
[Federal Register Volume 79, Number 148 (Friday, August 1, 2014)]
[Notices]
[Pages 44875-44878]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18128]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72693]


Order Granting a Limited Exemption From Rule 102 of Regulation M 
Concerning the BATS Exchange, Inc.'s Pilot Supplemental Competitive 
Liquidity Provider Program

July 28, 2014.
    The Securities and Exchange Commission (``Commission'') approved a 
proposed rule change of the BATS Exchange, Inc. (``Exchange'' or 
``BATS'') to add new Interpretation and Policy .03 to Rule 11.8 (``New 
IP .03'') which establishes the Supplemental Competitive Liquidity 
Provider (``CLP'') Program (``CLP Program'' or ``Program'') effective 
for one year on a pilot basis (the ``pilot''). The CLP Program permits 
certain market makers to become CLPs (``ETP CLPs'') in exchange-traded 
products (``ETPs'').\1\ The Exchange states that the CLP Program is 
designed to incentivize quoting volume in certain ETPs by providing 
credit to CLPs for certain market making activity.\2\ Participating 
issuers (or sponsors on behalf of the issuer) fund the Program by 
paying non-refundable ``CLP Fees,'' which are then credited to the 
Exchange's general revenues.\3\ The

[[Page 44876]]

Commission believes that payment of the CLP Fee by the issuer (or a 
sponsor on behalf of the issuer) for the purpose of incentivizing 
market makers to participate as a CLP in the issuer's otherwise less 
liquid 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.\4\ As a result, absent exemptive relief, 
participation in the CLP Program by an issuer (or sponsor on behalf of 
the issuer) would violate Rule 102 of Regulation M.\5\ 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 New IP .03(f) (establishing the qualifications to be a 
CLP); see also Securities Exchange Act Release No. 72692 (July 28, 
2014) (SR-BATS 2014-022) (``Approval Order'') (providing more 
details regarding the Program).
    \2\ See Approval Order. The Approval Order contains a detailed 
description of the Program. The proposed rule change was published 
for comment in the Federal Register on June 13, 2014. Securities 
Exchange Act Release No. 72346 (Jun. 9, 2014), 79 FR 33982 (Jun. 13, 
2014). The Approval Order grants approval of the proposed rule 
change.
    \3\ The program is similar to other programs, such as NYSE 
Arca's ``ETP Incentive Program'' and NASDAQ Stock Market LLC's 
``Market Quality Program,'' designed to permit ETP issuers to pay 
incentives to those who make markets in their ETPs. See Securities 
Exchange Act Release No. 69706 (June 6, 2013); 78 FR 35340 (June 12, 
2013) (NYSEArca 2013-34) and Securities Exchange Act Release No. 
69195 (Mar. 20, 2013); 78 FR 18393 (Mar. 26, 2013) (NASDAQ 2012-
137); see also Securities Exchange Act Release No. 69707 (June 6, 
2013); 78 FR 35330 (June 12, 2013) (approving a limited exemption 
from Rule 102 of Regulation M concerning NYSE Arca's ETP Incentive 
Program Pilot); Securities Exchange Act Release No. 69196 (Mar. 20, 
2013); 78 FR 18410 (Mar. 26, 2013) (approving a limited exemption 
from Rule 102 of Regulation M concerning NASDAQ Stock Market LLC's 
Market Quality Program Pilot); and Securities Exchange Act Release 
No. 71805 (Mar. 26, 2014); 78 FR 18365 (Apr. 1, 2014) (approving a 
limited exemption from Rule 102 of Regulation M concerning NYSE 
Arca's Crowd Participant Program Pilot).
    \4\ See Securities Exchange Act Release No. 67411 (July 11, 
2012), 77 FR 42052 (July 17, 2012) (stating that ``[t]he Commission 
believes that issuer payments made under the [similar ETP Incentive 
and Market Quality Programs] 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'' and that ``[u]nder the [similar ETP Incentive Program], the 
purpose of the Program is `to create [an 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''). Similarly, the issuer pays for the Program for 
the stated purpose of incentivizing market makers to quote in 
certain ETPs, which also could induce bids or purchases for the 
issuer's security during a restricted period. See Approval Order.
    \5\ 17 CFR 242.102.
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    BATS stated that the CLP Program is designed to incentivize market 
makers to quote in certain ETPs.\6\ An issuer of an ETP that 
participates in the CLP Program would elect to pay a CLP Fee to BATS in 
an amount ranging from $10,000 to $100,000 per year, with the actual 
amount above $10,000 to be determined by the issuer.\7\ The CLP Fee is 
in addition to the current standard listing fee applicable to the ETP 
and is paid by the issuer to the Exchange's general revenues.\8\ 
Subject to the requirements set forth in New IP .03, the amount of a 
total daily payment available to CLPs (``CLP Rebate'') will be equal to 
one quarter of the total annual CLP Fees (basic and supplemental 
combined) for the security participating in the Program (``CLP 
Security'') divided by the number of trading days in the current 
quarter.\9\ If no CLP is eligible to receive a CLP Rebate because the 
CLP Program performance standards were not met by any CLP, no CLP would 
receive a CLP Rebate.\10\ The voluntary Program established by New IP 
.03 will be effective for one year on a pilot basis.\11\
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    \6\ See Approval Order.
    \7\ See Approval Order.
    \8\ Id.
    \9\ Id.; see also New IP .03(m)(1). In the Approval Order, the 
following example is provided: Where the total CLP Fees for a CLP 
Security is $64,000 and there are 64 trading days in the current 
quarter, the total CLP Rebate for the CLP Security would be $250 
(($64,000/4)/64).
    \10\ See Approval Order.
    \11\ New IP .03(p).
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    The Exchange will provide notification on its Web site regarding 
the following: (i) Acceptance of a CLP Company,\12\ on behalf of a CLP 
Security, or a CLP into the Program; (ii) the total number of CLP 
Securities that any one CLP Company may have in the Program; (iii) the 
names of CLP Securities and the CLP(s) in each CLP Security, the dates 
that a CLP Company, on behalf of a CLP Security, commences 
participation in and withdraws or is terminated from the Program, and 
the name of each CLP Company and its associated CLP Security or 
Securities; (iv) a statement about the Program that sets forth a 
general description of the Program as implemented on a pilot basis and 
a fair and balanced summation of the potentially positive aspects of 
the Program (e.g., enhancement of liquidity and market quality in CLP 
Securities) as well as the potentially negative aspects and risks of 
the Program (e.g., possible lack of liquidity and negative price impact 
on CLP Securities that are withdrawn or are terminated from the 
Program), and indicates how interested parties can get additional 
information about CLP Securities in the Program; and (v) the intent of 
a CLP Company, on behalf of a CLP Security, or the CLP to withdraw from 
the Program, and the date of actual withdrawal or termination from the 
Program.\13\ In addition, a CLP Company that, on behalf of a CLP 
Security, is approved to participate in the Program shall issue a press 
release to the public when the CLP Company, on behalf of a CLP 
Security, commences or ceases participation in the Program.\14\ The 
press release shall be in a form and manner prescribed by the Exchange, 
and, if practicable, shall be issued at least two days before 
commencing or ceasing participation in the Program.\15\ The CLP Company 
shall dedicate space on its Web site, or, if it does not have a Web 
site, on the Web site of the Sponsor of the CLP Security, which space 
will (i) include any such press releases, and (ii) provide a hyperlink 
to the dedicated page on the Exchange's Web site that describes the 
Program.\16\
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    \12\ CLP Company is defined in New IP .03(b)(2) as ``the trust 
or company housing the ETP or, if the ETP is not a series of a trust 
or company, then the ETP itself. . . .''
    \13\ See New IP .03(o).
    \14\ See New IP .03(d)(4).
    \15\ Id.
    \16\ Id.
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    The Commission received no comments on the proposal.\17\ However, 
certain commenters expressed concerns about similar ETP Incentive and 
Market Quality Programs,\18\ 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.\19\ In 
particular, commenters to those similar proposals discussed the 
potential distortive impact on the natural market forces of supply and 
demand.\20\ Commenters to those proposals also discussed what they 
viewed as the failure of those programs, as originally conceived, to 
adequately mitigate their potential negative impacts.\21\
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    \17\ See Approval Order.
    \18\ See note 3, supra.
    \19\ 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, in which he stated, ``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 [NYSE Arca 
ETP Incentive 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.
    \20\ See, e.g., Letter from F. William McNabb, Chairman and 
Chief Executive Officer, Vanguard, dated Aug. 16, 2012.
    \21\ See, e.g., Letter from Gus Sauter, Managing Director and 
Chief Investment Officer, Vanguard, dated June 7, 2012.
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    For example, 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.'' \22\ 
Another commenter

[[Page 44877]]

questioned whether any safeguards could alleviate their concerns 
regarding issuer payments to market makers.\23\ Another commenter 
questioned whether information relating to the similar Market Quality 
Program posted to that exchange's Web site in a similar manner as 
required in New IP .03 by BATS 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.\24\
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    \22\ Letter from F. William McNabb, Chairman and Chief Executive 
Officer, Vanguard, dated Aug. 16, 2012.
    \23\ Letter from Ari Burstein, ICI, dated Aug. 16, 2012 (stating 
that ``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'').
    \24\ Letter from Gus Sauter, Managing Director and Chief 
Investment Officer, Vanguard, dated (May 3, 2012) (asking whether it 
is 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 given what is known about investor 
behavior and, if not, asserting that ``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 \25\ 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.\26\ As mentioned 
above, the Commission believes that the payment of the CLP Fee would 
constitute an indirect attempt to induce a bid for or purchase of a 
covered security during the applicable restricted period.\27\ As a 
result, absent exemptive relief, participation in the Program by a 
sponsor or issuer would violate Rule 102.
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    \25\ Covered security is defined as any security that is the 
subject of a distribution, or any reference security. 17 CFR 
242.100(b).
    \26\ 17 CFR 242.102(a).
    \27\ See note 3, supra.
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    On the basis of the conditions set out below and the requirements 
set forth in New IP .03, 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 CLP Fee as 
set forth in New IP .03 during the pilot.\28\ 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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    \28\ 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 CLP 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 CLP 
Fee on the natural market forces of supply and demand. The general 
disclosures required by New IP .03, while helpful, may not be 
sufficient to obtain this result.\29\ 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.\30\
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    \29\ New IP .03(d)(4) 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's or sponsor's press release and Web page directly contain a 
number of helpful disclosures for investors, including risks of the 
program.
    \30\ 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 CLP 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 IP .03. These 
requirements can be satisfied via the press release and dedicated Web 
page required by New IP .03(d)(4), 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).\31\ We also note that, to the extent that information 
about participation in the Program is material, disclosure of this kind 
may already be required by the federal securities laws and rules.
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    \31\ See condition (4), infra.
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Conclusion

    It is therefore ordered, that issuers or sponsors who pay a CLP Fee 
are hereby exempted from Rule 102 of Regulation M solely to permit the 
payment of the CLP Fee as set forth in New IP .03 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 IP .03.
    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 a CLP 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

[[Page 44878]]

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 CLP 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 CLP Fee as set forth in New IP .03 for a 
security that is an ETP participating in the Program,\32\ and does not 
extend to any other activities, any other security of the trust related 
to the participating ETP, or any other issuers.\33\ 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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    \32\ All ETPs that are allowed to participate in the Program 
have a pool of underlying assets. See New Rule 7.25(b)(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.
    \33\ 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.\34\
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    \34\ 17 CFR 200.30-3(a)(6).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18128 Filed 7-31-14; 8:45 am]
BILLING CODE 8011-01-P


