for cash.
    \14\ Under the proposal, a ``Retail Investor'' is defined as (i) 
a natural person; (ii) a trust established exclusively for the 
benefit of a natural person or a group of related family members; or 
(iii) a tax deferred retirement plan where investments are selected 
by a natural person purchasing for its own account.
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    For each series of Managed Portfolio Shares, an estimated value, 
defined in the proposed rules as the ``Portfolio Indicative Value'' 
(``PIV''), that reflects an estimated intraday value of a fund's 
portfolio will be disseminated. The PIV 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 at least 
every 15 seconds during the Exchange's Core Trading Session (normally, 
9:30 a.m. to 4:00 p.m., Eastern Time). The Exchange states that 
dissemination of the PIV 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 exchange further 
states that the PIV should not be viewed as a ``real-time'' update of 
the NAV per share of each fund because the PIV 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.\15\
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    \15\ Unlike the PIV, which will be based on consolidated last 
sale information, 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 is the 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 PIV until the first trade in that stock is reported.
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    The Exchange has represented that, after consulting with various 
Lead Market Makers that trade exchange-traded funds (``ETFs'') on the 
Exchange, it believes that market makers will be able to make efficient 
and liquid markets priced near the PIV as long as an accurate PIV is 
disseminated every 15 seconds and as long as market makers have 
knowledge of a fund's means of achieving its investment objective, even 
without daily disclosure of a fund's underlying portfolio. The Exchange 
believes that market makers will employ risk-management techniques such 
as ``statistical arbitrage'' to make efficient markets in an issue of 
Managed Portfolio Shares without knowledge of a fund's underlying 
portfolio. The Exchange represents that market makers have indicated to 
it that, after the first few days of trading, there will be sufficient 
data to run a statistical analysis that will lead to spreads being 
tightened substantially around the PIV. The Exchange states that 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).
    The Exchange's proposal provides that the Exchange will file 
separate proposals under Section 19(b) of the Act before listing and 
trading any series of Managed Portfolio Shares.

B. Description of the Funds

1. The Funds' Investments
    The portfolio for each Fund would consist primarily of stocks in 
the Russell 3000 Index and shares issued by other ETFs that invest 
primarily in shares of issuers in the Russell 3000 Index (which 
consists of stocks included in the Russell 1000 Index and the Russell 
2000 Index).\16\ All exchange-listed equity securities in which the 
Funds would invest would be listed and traded on U.S. national 
securities exchanges. Each Fund would target an overall net equity 
market exposure of between 70% and 130% of the Fund's assets. Each Fund 
would purchase securities that its portfolio managers believed to be 
undervalued and would sell short securities that the portfolio managers 
believed to be overvalued. Under normal market conditions,\17\ each 
Fund's net long equity market exposure would not exceed 130%, and its 
net short equity market exposure would not exceed 30%, but the 
portfolio managers might at times exceed these percentages.
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    \16\ ETFs would include Investment Company Units (as described 
in NYSE Arca Equities Rule 5.2(j)(3)); Portfolio Depositary Receipts 
(as described in NYSE Arca Equities Rule 8.100); and Managed Fund 
Shares (as described in NYSE Arca Equities Rule 8.600). All ETFs 
would be listed and traded on a U.S. national securities exchange. 
The Funds would invest in the securities of ETFs registered under 
the 1940 Act consistent with the requirements of Section 12(d)(1) of 
the 1940 Act, or any rule, regulation or order of the Commission or 
interpretation thereof.
    \17\ The terms ``normally'' and ``under normal market 
conditions'' would include, but not be limited to, the absence of 
extreme volatility or trading halts in the equity markets or the 
financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
events such as systems failure, natural or man-made.
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    The ActiveShares\SM\ Large Cap Fund. According to the Exchange, the 
Fund's investment objective would be long-term capital appreciation. 
Normally, the Fund would invest primarily in securities included in the 
Russell 1000 Index and ETFs that primarily invest in stocks in the 
Russell 1000 Index.
    The ActiveShares\SM\ Mid-Cap Fund. According to the Exchange, the 
Fund's investment objective would be long-term capital appreciation. 
Normally, the Fund would invest primarily in securities that are 
included in the Russell 2000 Index and ETFs that primarily invest in 
stocks in the Russell 2000 Index.
    The ActiveShares\SM\ Multi-Cap Fund. According to the Exchange, the 
Fund's investment objective would be long-term capital appreciation. 
The Fund would invest primarily in securities included in the Russell 
3000 Index and ETFs that primarily invest in stocks in the Russell 3000 
Index.
    Other Investments. While each Fund, under normal market conditions, 
would invest primarily in stocks included in the Russell 3000 Index and 
ETFs, as described above, each Fund would be able to invest its 
remaining assets in repurchase agreements and reverse repurchase 
agreements, high-quality money market instruments, and the securities 
of other investment companies to the extent allowed by law.
2. Creation of Shares
    Each Fund would issue Shares on a continuous basis for cash at NAV, 
and the Exchange represents that the issuance of Shares would operate 
in a manner substantially similar to that of other ETFs and, in 
particular, to that of certain fixed-income ETFs that issue shares 
solely for cash. Unlike most ETFs, however, Shares would be issued in 
any amount rather than only in a specified block size (i.e., a Creation 
Unit). Only Depository Trust Company participants and their customers 
will be able to acquire Shares at NAV directly from a Fund.
    Each Fund would establish a cut-off time (``Order Cut-Off Time'') 
for orders, and this time could be set earlier than the time at which 
the fund calculates its NAV. Each Fund would reserve the right to 
reject any purchase order at any time. Each Fund would be able to 
impose a transaction fee in connection with the purchase of Shares from 
the Fund. This fee would be determined by the Fund's adviser, but would 
not exceed 2%.
3. Redemption of Shares by or Through Authorized Participants
    Redemption orders of Redemption Units (currently 50,000 shares) 
\18\ or

[[Page 31364]]

multiples thereof would have to be placed by or through an authorized 
participant. The agreement signed by each authorized participant would 
require the establishment of a blind trust, with the Funds' custodian 
as trustee, to receive distributions of portfolio securities upon 
redemption.\19\ Accordingly, although redemption proceeds generally 
would be in the form of portfolio securities, rather than cash, the 
redeeming authorized participants would never know what securities they 
had received in exchange for their Shares.\20\
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    \18\ Proposed Rule 8.900(c)(4) defines the term ``Redemption 
Unit'' as a specified number of Managed Portfolio Shares used for 
determining whether a Retail Investor may redeem for cash. 
Currently, the size of a Redemption Unit is 50,000 Shares, but this 
is subject to change.
    \19\ The custodian would act as trustee of the blind trusts, and 
the trustee will be paid by the authorized participant a fee 
negotiated by the funds' adviser on behalf of authorized 
participants.
    \20\ In contrast, an authorized participant redeeming Managed 
Fund Shares generally knows what securities it will receive from the 
fund, because these securities are disclosed on a daily basis as a 
``redemption basket.''
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    The Exchange has stated that it expects that an authorized 
participant would instruct the trustee of its blind trust to liquidate 
redemption securities using market-on-close orders on the date of 
redemption so that the authorized participant would realize redemption 
proceeds as close as possible to the Fund's NAV on the redemption date. 
To allow the Funds' adviser sufficient time to identify the redemption 
securities and transfer the redemption basket of portfolio securities 
to the blind trusts, and to permit the trustee adequate time to process 
liquidation transactions in accordance with the authorized 
participants' instructions, the Exchange expects each of the Funds to 
designate an Order Cut-Off Time prior to the time that its NAV is 
calculated. The redemption basket would 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, tradable sizes, or other situations. The redemption 
securities that the blind trust receives may mirror the portfolio 
holdings of a fund pro rata or, if the adviser determines to reduce one 
or more portfolio exposures through an in-kind distribution, may 
constitute only a portion of the holdings that would not be 
proportionate to the overall portfolio holdings of a Fund.
4. Redemption of Shares Through the Retail Redemption Facility
    Retail Investors would be able to place orders to redeem Shares in 
less than Redemption Unit size by instructing their broker to redeem 
Shares directly from the Fund for cash at NAV (the ``Retail Redemption 
Facility''). Each Fund would be able to impose a transaction fee in 
connection with the redemption of Shares directly with the Fund. This 
fee would be determined by the Fund's adviser, but would not exceed 2%.

II. Summary of the Comments Received

    The Commission received one letter opposing the proposed rule 
change, and two letters supporting it, including one from the Exchange 
responding to the opposing commenter's objections. These letters are 
summarized below.

A. The Gastineau Letter

    This commenter opposes approval of the proposal, presenting a 
number of arguments.\21\ The commenter asserts that there is a 
``significant risk'' that the Internal Revenue Service (``IRS'') will 
deny the purported tax benefits of the Funds' distinctive in-kind 
redemption program.\22\ Therefore, the commenter recommends that 
approval of the proposal be conditioned on the issuer obtaining a 
favorable IRS determination of the tax treatment through a Private 
Letter Ruling.\23\
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    \21\ The commenter notes that he has a retained economic 
interest in a product that may be competitive with Managed Portfolio 
Shares and states that his views on the Exchange's filing ``may be 
considered subject to a conflict of interest.'' Gastineau Letter, 
supra note 4, at 1, n.1.
    \22\ See id. at 5.
    \23\ See id.
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    The commenter predicts that, compared to most existing ETFs, the 
Shares will probably trade with significantly wider bid-ask spreads, 
with more variable premiums and discounts, or with both, because of 
what the commenter characterizes as the unreliability of the Funds' 
proposed method for ensuring secondary market trading efficiency. The 
commenter states that the Funds would not be disclosing any holdings 
(except on a quarterly basis) and that the Funds' market makers would 
have only indirect, and likely imperfect, information about Fund 
holdings.\24\ The commenter argues that effectively arbitraging the 
Funds will be significantly more difficult than the arbitrage for most 
existing foreign ETFs.\25\ The commenter argues that there is no 
support for the Exchange's contention that existing ETFs holding 
portfolios of foreign securities, such as index-based ETFs holding 
Asian stocks, have demonstrated efficient pricing characteristics even 
though, because foreign stocks do not trade during the same hours as 
U.S. ETFs, the ETFs holding foreign stocks do not provide opportunities 
for riskless arbitrage transactions during much of the trading day.\26\ 
The commenter also cites a draft academic working paper \27\ for the 
propositions that market trading efficiency varies significantly by 
type and size of ETF; that funds with high share trading volumes, 
liquid underlying holdings, and efficient arbitrage mechanisms trade 
with relatively tight bid-ask spreads and more stable premiums and 
discounts; and that funds lacking these characteristics generally 
traded with wider spreads and more variable premiums and discounts.
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    \24\ See id. at 8.
    \25\ See id. at 7, 8.
    \26\ See id. at 9.
    \27\ ``Inefficiencies in the Pricing of Exchange-Traded Funds,'' 
Antti Petajisto, September 20, 2013, available at http://www.petajisto.net/.
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    The commenter states that, for a number of reasons, the 
dissemination of a PIV by the Funds is likely to prove ineffective in 
ensuring alignment of secondary market prices for the Shares with the 
values of the underlying portfolios. The commenter asserts that, during 
periods of rapid market movement, the use of last-sale prices to 
calculate a PIV, coupled with the dissemination of the PIV only every 
15 seconds, will mean that the PIV will be a lagging indicator of 
actual portfolio values.\28\ Additionally, the commenter asserts that 
the PIV may reflect clearly erroneous values for securities that have 
not yet opened for trading on a particular business day or that are 
subject to an intraday interruption in trading.\29\ The commenter also 
criticizes the Exchange's representation that the adviser and 
calculation agent will use ``commercially reasonable efforts'' to 
calculate the PIV, arguing that this is a substantially lower standard 
of care than that applying to NAV calculations for ETFs and mutual 
funds.\30\ The commenter further asserts that no one will stand behind 
a Fund's PIV to ensure timeliness and accuracy.\31\ The commenter 
asserts that, without a reliable PIV, the Shares cannot and will not 
trade acceptably in the secondary market.\32\
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    \28\ See Gastineau Letter, supra note 4, at 10.
    \29\ See id.
    \30\ See id. at 10-11.
    \31\ See id. at 11.
    \32\ See id.
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    The commenter predicts that frequent PIV errors will in turn cause 
``erroneous share trades'' to be executed.\33\ The commenter states 
that the proposal does not address the treatment of erroneous share 
trades resulting from a faulty PIV--namely, whether PIV errors and 
related erroneous trades will be detected by the Exchange, whether such 
trades would be cancelled, and whether the Exchange would apply a 
materiality

[[Page 31365]]

standard for cancellations.\34\ The commenter argues that, as a 
condition of approval, the Exchange should be required to monitor the 
timeliness and accuracy of PIV dissemination and to implement 
procedures to address trades when an erroneous PIV has been 
disseminated.\35\
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    \33\ See id. at 13.
    \34\ See id.
    \35\ See id.
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    The commenter also predicts that the following elements of the 
proposed redemption arrangements would introduce additional costs and 
uncertainties for authorized participants:
     The Funds' custodian would have a monopoly position as the 
sole eligible provider of trustee services for the blind trust;
     The Funds' adviser, rather than the authorized 
participant, would negotiate the fees paid to the trustee;
     In contrast to existing ETFs, no authorized participant 
would have the potential ability to use its market knowledge and market 
position to enhance arbitrage profits (or offset arbitrage costs) by 
managing sales of the distributed securities to minimize market impact 
or to realize prices above the market close; and
     The Funds' custodian, who stands in for the authorized 
participant in the sale of distributed securities, would have no 
apparent incentive to sell distributed securities with low market 
impact or at prices above the close and would experience little or no 
downside from doing the opposite.
    The commenter also asserts that redeeming authorized participants 
would be exposed to potential costs and risks associated with not being 
able to control disposition of significantly more concentrated 
redemption proceeds, and the commenter argues that these extra costs 
and risks associated with the blind trust arrangement will be passed 
through to shareholders transacting in the secondary market, reflected 
as wider bid-ask spreads, more volatile premiums and discounts for the 
Shares, or both.
    The commenter posits that the lack of portfolio transparency would 
favor market makers and other professional traders over other market 
participants, such as investors, and the commenter concludes that this 
disparate treatment is contrary to the principle that all participants 
should be on an equal footing with respect to knowledge of a fund's 
holdings.\36\ Notwithstanding the public dissemination of the PIV, the 
commenter argues that market makers and other professional traders 
would have a significant indirect information advantage over other 
participants because of their ability to glean information about a 
Fund's holdings through sophisticated data analysis of changes in the 
PIV.\37\ In particular, the commenter asserts that PIV disclosures 
might enable market makers and professional traders to uncover a Fund's 
holdings and trading activity, rendering the Fund susceptible to the 
dilutive effects of front running.\38\ The commenter asserts that, 
prior to approval, the proposal should be amended to include: (1) A 
discussion of the steps to be taken to minimize reverse engineering 
risk; (2) a discussion of how the Funds propose to resolve the conflict 
between providing market makers with adequate information to support 
efficient Share trading and protecting against reverse engineering; and 
(3) representations that the Funds will adequately disclose reverse-
engineering risk and the conflicts the Funds face in seeking to provide 
for efficient market trading and protection against reverse 
engineering.\39\
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    \36\ See id. at 14-15.
    \37\ See id. at 14.
    \38\ See id. at 15. The commenter discusses certain factors 
determining a fund's susceptibility to reverse engineering using 
intraday valuations disseminated at 15 second intervals. See id.
    \39\ See id. at 15-16.
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    The commenter argues that the Commission should not grant the 
issuer's pending request for exemptive relief under the 1940 Act to 
maintain early Order Cut-Off Times for Fund redemptions, which are 
intended to facilitate the timely sale of distributed securities by the 
blind trusts that receive the proceeds of authorized participant 
redemptions and the efficient processing of redemptions by retail 
investors through the Retail Redemption Facility.\40\
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    \40\ See id. at 16. The commenter alleges that the prospectus 
contains a number of material misstatements and omissions relating 
to in-kind redemptions and direct purchases and redemptions. See id. 
at 27-28.
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    The commenter posits that a principal purpose of including direct 
Share purchases and the Retail Redemption Facility in the proposal is 
to provide comfort to the Commission and market participants that 
investors will be able to transact with the Fund at or near NAV 
whenever secondary market trading prices of shares vary significantly 
from NAV.\41\ The commenter argues that these provisions, as proposed, 
are inadequate for this purpose because: (1) The Retail Redemption 
Facility will be available only to a limited set of shareholders and 
will restricted to redemptions of less than a Redemption Unit of 
shares; (2) the expected early Order Cut-Off Time for direct share 
purchases and the Retail Redemption Facility means that an investor's 
ability to directly purchase or redeem shares for cash will exist for 
only a portion of each business day; (3) investors who directly 
purchase and redeem shares will be subject to transaction fees imposed 
by the Fund of up to 2% and may also be subject to broker-dealer 
processing fees; (4) self-directed investors may not have adequate 
information about the available liquidity options to make intelligent 
choices about how best to buy and sell shares; (5) broker-dealers may 
not have adequate information to ensure that their customers 
consistently receive best execution on transactions in shares, given 
the two distinct liquidity pathways; and (6) broker-dealers may not 
have or may not develop the systems capabilities necessary to support 
customer transactions in Funds offering both secondary market trading 
in shares and direct share purchases and redemptions.\42\
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    \41\ See id. at 17.
    \42\ See id. at 18.
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    The commenter recommends that the Funds should be required to 
extend eligibility for the Retail Redemption Facility to all 
shareholders and that the Order Cut-Off Times for direct purchases of 
shares and redemptions under the Retail Redemption Facility be 
established as of the close of the Exchange's regular trading 
session.\43\ The commenter recommends that the Exchange be required to 
limit trading in shares to broker-dealers that have represented to the 
Exchange that they have systems in place (a) to accommodate direct 
purchases and redemptions of Shares on terms no less favorable than 
secondary market transactions and (b) to ensure best execution of 
transactions in shares, considering both secondary market trading and 
direct purchase and redemption options.\44\ The commenter also 
recommends that the broker-dealers trading shares on the Exchange 
should not be permitted to charge their customers processing fees on 
direct purchases and redemptions of shares that exceed what they charge 
the same customers for secondary market trades.\45\ Further, the 
commenter recommends that the Funds should not be permitted to charge 
transaction fees on direct purchases and redemptions of shares that 
exceed the associated Fund

[[Page 31366]]

expenses incurred, taking into account the size of a specific 
transaction.\46\
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    \43\ See id. at 20.
    \44\ See id.
    \45\ See id.
    \46\ See id. at 20-21. The commenter does not agree with the 
representations made in the proposal relating to certain cost 
efficiencies with respect to: (1) Fund operating expenses as 
reflected in their total expense ratios; (2) Fund trading costs and 
possible cash drag on returns incurred in connection with direct 
purchases and redemptions of shares; (3) transaction fees imposed by 
the Fund on direct purchases and redemptions of shares; and (4) 
processing fees paid by shareholders to their broker-dealers on 
direct purchases and redemptions of shares. See id. at 21-23.
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    The commenter asserts that the Funds should: (1) Be required to 
limit their equity investments to U.S.-exchange-listed stocks with 
market caps of $5 billion or greater (consistent with the general 
understanding of large- and medium-cap stocks; a universe of about 700 
stocks currently); (2) not be permitted to invest in illiquid assets or 
debt instruments of non-U.S. issuers; and (3) not be permitted to 
employ investment leverage or hold short positions.\47\
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    \47\ See id. at 24.
---------------------------------------------------------------------------

    The commenter notes that the Exchange will permit trading in the 
Shares between 4:00 a.m. and 8:00 p.m., but that the PIV will only be 
disseminated during the Core Trading Session of 9:30 a.m. to 4:00 p.m. 
The commenter asserts that the proposal does not adequately address the 
significant risk that the prices of shares bought or sold in the 
Opening Session (4:00 a.m. to 9:30 a.m.) and Late Trading Session (4:00 
p.m. to 8:00 p.m.) will vary widely from underlying portfolio values 
because an updated PIVs would not be available.\48\ Therefore, the 
commenter suggests that trading in shares should be limited to the 
Exchange's Core Trading Session.\49\
---------------------------------------------------------------------------

    \48\ See id.
    \49\ See id.
---------------------------------------------------------------------------

    The commenter states that, given the importance of the PIV to the 
decision-making process of current and prospective Fund investors, all 
Fund investors should have ongoing access to current PIV values.\50\ 
The commenter suggests that each Fund's current PIV be provided at no 
charge on a public Web site and made available to the public no later 
than it is made available to any other market participant.\51\ The 
commenter also suggests that the following information be published on 
the Funds' Web site:
---------------------------------------------------------------------------

    \50\ See id. at 25.
    \51\ See id.
---------------------------------------------------------------------------

     PIV Information--Real-time PIVs updated continuously 
throughout the Exchange's Core Trading Session on each business day; 
updated daily, complete intraday PIV history for at least the 20 most 
recent trading days (allowing buyers and sellers of shares to compare 
their executed prices to reported PIVs at the time of their trade 
execution); updated daily, the prior business day's closing PIV and a 
calculation showing the relationship of closing PIV to NAV (allowing 
investors to evaluate PIV to NAV correspondence); and updated daily, a 
chart and tables showing the frequency distribution and range of the 
closing PIV-to-NAV ratios for each calendar quarter over the life of 
the Fund.\52\
---------------------------------------------------------------------------

    \52\ See id. at 26.
---------------------------------------------------------------------------

     Closing Price Premiums/Discounts--Updated daily, the prior 
business day's closing market price and premium or discount (expressed 
as a percentage) based on the relationship of the closing market price 
to NAV; and, updated daily, a chart showing the frequency distribution 
and range of daily closing price premiums and discounts (expressed as 
percentages) for each calendar quarter over the life of the Fund.
     Intraday Estimated Premiums/Discounts--Updated daily, the 
prior business day's average, minimum, and maximum intraday estimated 
premiums and discounts (expressed as percentages) based on PIVs and 
bid-ask midpoints at each PIV publication time; and, updated daily, a 
chart showing the frequency distribution and range of daily average, 
minimum, and maximum intraday estimated premiums and discounts 
(expressed as percentages) for each calendar quarter over the life of 
the Fund.\53\
---------------------------------------------------------------------------

    \53\ See id.
---------------------------------------------------------------------------

     Bid-Ask Spreads--Updated daily, the prior business day's 
closing bid-ask spread and average, minimum, and maximum intraday bid-
ask spreads (expressed as percentages) during the Exchange's Core 
Trading Session; and, updated daily, a chart showing the frequency 
distribution and range of daily closing bid/ask spreads and intraday 
average, minimum, and maximum bid-ask spreads (expressed as 
percentages) for each calendar quarter over the life of the Fund.\54\
---------------------------------------------------------------------------

    \54\ See id.
---------------------------------------------------------------------------

     Fund Market Exposure and Leverage--Updated daily, the 
prior business day's net long or short equity market exposure and 
amount of investment leverage employed, each expressed as a percentage 
of Fund net assets; and, updated daily, a chart showing the frequency 
distribution and range of the Fund's daily net market exposure and 
leverage percentages for each calendar quarter over the life of the 
Fund.\55\
---------------------------------------------------------------------------

    \55\ See id. at 26-27.
---------------------------------------------------------------------------

     Purchase and Redemption Transaction Fees--Updated daily, 
transaction fees currently applicable to direct purchases of shares, 
redemptions through the Retail Redemption Facility, and redemption unit 
redemptions; and, updated daily, a chart showing the frequency 
distribution and range of transaction fees applicable to direct 
purchases of shares, redemptions through the Retail Redemption 
Facility, and redemption unit redemptions for each calendar quarter 
over the life of the Fund.\56\
---------------------------------------------------------------------------

    \56\ See id. at 27.
---------------------------------------------------------------------------

    Finally, the commenter asserts that, given the fundamental 
differences in how the Shares may be bought or sold, compared to other 
ETFs, it is not appropriate for the Funds to be advertised or marketed 
as ETFs.\57\ Therefore, the commenter recommends that the Commission 
take appropriate steps to ensure that the Exchange, broker-dealers, and 
market data providers do not describe the Funds as ETFs.\58\
---------------------------------------------------------------------------

    \57\ See id. at 28-29.
    \58\ See id.
---------------------------------------------------------------------------

B. The DeCore Letter

    The DeCore Letter supports the proposed rule change, asserting that 
investors would have access for the first time to many different types 
of active management strategies.\59\ The commenter predicts that 
trading spreads in Managed Portfolio Shares will not be as ``tight'' as 
trading spreads in the SPY or QQQ (where futures, options, and equity 
portfolios can be used as a pure hedge), but that a frequent update of 
the intraday indicative value will allow market maker spreads to be 
reasonable.\60\ The commenter asserts that Managed Portfolio Shares 
would have the benefit of intraday trading and of creation and 
redemption at closing NAV and that they would, unlike other ETFs, also 
offer the additional advantage of allowing investors to create or 
redeem directly for cash in amounts less than a creation unit.\61\
---------------------------------------------------------------------------

    \59\ See DeCore Letter, supra note 7, at 1.
    \60\ See id.
    \61\ See id. at 1-2.
---------------------------------------------------------------------------

C. The Exchange's Response Letter

    The Exchange asserts that the concerns of the opposing commenter 
are driven by competitive motives and argues that these concerns should 
not affect the Commission's decision to approve or disapprove the 
proposed rule change.\62\ Instead, according to the Exchange, different 
proposals to list and trade actively managed EFTs without daily 
portfolio disclosure should be

[[Page 31367]]

assessed on their individual merits and risks.\63\ The Exchange also 
asserts that, assuming investor protection concerns are adequately 
addressed, investors and the marketplace can only benefit from listing 
and trading of a variety of products with different structures, 
positing that competitive forces will ultimately decide the success of 
failure of such initiatives.\64\
---------------------------------------------------------------------------

    \62\ See Response Letter, supra note 7, at 5.
    \63\ See id.
    \64\ See id.
---------------------------------------------------------------------------

    More specifically, the Exchange states that the opposing commenter 
offers no direct support for his doubts regarding the assertions by 
lead market makers (``LMMs'') about efficient secondary market trading, 
and the Exchange asserts that these LMMs are uniquely suited to 
prospectively assess the effectiveness of arbitrage in the shares.\65\ 
The Exchange reiterates that market makers have indicated that the 
available information regarding the Shares would be sufficient for 
arbitrage and hedging purposes.\66\ Additionally, the Exchange states 
that, based on discussions with market makers, it expects that market 
makers would agree to act as LMMs in the Shares and believes that no 
market maker would accept an LMM assignment if it were not entirely 
comfortable in its ability to hedge its positions.\67\ The Exchange 
also reiterates that its existing trading surveillance procedures would 
be applied to trading in the Shares and that such procedures are 
adequate to properly deter and detect violations of Exchange rules and 
federal securities laws applicable to trading on the Exchange.\68\
---------------------------------------------------------------------------

    \65\ See id. at 2.
    \66\ See id.
    \67\ See id.
    \68\ See id.
---------------------------------------------------------------------------

    The Exchange agrees with the opposing commenter that an accurate 
PIV would be essential for trading in the Shares, but asserts that the 
commenter offers no support for the assertion that the PIV would be 
unreliable.\69\ The Exchange reiterates that market makers have 
indicated that, after the first few days of trading, there would be 
sufficient data to run a statistical analysis that would lead to 
differences between the Share price of the ETF and the PIV being 
tightened substantially.\70\ The Exchange states that it has no reason 
to believe that the PIV, which would be calculated using methodology 
substantially similar to that used in the calculation of all other ETF 
intraday indicative values, would be inherently unreliable.\71\ The 
Exchange reiterates its view that market participants would accept the 
PIV as a reliable, indicative real-time value because (1) the PIV would 
be calculated and disseminated based on a Fund's actual portfolio 
holdings; (2) the securities in which the Funds plan to invest are 
generally highly liquid and actively traded and therefore generally 
have accurate real-time pricing available; and (3) market participants 
would have a daily opportunity to evaluate whether the PIV at or near 
the close of trading was indeed predictive of the actual NAV.\72\
---------------------------------------------------------------------------

    \69\ See id.
    \70\ See id.
    \71\ See id.
    \72\ See id.
---------------------------------------------------------------------------

    Responding to the opposing commenter's suggestion that the Exchange 
be required to institute a program to monitor the timeliness and 
accuracy of disseminated PIVs and to adopt appropriate procedures for 
the treatment of trades executed during periods when erroneous PIVs 
were disseminated, the Exchange reiterates that it has no reason to 
believe that the PIVs would be inherently unreliable, and therefore it 
does not propose to institute any additional monitoring programs. 
Instead, the Exchange states that it would rely on its existing 
surveillance systems to monitor trading in the Shares.\73\ The Exchange 
also states that all exchanges may cancel trades only according to 
their respective rules and that, while its rule applicable to trade 
cancellations (NYSE Area Equities Rule 7.10) would apply to trading in 
the Shares, that rule neither addresses trade cancellations in the 
event erroneous PIVs are disseminated nor provides the Exchange 
discretion to cancel trades.\74\
---------------------------------------------------------------------------

    \73\ See id. at 3.
    \74\ See id.
---------------------------------------------------------------------------

    In response to the opposing commenter's concerns about the adequacy 
of the risks included in the Exchange's Information Bulletin 
(``Bulletin'')--which would provide Exchange members with key 
information about the Shares--and the commenter's suggestion that 
trading in the Shares be limited to the Core Trading Session, the 
Exchange states that: (1) Its surveillance procedures are operative 
during all trading sessions and are adequate to monitor trading in the 
Shares; (2) that it has no reason to discount the assertions of market 
makers regarding their ability to make efficient markets during all 
trading sessions; and (3) it will ensure that the Bulletin would 
adequately address the special characteristics and risks associated 
with trading in the Shares.\75\
---------------------------------------------------------------------------

    \75\ See id.
---------------------------------------------------------------------------

    In response to the opposing commenter's concern that market 
professionals could reverse-engineer the holdings underlying the Shares 
and thereby obtain an advantage over retail customers, the Exchange 
states that the following information would be publicly available to 
market professionals and retail investors alike: A PIV, disseminated 
every 15 seconds; an NAV, disseminated daily after the close; and the 
national best bid and offer and last trade for the Shares, disseminated 
in real-time through the Consolidated Quotation System and the 
Consolidated Tape.\76\ The Exchange states that, as with other ETFs, 
any independent view that market participants might have about the 
composition of the fund holdings and the value of those holdings would 
be included in the prices at which those participants would be willing 
to trade the product.\77\
---------------------------------------------------------------------------

    \76\ See id.
    \77\ See id.
---------------------------------------------------------------------------

    Responding to the commenter's recommendations that the Funds extend 
eligibility for the Retail Redemption Facility to all shareholders, 
that the Order Cut-off Times for direct purchases of Shares and 
redemption under the Retail Redemption Facility be established as the 
close of the Exchange's Regular Trading Session, and that trading in 
the Shares be limited to broker-dealers that make certain 
representations to the Exchange regarding direct purchases and 
redemptions, the Exchange asserts that the process proposed in the 
Notice is consistent with the applicable provisions of the Act.\78\
---------------------------------------------------------------------------

    \78\ See id. at 4.
---------------------------------------------------------------------------

    Responding to the commenter's recommendation that the PIV be posted 
on each Fund's Web site in real time (along with other information), 
the Exchange states that such real-time Web site disclosure of an 
indicative value is not required of other ETFs.\79\ The Exchange states 
that the PIV is designed to provide guidance regarding variances 
between the prior day's closing prices and intraday changes in the 
value of the underlying portfolio.\80\ The pricing of the Shares 
themselves would be disseminated in real time through the Consolidated 
Quotation System, according to the Exchange.\81\
---------------------------------------------------------------------------

    \79\ See id.
    \80\ See id.
    \81\ See id.
---------------------------------------------------------------------------

    Finally, the Exchange argues that the opposing commenter's 
arguments regarding the following are not relevant to the Commission's 
determination, under Section 19(b) of the Act, whether the Exchange's 
proposal is consistent with the Act: (1) Tax treatment of in-

[[Page 31368]]

kind distributions through the blind trust; (2) early Order Cut-Off 
Times for redemption; (3) cost considerations; \82\ (4) the commenter's 
recommendation to curtail the permitted investments of the funds; and 
(5) prospectus disclosures.\83\
---------------------------------------------------------------------------

    \82\ The Exchange argues that limiting broker-dealer processing 
fees on direct purchases and redemptions of Shares would require 
Commission rulemaking. See id. at 4.
    \83\ See id. at 4-5.
---------------------------------------------------------------------------

III. Proceedings to Determine Whether to Approve or Disapprove SR-
NYSEArca-2014-10 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \84\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described below, the Commission seeks and encourages 
interested persons to provide comments on the proposed rule change.
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\85\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \86\
---------------------------------------------------------------------------

    \85\ Id.
    \86\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval which would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\87\
---------------------------------------------------------------------------

    \87\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 23, 2014. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by July 7, 
2014.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, in addition to any 
other comments they may wish to submit about the proposed rule change. 
In particular, the Commission seeks comment on the statements of the 
Exchange contained in the Notice,\88\ the issues raised by the opposing 
commenter, the Exchange's responses to those issues, and any other 
issues raised by the listing and trading of an actively managed ETF 
that does not make daily public disclosure of its investment portfolio.
---------------------------------------------------------------------------

    \88\ Supra, note 3.
---------------------------------------------------------------------------

    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 rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2014-10 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 Numbers SR-NYSEArca-2014-10. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of these filings also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2014-10 and should 
be submitted on or before June 23, 2014. Rebuttal comments should be 
submitted by July 7, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\89\
---------------------------------------------------------------------------

    \89\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-12647 Filed 5-30-14; 8:45 am]
BILLING CODE 8011-01-P


