
[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Notices]
[Pages 68309-68318]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26949]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73562; File No. SR-NASDAQ-2014-020]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, Relating to Listing and Trading of Exchange-Traded Managed 
Fund Shares

November 7, 2014.

I. Introduction

    On February 26, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt Nasdaq Rule 5745, which 
would govern the listing and trading of Exchange-Traded Managed Fund 
Shares (``ETMF Shares'' or ``ETMFs''), and to amend related references 
under Nasdaq Rules 4120, 5615, IM-5615-4, and 5940. The proposed rule 
change was published for comment in the Federal Register on March 12, 
2014.\3\ The Commission initially received four comment letters on the 
proposal.\4\ On April 23, 2014, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within 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.\6\ On June 9, 2014, the Commission instituted 
proceedings to determine whether to approve or disapprove the proposed 
rule change.\7\ In response to the Order Instituting Proceedings, the 
Commission received one comment letter on the proposal.\8\ On September 
4,

[[Page 68310]]

2014, the Commission issued a notice of designation of a longer period 
for Commission action on proceedings to determine whether to approve or 
disapprove the proposed rule change.\9\ On September 12, 2014, the 
Exchange filed Amendment No. 1 to the proposed rule change.\10\ 
Thereafter, the Commission received two additional comment letters on 
the proposed rule change.\11\ The Commission is publishing this notice 
to solicit comments from interested persons on Amendment No. 1 to the 
proposed rule change and is approving the proposed rule change, as 
modified by Amendment No. 1 thereto, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71657 (Mar. 6, 
2014), 79 FR 14092 (Mar. 12, 2014) (SR-NASDAQ-2014-020) 
(``Notice'').
    \4\ See Letters to the Commission from Christopher Davis, 
President, Money Management Institute, dated March 27, 2014 (``MMI 
Letter''); Robert Tull, President, Robert Tull & Co., dated March 
31, 2014 (``Tull Letter''); Avi Nachmany, Co-Founder, Director of 
Research, E.V.P., Strategic Insight, dated Apr. 1, 2014 (``Strategic 
Insight Letter''); and Eric Noll, President and Chief Executive 
Officer, ConvergEx Group, LLC, dated Apr. 1, 2014 (``ConvergEx 
Letter'').
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 72007 (Apr. 23, 
2014), 79 FR 24045 (Apr. 29, 2014) (SR-NASDAQ-2014-020). The 
Commission determined that it was appropriate to designate a longer 
period within which to take action on the proposed rule change so 
that it had sufficient time to consider the proposed rule change. 
Accordingly, the Commission designated June 10, 2014 as the date by 
which it should approve, disapprove, or institute proceedings to 
determine whether to disapprove the proposed rule change.
    \7\ See Securities Exchange Act Release No. 72350 (Jun. 9, 
2014), 79 FR 33959 (Jun. 13, 2014) (SR-NASDAQ-2014-020) (``Order 
Instituting Proceedings''). In the Order Instituting Proceedings, 
the Commission noted, among other things, that questions remained as 
to whether the Exchange's proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically whether it 
is designed to prevent fraudulent and manipulative acts and 
practices, promotes just and equitable principles of trade, and 
protects investors and the public interest.
    \8\ See Letter to the Commission from Thomas E. Faust, Jr., 
Chairman and Chief Executive Officer, on behalf of Eaton Vance 
Corporation and its subsidiaries Eaton Vance Management and Navigate 
Fund Solution LLC (collectively, ``Eaton Vance''), dated July 3, 
2014 (``Eaton Vance Letter''). Eaton Vance Management and the Eaton 
Vance ETMF Trust have, as co-applicants, filed an application with 
the Commission seeking relief from certain provisions of the 
Investment Company Act of 1940 (``1940 Act'') to permit them to 
offer ETMFs. The Commission published notice of this application 
(``Notice of Application for Exemptive Relief'') on November 6, 
2014. See Investment Company Act Release No. 31333 (Nov. 6, 2014) 
(Eaton Vance Management, et al.; Notice of Application). Navigate 
Fund Solutions LLC (``Navigate'') owns patent rights and other 
protected intellectual property relating to ETMFs and NAV-Based 
Trading that it intends to license to Nasdaq to support the listing 
and trading of ETMFs that have themselves entered into license 
agreements with Navigate.
    \9\ See Securities Exchange Act Release No. 72987 (Sept. 4, 
2014), 79 FR 53808 (Sept. 10, 2014) (SR-NASDAQ-2014-020).
    \10\ In Amendment No. 1, Nasdaq confirmed that all ETMFs listed 
on the Exchange will have a unique identifier associated with their 
ticker symbols and that, in the systems used to transmit and process 
transactions in ETMF Shares, an ETMF's next-determined NAV will be 
represented by a proxy price. Previously, the filing stated that 
Nasdaq expects all ETMFs listed on the Exchange to have a unique 
identifier associated with their ticker symbols and that Nasdaq 
expects an ETMF's next-determined NAV to be represented by a proxy 
price. Additionally, the Exchange removed references to ETMF entry 
and annual fees as the Exchange intends to address such fees in a 
separate filing.
    \11\ See Letters to the Commission from Daniel J. McCabe, Chief 
Executive Officer, Precidian Investments LLC (``Precidian''), dated 
October 30, 2014 (``Precidian Letter'') and Thomas E. Faust, Jr., 
Chairman and Chief Executive Officer, on behalf of Eaton Vance, 
dated October 31, 2014 (``Eaton Vance Response Letter'').
---------------------------------------------------------------------------

II. Description of the Proposal \12\
---------------------------------------------------------------------------

    \12\ The Commission notes that more detailed information 
regarding the proposal is included in the Notice. See Notice, supra 
note 3.
---------------------------------------------------------------------------

    The Exchange proposes to adopt new Nasdaq Rule 5745 to govern the 
listing and trading of ETMF Shares.\13\ At this time, Nasdaq is not 
proposing to list any ETMF Shares under new Nasdaq Rule 5745.\14\ 
Unlike actively-managed exchange-traded funds, ETMFs will not be 
required under Nasdaq Rule 5745 to disclose their holdings on a daily 
basis.\15\ The Exchange states that, as required for traditional open-
end investment companies, ETMFs will disclose their full portfolio 
positions at least quarterly, with a delay (not to exceed 60 days). 
Nasdaq will deem ETMF Shares to be equity securities, thus rendering 
trading in ETMF Shares subject to Nasdaq's existing rules governing the 
trading of equity securities.
---------------------------------------------------------------------------

    \13\ Nasdaq intends to enter into a license agreement to allow 
for the listing and trading of ETMF Shares on the Exchange. The 
Exchange states that aspects of ETMFs and NAV-Based Trading 
(described below) are protected intellectual property subject to 
issued and pending U.S. patents held by Navigate, a wholly owned 
subsidiary of Eaton Vance Corporation. Nasdaq will enter into a 
license agreement with Navigate to allow for NAV-Based Trading on 
the Exchange of ETMFs that have themselves entered into license 
agreements with Navigate.
    \14\ Nasdaq Rule 5745(b)(1) provides that Nasdaq will file 
separate proposals under Section 19(b) of the Act before the listing 
of any specific ETMF Shares.
    \15\ Nasdaq lists actively-managed funds under Nasdaq Rule 5735, 
which requires the identities and quantities of the securities and 
other assets held by a fund to be disseminated at least once daily. 
See Nasdaq Rule 5735 (d)(2)(B)(i).
---------------------------------------------------------------------------

    ETMF Shares will trade on Nasdaq using a new trading protocol 
called ``NAV-Based Trading.'' \16\ In NAV-Based Trading, as described 
in Nasdaq Rule 5745(b)(3), all bids, offers, and execution prices will 
be expressed as a premium/discount (which may be zero) to the ETMF's 
next-determined net asset value, or NAV \17\ (e.g., NAV-$0.01; 
NAV+$0.01). An ETMF's NAV will be determined each business day, 
normally as of 4:00 p.m. Eastern Time. Executions using NAV-Based 
Trading will be binding at the time orders are matched on Nasdaq's 
facilities, with the transaction prices contingent upon the 
determination of the ETMF's NAV at the end of the business day.\18\
---------------------------------------------------------------------------

    \16\ Nasdaq represents that all ETMFs listed on the Exchange 
will have a unique identifier associated with their ticker symbols, 
which would indicate that their Shares are traded using NAV-Based 
Trading. See Amendment No. 1, supra note 10.
    \17\ As with other registered open-end investment companies, the 
NAV of ETMF Shares generally would be calculated daily Monday 
through Friday as of the close of regular trading on the New York 
Stock Exchange, normally 4:00 p.m. Eastern Time. NAV would be 
calculated by dividing the ETMF's net asset value by the number of 
ETMF Shares outstanding. See Notice at note 9, supra note 3.
    \18\ Because, in NAV-Based Trading, prices of executed trades 
are not determined until the reference NAV is calculated, buyers and 
sellers of ETMF Shares during the trading day will not know the 
final value of their purchases and sales until the end of the 
trading day.
---------------------------------------------------------------------------

    Member firms will utilize existing order types and interfaces to 
transmit ETMF Share bids and offers to Nasdaq, which will process ETMF 
Share trades like trades in shares of ETFs and other listed securities. 
Nasdaq represents that an ETMF's next-determined NAV will be 
represented by a proxy price (e.g., 100.00) and a premium/discount of a 
stated amount to the next-determined NAV to be represented by the same 
increment/decrement from the proxy price used to denote NAV (e.g., NAV-
$0.01 would be represented as 99.99; NAV+$0.01 as 100.01).\19\ To avoid 
potential investor confusion, Nasdaq will work with member firms and 
providers of market data services to seek to ensure that 
representations of intraday bids, offers, and execution prices for 
ETMFs that are made available to the investing public follow the ``NAV-
$0.01/NAV+$0.01'' (or similar) display format, rather than displaying 
proxy prices.
---------------------------------------------------------------------------

    \19\ See Amendment No. 1, supra note 10. Order transmission and 
processing systems currently in common use by exchanges and member 
firms are generally not designed to accommodate pricing 
arrangements, such as NAV-Based Trading, in which bids, offers, and 
execution prices are determined by reference to a price or value 
that is unknown at the time of trade execution. Compared to the 
alternative of building and maintaining (and requiring member firms 
to build and maintain) a dedicated NAV-Based Trading order 
transmission and processing system, the Exchange believes that the 
proposed approach (using, for processing purposes, a proxy price to 
represent next-determined NAV) offers major advantages in terms of 
cost, efficiency, and time to implement. To convert proxy prices 
used to represent intraday bids, offers, and execution prices into 
prices expressed in relation to the next-determined NAV, member 
firms would subtract from the reported proxy price (e.g., 99.99) the 
proxy for NAV (e.g., 100.00) and insert ``NAV'' in front of the 
calculated number expressed in dollars (e.g., 99.99-100.00 = -0.01, 
expressed as ``NAV-$0.01'').
---------------------------------------------------------------------------

    Nasdaq will report intraday bids, offers, and trades for ETMFs in 
real-time to the Consolidated Tape using the proxy price format. In 
addition, Nasdaq will disseminate intraday ETMF bids, offers, and 
trades through a proprietary exchange data feed using the NAV + $.01/
NAV-$.01 format.\20\ The Exchange will also provide the member firms 
participating in each ETMF Share trade with a contemporaneous notice of 
trade execution, indicating the number of ETMF Shares bought or sold 
and the executed premium/discount to NAV.\21\
---------------------------------------------------------------------------

    \20\ The ETMF bid, offer, and trade information disseminated to 
the Consolidated Tape will be the same information disseminated 
though a proprietary Nasdaq data feed and will differ only in the 
format in which the information is provided (proxy price format on 
the Consolidated Tape versus NAV plus or minus format on the 
proprietary Nasdaq data feed).
    \21\ All orders to buy or sell an ETMF Share that are not 
executed on the day the order is submitted would be automatically 
cancelled as of the close of trading on such day.
---------------------------------------------------------------------------

    After the Reporting Authority (defined below) calculates an ETMF's 
NAV and provides this information to the Exchange, Nasdaq will price 
each ETMF Share trade entered into during the day at the ETMF's NAV 
plus/minus the trade's executed premium/discount. Using the final trade 
price, each ETMF Share trade will then be disseminated through a 
proprietary exchange data feed and confirmed to the member firms

[[Page 68311]]

participating in the trade, supplementing the previously provided 
information with final pricing information. After the final trade price 
is determined, Nasdaq will deliver the ETMF Share trading data to the 
National Securities Clearing Corporation (``NSCC'') for clearance and 
settlement, following the same processes used for the clearance and 
settlement of trades in other exchange-traded securities.

Proposed Listing Rules for Exchange-Traded Managed Fund Shares

    Nasdaq Rule 5745(b)(1) provides that Nasdaq will file separate 
proposals under Section 19(b) of the Act before the listing of any 
specific ETMF Shares. Nasdaq Rule 5745(b)(2) provides that transactions 
in ETMF Shares will occur during Nasdaq's Regular Market Session 
through 4:00 p.m.\22\ Nasdaq Rule 5745(b)(3) provides that ETMF Shares 
will trade on Nasdaq at market-determined premiums or discounts to the 
next-determined NAV, and that the minimum price variation for quoting 
and entry of orders in ETMF Shares will be $0.01. Nasdaq Rule 
5745(b)(4) provides that Nasdaq will implement written surveillance 
procedures for ETMF Shares. Nasdaq Rule 5745(b)(5) provides that, for 
ETMF Shares based on an international or global portfolio, the 
statutory prospectus or the application for exemption from provisions 
of the 1940 Act for such series of ETMF Shares must state that such 
series must comply with the federal securities laws in accepting 
securities for deposit and satisfying redemptions with securities, 
including that the securities accepted for deposit and the securities 
used to satisfy redemption requests are sold in transactions that would 
be exempt from registration under the Securities Act of 1933 
(``Securities Act'').
---------------------------------------------------------------------------

    \22\ Nasdaq Rule 4120(b)(4) defines the Regular Market Session 
as the trading session from 9:30 a.m. to 4:00 p.m. or 4:15 p.m. ETMF 
Shares would trade until 4:00 p.m.
---------------------------------------------------------------------------

    Definitions. Nasdaq Rule 5745(c)(1) defines the term ``ETMF Share'' 
as a security that: (1) Represents an interest in a registered 
investment company organized as an open-end management investment 
company that invests in a portfolio of securities and other assets 
selected and managed by the ETMF's investment adviser consistent with 
the ETMF's investment objectives and policies; (2) is issued in 
specified aggregate unit quantities in return for a deposit of a 
specified portfolio of securities and/or a cash amount with a value per 
Share equal to the ETMF's NAV; (3) when aggregated in the same 
specified unit quantities, may be redeemed in exchange for a specified 
portfolio of securities and/or cash with a value per Share equal to the 
ETMF's NAV; and (4) is traded on Nasdaq or another national securities 
exchange using NAV-Based Trading, including pursuant to unlisted 
trading privileges.
    In addition, Nasdaq Rule 5745(c)(2) defines the term ``Intraday 
Indicative Value'' (``IIV'') as the estimated indicative value of an 
ETMF Share based on current information regarding the value of the 
securities and other assets held by the ETMF. Nasdaq Rule 5745(c)(3) 
defines the term ``Composition File'' as the specified portfolio of 
securities and/or cash that an ETMF will accept as a deposit in issuing 
ETMF Shares and the specified portfolio of securities and/or cash that 
an ETMF will deliver in a redemption of ETMF Shares. The current 
Composition File will be disseminated through the NSCC once each 
business day before the open of trading in ETMF Shares on Nasdaq on 
such day. To maintain the confidentiality of current portfolio trading, 
an ETMF's Composition File generally will not be a pro rata reflection 
of the ETMF's securities positions. Each security included in the 
Composition File will be a current holding of the ETMF, but the 
Composition File generally will not include all of the securities in 
the ETMF's portfolio or match the weightings of the included securities 
in the portfolio. The Composition File also may consist entirely of 
cash, in which case it would not include any of the securities in the 
ETMF's portfolio.
    Nasdaq Rule 5745(c)(4) defines the term ``Reporting Authority'' as 
Nasdaq, an institution or a reporting service designated by Nasdaq as 
the official source for calculating and reporting information relating 
to such series of ETMF Shares, including, but not limited to, the IIV, 
the amount of any cash distribution to holders of ETMF Shares, NAV, the 
Composition File, or other information relating to the issuance, 
redemption, or trading of ETMF Shares. A series of ETMF Shares may have 
more than one Reporting Authority, each having different functions.
    Initial and Continued Listing. Nasdaq Rule 5745(d) sets forth the 
initial and continued listing criteria applicable to ETMF Shares. 
Nasdaq Rule 5745(d)(1)(A) provides that, for each series of ETMF 
Shares, Nasdaq will establish a minimum number of ETMF Shares required 
to be outstanding at the time of commencement of trading. In addition, 
under Nasdaq Rule 5745(d)(1)(B), Nasdaq will obtain a representation 
from the issuer of each series of ETMF Shares that the NAV for such 
series will be calculated on each business day that the New York Stock 
Exchange is open for trading and that the NAV will be made available to 
all market participants at the same time. Under Nasdaq Rule 
5745(d)(1)(C), the Reporting Authority that provides the Composition 
File must implement and maintain, or be subject to, procedures designed 
to prevent the use and dissemination of material, non-public 
information regarding the ETMF's portfolio positions and changes in 
positions.
    Nasdaq Rule 5745(d)(2)(A) provides that each series of ETMF Shares 
could continue to be listed and traded if the IIV for the ETMF Shares 
is widely disseminated by one or more major market data vendors at 
intervals of not more than 15 minutes during the Regular Market Session 
when the ETMF Shares trade on Nasdaq. As stated in the Notice, the 
purpose of IIVs in NAV-Based Trading is to enable investors to 
determine the number of ETMF Shares to buy or sell if they want to 
transact in an approximate dollar amount. For this purpose, Nasdaq 
believes that dissemination of IIVs at intervals of not more than 15 
minutes should generally be sufficient. The Exchange states that more 
frequent dissemination of IIVs may increase fund costs without apparent 
benefit and could focus unwarranted investor attention on these 
disclosures. Moreover, for certain strategies, more frequent IIV 
disclosure could provide unintended information about current portfolio 
trading activity to market participants who possess the requisite 
analytical capabilities, computation power, and motivation to reverse 
engineer the ETMF's portfolio positions. An ETMF will be permitted to 
disseminate IIVs at intervals of less than 15 minutes, but would not be 
required to do so to maintain trading on the Exchange.
    Nasdaq Rule 5745(d)(2)(B) provides that Nasdaq will consider the 
suspension of trading in, or removal from listing of, a series of ETMF 
Shares under any of the following circumstances: (1) If, following the 
initial twelve-month period after commencement of trading on the 
Exchange of a series of ETMF Shares, there are fewer than 50 beneficial 
holders of the series of ETMF Shares for 30 or more consecutive trading 
days; (2) if the ETMF's IIV or NAV is no longer calculated or if its 
IIV, NAV, or Composition File is no longer available to all market 
participants at the same time; (3) if the ETMF has failed to submit any 
filings required by the Commission or if Nasdaq is aware that the ETMF 
is not in compliance with the

[[Page 68312]]

conditions of any exemptive order or no-action relief granted by the 
Commission with respect to the series of ETMF Shares; or (4) if such 
other event shall occur or condition exists which, in the opinion of 
Nasdaq, makes further dealings on Nasdaq inadvisable.
    Nasdaq Rule 5745(d)(2)(C) provides that, if the IIV of a series of 
ETMF Shares is not being disseminated as required, Nasdaq may halt 
trading during the day in which the interruption to the dissemination 
of the IIV occurs. If the interruption to the dissemination of the IIV 
persists past the trading day in which it first occurred, Nasdaq will 
halt trading no later than the beginning of the trading day following 
the interruption. In addition, if the Exchange becomes aware that the 
NAV with respect to a series of ETMF Shares is not calculated on each 
business day that the New York Stock Exchange is open for trading and 
disseminated to all market participants at the same time, it will halt 
trading in such series until such time as the NAV is available to all 
market participants at the same time. If Nasdaq becomes aware that the 
Composition File with respect to a series of ETMF Shares is not 
disseminated to all market participants at the same time, it will halt 
trading in such series until such time as the Composition File is 
available to all market participants at the same time.
    In addition, Nasdaq Rule 5745(d)(2)(D) provides that, upon 
termination of an ETMF, the ETMF Shares issued in connection with such 
entity must be removed from listing on Nasdaq. Nasdaq Rule 
5745(d)(2)(E) provides that voting rights must be as set forth in the 
applicable ETMF prospectus.
    Additional Provisions. Nasdaq Rule 5745(e) provides that neither 
Nasdaq, the Reporting Authority, nor any agent of Nasdaq shall have any 
liability for damages, claims, losses, or expenses caused by any 
errors, omissions, or delays in calculating or disseminating any of the 
following: The current portfolio value; the current value of the 
securities and other assets required to be deposited in connection with 
the issuance of ETMF Shares; the amount of any dividend-equivalent 
payment or cash distribution to holders of ETMF Shares; NAV; the 
Composition File; or other information relating to the purchase, 
redemption, or trading of ETMF Shares, resulting from any negligent act 
or omission by Nasdaq, the Reporting Authority, or any agent of Nasdaq, 
or any act, condition, or cause beyond the reasonable control of 
Nasdaq, its agent, or the Reporting Authority, including, but not 
limited to, an act of God, fire, flood, extraordinary weather 
conditions, war, insurrection, riot, strike, accident, action of 
government, communications or power failure, equipment or software 
malfunction, or any error, omission, or delay in the reports of 
transactions in one or more underlying securities.
    Nasdaq Rule 5745(f) applies only to series of ETMF Shares that are 
the subject of an order by the Commission exempting such series from 
certain prospectus delivery requirements under Section 24(d) of the 
1940 Act and are not otherwise subject to prospectus delivery 
requirements under the Securities Act. Nasdaq will inform its members 
regarding application of Nasdaq Rule 5745(f) to a particular series of 
ETMF Shares by means of an information circular prior to commencement 
of trading in such series. Under the rule, Nasdaq requires that members 
provide to all purchasers of a series of ETMF Shares a written 
description of the terms and characteristics of those securities, in a 
form prepared by the open-end management investment company issuing 
such securities, not later than the time a confirmation of the first 
transaction in such series is delivered to such purchaser. In addition, 
members shall include such a written description with any sales 
material relating to a series of ETMF Shares that is provided to 
customers or the public. Any other written materials provided by a 
member to customers or the public making specific reference to a series 
of ETMF Shares as an investment vehicle must include a statement in 
substantially the following form: ``A circular describing the terms and 
characteristics of (the series of ETMF Shares) has been prepared by the 
(open-end management investment company name) and is available from 
your broker. It is recommended that you obtain and review such circular 
before purchasing (the series of ETMF Shares).'' A member carrying an 
omnibus account for a non-member broker-dealer is required to inform 
such non-member that execution of an order to purchase a series of ETMF 
Shares for such omnibus account would be deemed to constitute agreement 
by the non-member to make such a written description available to its 
customers on the same terms as are directly applicable to members under 
this rule. Upon request of a customer, a member shall also provide a 
prospectus for the particular series of ETMF Shares.
    Nasdaq Rule 5745(g) provides that, if the investment adviser to an 
ETMF issuing Shares is a registered broker-dealer or affiliated with a 
broker-dealer, such investment adviser shall erect a ``fire wall'' 
between the investment adviser and the broker-dealer personnel or 
broker-dealer affiliate, as applicable, with respect to access to 
information concerning the composition and/or changes to such ETMF's 
portfolio holdings. Personnel who make decisions on the ETMF's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material, non-public information regarding 
the applicable ETMF portfolio.

Other Rule Changes

    The Exchange is also making conforming changes to: (1) Nasdaq Rule 
4120(a)(9) and (10) to add provisions applicable to ETMF Shares with 
respect to trading halts; (2) Nasdaq Rule 4120(b)(4)(A) and (E) to 
modify certain defined terms to include references to ETMF Shares; and 
(3) Nasdaq Rule 5615(a)(5) and IM-5615-4 to add references to ETMFs for 
purposes of certain corporate governance requirements.\23\
---------------------------------------------------------------------------

    \23\ The Exchange also is making certain other minor technical 
changes to these rules unrelated to ETMFs. Specifically, the 
Exchange is amending Rules 4120(a)(9), (b)(4)(A), and (b)(4)(E) to 
include appropriate references to various derivative securities 
defined in Rule 5711, and to make certain other typographical 
corrections and clarifications.
---------------------------------------------------------------------------

III. Summary of Comment Letters

    As noted above, the Commission received a total of seven comment 
letters from six commenters concerning the Exchange's proposal.\24\ 
Five of the commenters support the proposal, and one commenter opposes 
the proposal. Generally, the supporting commenters believe that ETMFs 
could offer investment managers and investors a tax-efficient 
alternative to today's mutual funds.\25\ In addition to the benefits of 
tax-efficiency, some commenters state their belief that ETMFs would 
offer the benefits of lower costs to investors as a result of lower 
expenses,\26\ and one commenter states its belief that a benefit would 
be transparency of ETMF transaction costs.\27\ The same commenter also 
states its view that the non-disclosed nature of the ETMF portfolio 
would serve as a barrier to front-running of portfolio trades of 
actively managed funds and that the proposed ETMFs would promote 
renewed competition in the fund marketplace by encouraging investment 
managers concerned about

[[Page 68313]]

maintaining the confidentiality of their portfolio trading to offer 
their leading strategies in a better performing product structure.\28\ 
The opposing commenter, however, believes that ETMFs would likely not 
provide tax benefits and may cost more to operate than existing ETFs, 
because the ETMF will be forced to rebalance its portfolio every time 
there is a creation or redemption causing the fund to incur additional 
costs.\29\ In response to the opposing commenter, Eaton Vance, the 
sponsor of ETMFs, states its view that the more relevant comparison for 
ETMFs is mutual funds and that it expects ETMFs to achieve significant 
performance and tax efficiency advantages over similar mutual funds by 
utilizing in-kind purchases and redemptions and by imposing Creation 
Unit transaction fees to offset the associated processing and trading 
costs to the fund.\30\ The opposing commenter also states its view that 
NAV-Based Trading provides no discernable benefit to investors and 
would likely add to investor confusion because the proposal would allow 
the listing of products on an exchange that would not trade at current 
market prices.\31\ In response, Eaton Vance acknowledges that ETMF 
Shares will not trade at prices determined intraday, but notes that 
each ETMF's registration statement, Web site, and any advertising or 
marketing materials will include prominent disclosure of this fact.\32\ 
Eaton Vance further responds with its view that ETMFs provide several 
advantages over traditional mutual funds \33\ and actively managed 
ETFs.\34\
---------------------------------------------------------------------------

    \24\ See supra notes 4, 8, and 11.
    \25\ See MMI Letter; Tull Letter; Strategic Insight Letter; 
ConvergEx Letter at 1; and Eaton Vance Letter at 2, supra notes 4 
and 8.
    \26\ See Tull Letter; Strategic Insight Letter; and ConvergEx 
Letter at 1, supra note 4.
    \27\ See Tull Letter, supra note 4.
    \28\ Id.
    \29\ See Precidian Letter at 5-6, supra note 11. Precidian 
states its view that the fewer securities contained in the creation 
or redemption basket, the worse the problem becomes.
    \30\ See Eaton Vance Response Letter at 6, supra note 11.
    \31\ See Precidian Letter at 2, supra note 11. Precidian states 
its belief that intraday liquidity is a foundational principle of 
exchanges and the secondary market as a whole.
    \32\ See Eaton Vance Response Letter at 3, supra note 11. Eaton 
Vance also responded to concerns about investor confusion in its 
first comment letter. See infra notes 43-51 and accompanying text.
    \33\ Eaton Vance believes that the potential advantages ETMFs 
have over mutual funds are: (a) Protecting fund shareholders from 
the dilutive effects of other shareholders' transactions; (b) 
protecting fund shareholders from tax realizations in connection 
with other shareholders' transactions; (c) realizing savings in 
shareholder servicing and other fund expenses; and (d) enhancing the 
competitiveness of fund distribution. See Eaton Vance Response 
Letter at 3-4, supra note 11.
    \34\ Eaton Vance believes that the potential advantages ETMFs 
have over actively managed ETFs are: (a) Maintaining the 
confidentiality of portfolio trading activity; (b) providing trade 
execution cost transparency and quality control to fund investors; 
and (c) facilitating tight bid-ask spreads and narrow premiums/
discounts in secondary market trading. See Eaton Vance Response 
Letter at 3-4, supra note 11.
---------------------------------------------------------------------------

    In addition, several commenters state their belief about the 
potential positive impact the proposed ETMF product may have on 
arbitrage and pricing. Specifically, one commenter states its view that 
NAV-Based Trading for ETMFs should expand market maker opportunities as 
the arbitrage moves towards order management control and away from 
sophisticated arbitrage pricing models using real-time pricing that 
makes it difficult for an investor to calculate personal market entry 
and exit costs.\35\ Another commenter states its view that, because 
ETMFs could promote competition in the fund marketplace, such 
competition might enable ETMFs to trade close to the underlying fund 
value on a consistent basis.\36\ The opposing commenter, however, 
believes that market professionals will be unable to effectively hedge 
their ETMF positions due to a stale and possibly inaccurate IIV that is 
published every 15 minutes.\37\ Eaton Vance responds to the opposing 
commenter by stating that the sole purpose of the IIV is to help 
investors determine the number of ETMF Shares to buy or sell if they 
want to transact in an approximate dollar amount and that market makers 
will never have any reason to refer to the IIV in connection with their 
market making function.\38\ In response to the need for a market maker 
to hedge their ETMF positions, Eaton Vance asserts that a market maker 
holding positions in ETMF Shares is not exposed to intraday market 
risk, and, as such, there would be no need for market makers to hedge 
their positions intraday.\39\
---------------------------------------------------------------------------

    \35\ See Tull Letter, supra note 4.
    \36\ See ConvergEx Letter at 2, supra note 4.
    \37\ See Precidian Letter at 5, supra note 11.
    \38\ See Eaton Vance Response Letter at 5, supra note 11.
    \39\ See Eaton Vance Response Letter at 6, supra note 11.
---------------------------------------------------------------------------

    One commenter states its view that the promise of ETMFs can be 
realized if a ``common Chassis'' is adopted by multiple fund managers, 
who would then simultaneously educate the marketplace about the 
benefits of ETMFs.\40\ The same commenter also believes that the 
adoption curve of ETMFs might parallel the acceleration in the use of 
mutual funds triggered by the introduction in the early 1990s of the 
Schwab's Mutual Fund OneSource[supreg] supermarket, when numerous fund 
managers articulated the benefit of a common administrative 
platform.\41\ The commenter concludes that ETMFs have the potential to 
significantly improve returns to investors in actively-managed funds, 
and to encourage additional investment and savings by millions of 
American over the coming decades.\42\
---------------------------------------------------------------------------

    \40\ See Strategic Insight Letter, supra note 4.
    \41\ Id.
    \42\ Id.
---------------------------------------------------------------------------

    In response to the questions raised in the Order Instituting 
Proceedings regarding the ability of market participants to fully 
understand NAV-Based Trading and the public availability of information 
for ETMFs, Eaton Vance submitted a comment letter stating that the 
Exchange intends to provide members with a detailed explanation of NAV-
Based Trading through a Trading Alert and will inform members of the 
special characteristics and risks associated with trading ETMF Shares 
in an information circular--both to be issued prior to the commencement 
of ETMF trading.\43\ Additionally, Eaton Vance states that, in 
conjunction with the Exchange's communications to its members, it will 
also educate the marketplace through its Web site materials and 
disclosures in fund prospectuses and marketing literature by focusing 
on the key distinctions of ETMF investing which will include: (a) How 
to enter orders; (b) how to use IIV to help size ETMF orders; (c) the 
portfolio disclosures of ETMFs; and (d) the risks of NAV-Based 
Trading.\44\ Further, Eaton Vance emphasizes that it would make 
available an extensive library of ETMF educational materials and would 
maintain a Web site to provide a comprehensive, one-stop source of 
market information and investor education regarding ETMFs and NAV-Based 
Trading.\45\ Eaton Vance believes that these methods will provide 
adequate information to support NAV-Based Trading.\46\
---------------------------------------------------------------------------

    \43\ See Eaton Vance Letter at 3, supra note 8.
    \44\ Id.
    \45\ See Eaton Vance Letter at 4, supra note 8.
    \46\ Id.
---------------------------------------------------------------------------

    In response to the Commission's concerns regarding public 
availability of ETMF trading information, Eaton Vance states that NAV-
Based trade prices, best bids and offers for ETMF Shares, volume of 
ETMF Shares traded, and other intraday trading information will be 
continuously available for ETMFs on a real-time basis throughout each 
trading day on brokers' computer terminals and electronic market data 
services.\47\ In addition, Eaton Vance represents that it and Nasdaq 
will work with the Exchange's members and providers of market data 
services to ensure that representation of intraday bids, offers, and 
trade prices for ETMFs follow a ``NAV-$0.01/NAV+$0.01''

[[Page 68314]]

display format in an effort to avoid investor confusion.\48\ Eaton 
Vance further states that all ETMFs listed on Nasdaq will have a unique 
identifier associated with their ticker symbols indicating that the 
Shares are trading using NAV-Based Trading.\49\ Finally, Eaton Vance 
states that it will maintain a public Web site for ETMFs that will 
disclose, among other things, detailed fund information and contain 
links to current fund documents, including a fact sheet, summary and 
full prospectuses, statement of additional information, and shareholder 
reports for each fund.\50\ According to Eaton Vance, this Web site will 
also display per Share, the prior trading day's NAV and the following 
trading information for such day: (a) Intraday high, low, average, and 
closing prices of Shares in exchange trading; (b) the midpoint of the 
highest bid and lowest offer prices as of the close of exchange trading 
(expressed as a premium/discount to NAV); (c) the spread between 
highest bid and lowest offer prices as of the close of exchange 
trading; and (d) volume of Shares traded. Eaton Vance believes that 
such trading information will provide useful guidance to current buyers 
and sellers of Shares and accordingly believes there will be minimal 
risk of investor confusion.\51\
---------------------------------------------------------------------------

    \47\ Id.
    \48\ Id. The opposing commenter believes that ETMF pricing 
displayed in proxy prices will be confusing to investors. See 
Precidian Letter at 5, supra note 11. In response, Eaton Vance 
reiterates that it and the Exchange are working with member firms 
and providers of market data to ensure that representations of 
intraday bids, offers, and execution prices for ETMFs that are 
available to the public consistently follow the NAV + $.01/NAV-$.01 
display format. See Eaton Vance Response Letter at 5, supra note 11.
    \49\ See Eaton Vance Letter at 5, supra note 8. See also Eaton 
Vance Response Letter at 5, supra note 11.
    \50\ See Eaton Vance Letter at 5, supra note 8.
    \51\ Id.
---------------------------------------------------------------------------

    The opposing commenter raises several other concerns.\52\ The 
opposing commenter states its belief that a market professional buying 
ETMF Shares from an investor would have an economic interest in 
providing the worst price to the investor.\53\ In response, Eaton Vance 
states that ETMF Shares are no different from other traded securities 
and that market forces exert pressure on market professionals to offer 
competitive prices to investors, so that a market maker who seeks to 
trade ETMF Shares at uncompetitive prices will not attract the volume 
of trading required to earn meaningful profits.\54\ The opposing 
commenter also states its view that traders who accumulate large ETMF 
positions will be incentivized to move the NAV in their favor.\55\ 
Eaton Vance responds with its view that this is ``completely false,'' 
as the amount of profit a market maker or other trader earns by trading 
ETMFs is not affected by movements in the NAV.\56\ Eaton Vance argues 
that it doesn't matter whether an ETMF's NAV has moved higher or lower 
intraday as no level of NAV provides market makers with more profit 
than any other NAV.\57\
---------------------------------------------------------------------------

    \52\ The opposing commenter states its belief that ETMFs are not 
redeemable securities. See Precidian Letter at 2, supra note 11. In 
response, Eaton Vance states that it believes ETMFs satisfy the 
definition of a ``redeemable security'' as defined in the 1940 Act, 
but because the shares would not be individually redeemable, Eaton 
Vance has requested exemptive relief under the 1940 Act. See Eaton 
Vance Response Letter at 2, supra note 11. Eaton Vance's request for 
exemptive relief is currently before the Commission. See supra note 
8.
    \53\ See Precidian Letter at 2, supra note 11.
    \54\ See Eaton Vance Response Letter at 3, supra note 11.
    \55\ See Precidian Letter at 2, supra note 11.
    \56\ See Eaton Vance Response Letter at 3, supra note 11.
    \57\ Id. Eaton Vance's response does not appear to take into 
account a trader holding a position overnight or longer. See infra 
notes 82-83 and accompanying text.
---------------------------------------------------------------------------

    The opposing commenter also argues that because an ETMF's trade 
price is not determined until the end of the day, there may be 
significant problems for brokers and investors with respect to 
determining the buying power of an investor's account.\58\ For example, 
the commenter argues that an investor with a cash account may not have 
sufficient funds in the account to cover a purchase of an ETMF entered 
into during the day if the ETMF's NAV at the end of the day is higher 
than the investor expected.\59\ In response, Eaton Vance states that, 
based on extensive discussions with multiple broker-dealers and a 
review of broker-dealer account funding guidelines, Eaton Vance 
believes that broker-dealer account control procedures are adequate to 
accommodate trading of ETMF Shares and to mitigate the associated risks 
of inadequate investor account funding.\60\ The opposing commenter 
further questions how brokers will be able to calculate their net 
capital at any point in time during the day, noting its view that a 
firm with ETMF positions would not be able to determine the value of 
its ETMF positions during the day as quotes and last-sale prices are 
based on a future price, and the IIV is only published at 15 minute 
intervals.\61\ In response, Eaton Vance states its belief that ETMFs 
are likely not the only asset held by broker-dealers that does not lend 
itself to minute-by-minute intraday updated valuations.\62\ Eaton Vance 
further states that, based on how it expects ETMF market making to 
function, it does not believe that market makers will hold large ETMF 
inventory positions and that an ETMF market maker operating within 
relatively tight limits of its net capital requirement may build a 
buffer into the valuation of its ETMF positions to ensure continued 
capital adequacy.\63\
---------------------------------------------------------------------------

    \58\ See Precidian Letter at 3, supra note 11.
    \59\ See id.
    \60\ See Eaton Vance Response Letter at 4, supra note 11.
    \61\ See Precidian Letter at 4, supra note 11.
    \62\ See Eaton Vance Response Letter at 4, supra note 11.
    \63\ Id.
---------------------------------------------------------------------------

    Further, the opposing commenter states its view that inclusion of 
foreign stocks in an ETMF's portfolio will create problems in 
calculating the ETMF's NAV.\64\ The opposing commenter argues that if a 
portfolio includes stocks that trade in different time zones, it may be 
impossible to accurately set the NAV until the foreign market opens for 
trading.\65\ The opposing commenter believes that this would require 
the NSCC to reduce the settlement cycle for the portfolio's securities 
and would lessen the time that brokers can prepare confirmations, 
resulting in a delay in calculating margin calls and other time 
critical problems, such as stale pricing of the IIV.\66\ In response, 
Eaton Vance states that mutual funds holding foreign securities 
routinely apply fair value pricing procedures to determine their daily 
NAV, and it expects ETMFs to do the same.\67\
---------------------------------------------------------------------------

    \64\ See Precidian Letter at 3-4, supra note 11.
    \65\ See id. at 3, supra note 11.
    \66\ See id. at 4, supra note 11.
    \67\ See Eaton Vance Response Letter at 4, supra note 11.
---------------------------------------------------------------------------

    Finally, the opposing commenter raises the concern that brokerage 
firms, vendors, the Consolidated Tape, and quote system operators will 
have to alter their systems to support the ETMFs' price quotations of 
NAV+/NAV- notations.\68\ With regard to the Consolidated Tape, Eaton 
Vance does not believe that this is a valid concern, stating that ETMF 
trading prices and quotes will be reported in proxy price format 
requiring no special changes to the Consolidated Tape.\69\ Eaton Vance 
further states that the process of buying and selling ETMFs will be 
similar to buying and selling other exchange-traded securities, with 
the only significant distinction being that the price limits for limit 
orders will be expressed relative to NAV rather than as an absolute 
dollar price.\70\ Further, according to Eaton Vance, the execution, 
reporting, clearance, and

[[Page 68315]]

settlement of ETMF trades will be substantially the same as for other 
exchange-traded securities. Separately, based on discussions with 
broker-dealers and providers of market data services, Eaton Vance 
believes that any systems modifications to accommodate ETMFs will be 
relatively modest and can readily be achieved in a timely manner.\71\
---------------------------------------------------------------------------

    \68\ See Precidian Letter at 4, supra note 11.
    \69\ See Eaton Vance Response Letter at 5, supra note 11.
    \70\ See id.
    \71\ See id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rule and 
regulations thereunder applicable to a national securities 
exchange.\72\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act,\73\ which 
requires that the rules of an exchange be designed, among other things, 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and to protect investors and 
the public interest. The Commission finds that Nasdaq's proposal 
contains adequate rules and procedures to govern the listing and 
trading of ETMFs on the Exchange. Except for certain requirements 
relating to the daily disclosure of the fund portfolio, dissemination 
of the IIV, and NAV-Based trading (as discussed further below), the 
proposed listing standards of new Nasdaq Rule 5745 are substantively 
identical to the provisions of Nasdaq Rule 5735, which governs the 
listing of Managed Fund Shares on the Exchange. Further, all securities 
listed under proposed Nasdaq Rule 5745 will be subject to the full 
panoply of Nasdaq rules and procedures that currently govern the 
trading of equity securities on the Exchange, except that ETMFs will 
trade using NAV-Based Trading.
---------------------------------------------------------------------------

    \72\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \73\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As noted, ETMF Shares will not provide a ``Disclosed Portfolio'' on 
a daily basis.\74\ According to the Exchange, the purpose of the daily 
portfolio disclosure requirement for actively-managed ETFs is to 
provide market makers in those products with the portfolio information 
needed to hedge the intraday market risk they assume as they take 
inventory positions in the ETF shares in connection with their market 
making activities. Nasdaq states that, in ETF trading, a condition to 
maintaining a tight relationship between market-based trading prices 
for the ETF shares and contemporaneous ETF underlying portfolio values 
is that market makers have sufficient information regarding portfolio 
positions to enable them to earn reliable arbitrage profits by entering 
into long (or short) positions in ETF shares and offsetting short (or 
long) positions in the underlying holdings (or a suitable proxy). 
Nasdaq states that, in ETMF trading, by contrast, a market maker will 
assume no intraday market risk in connection with its inventory 
positions in ETMF shares because all ETMF Share transaction prices are 
based on the next-determined NAV.\75\ According to the Exchange, the 
process that connects ETMF trading prices to the NAV of the shares of 
ETMFs is effected at the end of each trading day when a market maker 
creates (redeems) Creation Units of ETMF Shares through an Authorized 
Participant to offset the net amount of ETMF Shares it has sold 
(bought) over the course of the trading day, and buys (sells) the 
quantity of Composition File instruments corresponding to the number of 
Creation Units created (redeemed).\76\
---------------------------------------------------------------------------

    \74\ In contrast, Nasdaq Rule 5735 requires Managed Fund Shares 
to disclose publicly their full portfolio positions at least once 
daily.
    \75\ According to the Exchange, whether an ETMF's underlying 
value goes up or down over the course of a trading day would not 
affect how much profit a market maker earns by selling (or buying) 
ETMF Shares in the market at a net premium (discount) to NAV, and 
then creating (redeeming) an offsetting number of ETMF Shares at the 
end of the day in transactions with the ETMF. The Exchange states 
that no intraday market risk means no requirement for intraday 
hedging, and therefore no associated requirement for portfolio 
disclosure to maintain a tight relationship between ETMF Share 
trading prices and the NAV of the ETMF.
    \76\ The Exchange states that an ETMF market maker that creates 
(redeems) a Creation Unit at the end of a trading day to offset its 
net intraday sales (purchases) of a Creation Unit quantity of ETMF 
Shares would earn profits to the extent that it either sells (buys) 
Shares at an aggregate premium (discount) to NAV or buys (sells) a 
Creation Unit-equivalent quantity of Composition File instruments at 
an aggregate discount (premium) to their end-of-day values, and the 
net amount of ETMF premium (discount) plus Composition File 
instruments discount (premium) exceeds the transaction fee that 
applies to a creation (redemption) of a Creation Unit of ETMF 
Shares. Nasdaq further states that this process is simplified for 
cash creations and redemptions, stating that an ETMF market maker 
that creates (or redeems) a Creation Unit in cash to offset its net 
intraday sales (purchases) of a Creation Unit quantity of ETMF 
Shares would earn profits to the extent that it sells (buys) ETMF 
Shares in the secondary market at an aggregate premium (discount) to 
NAV that exceeds the transaction fee that applies to a cash creation 
(redemption) of a Creation Unit of ETMF Shares.
---------------------------------------------------------------------------

    The Exchange states that, different from actively-managed ETFs, 
ETMFs offer market makers a profit opportunity that does not depend on 
either corresponding intraday adjustments in ETMF Share and underlying 
portfolio positions or the use of a hedge portfolio to manage intraday 
market risk.\77\ According to the Exchange, because the mechanism that 
underlies ETMF trading is simpler, more reliable, and exposes market 
makers to less risk than actively-managed ETF arbitrage, market makers 
should require less profit inducement to establish and maintain markets 
in ETMF Shares than for actively-managed ETFs, thereby enabling ETMFs 
to routinely trade at smaller premiums/discounts and narrower bid-ask 
spreads.
---------------------------------------------------------------------------

    \77\ According to the Exchange, market makers are expected 
generally to seek to minimize their exposure to price risk in ETMF 
Shares by holding little or no overnight inventory. The Exchange 
states that establishing Creation Unit sizes for ETMFs that are 
somewhat smaller (i.e., in a range of 5,000 to 50,000 Shares) than 
is customary for ETFs should facilitate tighter market maker 
inventory management. To the extent that market makers hold small 
positions in ETMF Shares overnight, they are expected to aggregate 
such holdings with other risk positions and transact at or near the 
market close to buy or sell offsetting positions in appropriate, 
broad-based hedging instruments. Nasdaq states that such hedging of 
overnight inventory risk on a macro basis does not require 
disclosure of non-Composition File portfolio positions.
---------------------------------------------------------------------------

    The Commission agrees that ETMFs will offer market makers a profit 
opportunity that does not require intraday hedging of ETMF Share price 
movements or changes in the value of the underlying portfolio 
positions. Because market makers will not need to engage in intraday 
hedging, the Commission believes that daily portfolio disclosure is not 
necessary. The Commission believes that NAV-Based Trading removes the 
need for market makers to hedge their ETMF positions intraday. Because 
all ETMF Share transaction prices are based on the next-determined NAV, 
a market maker will assume no intraday market risk in connection with 
its ETMF inventory positions and will not need to hedge the position. 
At the end of each day, a market maker will be able to offset its 
position of ETMF Shares by creating or redeeming through an authorized 
participant.\78\
---------------------------------------------------------------------------

    \78\ See supra notes 76 and 77 and accompanying text.
---------------------------------------------------------------------------

    The opposing commenter also raises a concern that market 
professionals will have an economic incentive to provide the worst 
price to an investor for ETMF Shares.\79\ In response, Eaton Vance 
states that ETMF Shares are no different from other traded securities 
and that market forces exert pressure on market professionals to offer 
competitive prices to investors, so that a market maker who seeks to 
trade ETMF Shares at uncompetitive prices will not attract the volume 
of trading required to earn

[[Page 68316]]

meaningful profits.\80\ The Commission believes that competitive forces 
will provide incentives for market professionals to provide competitive 
prices to investors and that ETMFs, in this respect, are not any 
different than other exchange-traded securities.
---------------------------------------------------------------------------

    \79\ See Precidian Letter at 2, supra note 11.
    \80\ See Eaton Vance Response Letter at 3, supra note 11.
---------------------------------------------------------------------------

    The opposing commenter also raises a concern that traders who 
accumulate large ETMF positions will be incentivized to move the NAV in 
their favor.\81\ Eaton Vance responds with its view that the amount of 
profit a market maker or other trader will earn by trading ETMFs will 
not be affected by movements in the NAV.\82\ Eaton Vance explains that 
it does not matter whether an ETMF's NAV has moved higher or lower 
intraday, as no level of NAV provides market makers with more profit 
than any other NAV.\83\ The Commission agrees with Eaton Vance's 
response with respect to a trader's incentives on an intraday basis 
because the amount of profit a trader could earn on an intraday basis 
will not be affected by movements in the NAV. However, traders that 
hold a large ETMF position overnight or longer could have an incentive 
to move the NAV in their favor (i.e., to move the NAV up so that they 
can sell their position at a profit). This, however, is not any 
different than the incentive a trader would have holding a large 
position in any exchange-traded security or mutual fund. Under the 
proposal, Nasdaq Rule 5745(b)(4) requires that Nasdaq implement written 
surveillance procedures for ETMF Shares. Exchanges routinely conduct 
surveillance activities to identify manipulative trading activity such 
as that described by the opposing commenter.\84\ And, with an ETMF, a 
trader would have less ability to influence the ETMF's NAV by trading 
in the underlying securities because of the lack of daily portfolio 
disclosure.
---------------------------------------------------------------------------

    \81\ See Precidian Letter at 2, supra note 11.
    \82\ See Eaton Vance Response Letter at 3, supra note 11.
    \83\ Id.
    \84\ The Commission also notes that the Exchange Act and the 
rules thereunder prohibit manipulative trading activity. See e.g., 
15 U.S.C. 78j(b) and 17 CFR 240.10b-5.
---------------------------------------------------------------------------

    Nasdaq Rule 5745(d)(2)(A) requires that the IIV for ETMF Shares be 
widely disseminated by one or more major market data vendors at 
intervals of not more than 15 minutes during the Regular Market Session 
when the ETMF Shares trade on Nasdaq.\85\ According to the Exchange, 
the purpose of IIVs in NAV-Based Trading is to enable investors to 
estimate the number of ETMF Shares to buy or sell if they want to 
transact in an approximate dollar amount. For this purpose, Nasdaq 
believes that dissemination of IIVs at intervals of not more than 15 
minutes should generally be sufficient. An ETMF will be permitted to 
disseminate IIVs at intervals of less than 15 minutes, but will not be 
required to do so to maintain trading on the Exchange. The Commission 
agrees that IIV dissemination in intervals of not more than 15 minutes 
should be sufficient to permit investors to determine the number of 
ETMF Shares they want to buy or sell associated with an approximate 
dollar amount.
---------------------------------------------------------------------------

    \85\ In contrast, Nasdaq Rule 5735 requires the IIV for Managed 
Fund Shares to be widely disseminated by one or more major market 
data vendors at least every 15 seconds during the time when the 
Managed Fund Shares trade on Nasdaq.
---------------------------------------------------------------------------

    As noted above, the opposing commenter believes that market 
professionals will be unable to effectively hedge their ETMF positions 
due to a stale and possibly inaccurate IIV that is published every 15 
minutes.\86\ Eaton Vance responds to the opposing commenter by stating 
that the sole purpose of the IIV is to help investors determine the 
number of ETMF Shares roughly corresponding to a given dollar amount 
and that market makers will never have any reason to refer to the IIV 
in connection with their market making function.\87\ In response to the 
need for market makers to hedge their ETMF positions, Eaton Vance 
asserts that market makers holding positions in ETMF Shares are not 
exposed to intraday market risk, and, as such, there would be no need 
for market makers to hedge their positions intraday.\88\ As detailed 
above, ETMFs will trade intraday at prices based on NAV and, unlike 
ETFs, ETMFs would not provide pricing signals for market intermediaries 
or other buyers or sellers of ETMF Shares seeking to estimate the 
difference between the value of the ETMF's portfolio and the price at 
which ETMF Shares are currently trading. As such, the Commission 
believes that a more frequently-disseminated IIV is not necessary for 
market participants to estimate the value of the ETMF's underlying 
portfolio for hedging purposes or the management of intraday market 
risk.
---------------------------------------------------------------------------

    \86\ See Precidian Letter at 5, supra note 11.
    \87\ See Eaton Vance Response Letter at 5, supra note 11.
    \88\ See Eaton Vance Response Letter at 6, supra note 11.
---------------------------------------------------------------------------

    The Commission believes that the proposed listing standards under 
new Nasdaq Rule 5745 are designed to promote just and equitable 
principles of trade and to protect investors and the public interest. 
Under proposed Nasdaq Rule 5745(d)(1)(B), the Exchange will obtain a 
representation from the issuer of each series of ETMF Shares that the 
NAV per share for the series will be calculated on each business day 
that the New York Stock Exchange is open for trading and that the NAV 
per share will be made available to all market participants at the same 
time. In addition, under Nasdaq Rule 5745(d)(1)(C), the Reporting 
Authority (as defined in proposed Nasdaq Rule 5745(c)(4)) \89\ must 
implement and maintain or be subject to procedures designed to prevent 
the use and dissemination of material, non-public information regarding 
the ETMF's portfolio positions and changes in the positions.
---------------------------------------------------------------------------

    \89\ The term ``Reporting Authority'' in respect of a particular 
series of ETMF Shares means Nasdaq, an institution, or a reporting 
service designated by Nasdaq as the official source for calculating 
and reporting information relating to such series of ETMF Shares, 
including, but not limited to, the IIV, the amount of any cash 
distribution to holders of ETMF Shares, NAV per share, and the 
Composition File or other information relating to the issuance, 
redemption, or trading of ETMF Shares. A series of ETMF Shares may 
have more than one Reporting Authority, each having different 
functions. See Nasdaq Rule 5745(c)(4).
---------------------------------------------------------------------------

    Under Nasdaq Rule 5745(d)(2)(B)(ii), the Exchange will consider 
suspension of trading in, or removal from listing of, a series of ETMF 
Shares if the IIV or the NAV is no longer calculated, or if the IIV, 
NAV, or Composition File is no longer available to all market 
participants at the same time. In addition, Nasdaq Rule 5745(d)(2)(C) 
provides additional circumstances that could result in a trading halt 
of ETMF Shares on the Exchange. If the IIV of a series of ETMF Shares 
is not being disseminated as required, Nasdaq may halt trading during 
the day in which the interruption to the dissemination of the IIV 
occurs. If the interruption to the dissemination of the IIV persists 
past the trading day in which it first occurred, Nasdaq will halt 
trading no later than the beginning of the trading day following the 
interruption. If Nasdaq becomes aware that the NAV per share with 
respect to a series of ETMF Shares is not calculated on each business 
day that the New York Stock Exchange is open for trading and 
disseminated to all market participants at the same time, it will halt 
trading in such series until such time as the NAV per share is 
available to all market participants. In addition, if Nasdaq becomes 
aware that the Composition File with respect to a series of ETMF Shares 
is not disseminated to all market participants at the same time, it 
will halt trading in such series until such time as

[[Page 68317]]

the Composition File is available to all market participants.\90\
---------------------------------------------------------------------------

    \90\ See Nasdaq Rule 5745(d)(2)(C).
---------------------------------------------------------------------------

    Further, under Nasdaq Rule 5745(g), if the investment adviser to an 
ETMF issuing ETMF Shares is a registered broker-dealer or is affiliated 
with a broker-dealer, such investment adviser must erect a ``fire 
wall'' between the investment adviser and the broker-dealer personnel 
or broker-dealer affiliate, as applicable, with respect to access to 
information concerning the composition and/or changes to such ETMF's 
portfolio holdings. Nasdaq Rule 5745(g) further requires personnel who 
make decisions on the ETMF's portfolio composition to be subject to 
procedures designed to prevent the use and dissemination of material, 
non-public information regarding the applicable ETMF portfolio. Lastly, 
Nasdaq Rule 5745(b)(4) requires that Nasdaq implement written 
surveillance procedures for ETMF Shares.
    As explained in more detail above, ETMFs will be traded using a 
novel and unique trading protocol called NAV-Based Trading. Orders to 
buy and sell ETMFs will be submitted to, and processed by, the Exchange 
in the customary manner for other exchange-traded securities, with the 
exception that the price limits for limit orders will be expressed 
relative to NAV rather than as an absolute dollar price. Further, the 
execution, reporting, clearance, and settlement of ETMF trades will be 
substantially the same as for other exchange-traded securities, except 
that the price of an execution will be expressed relative to NAV rather 
than as an absolute dollar price until the actual price is determined 
at the end of the day. Specifically, in NAV-Based Trading, all bids, 
offers, and execution prices will be expressed as a premium/discount 
(which may be zero) to the ETMF's next-determined NAV. Trades using 
NAV-Based Trading will be binding at the time orders are matched on 
Nasdaq's facilities, with the transaction prices contingent upon the 
determination of the ETMF's NAV at the end of the business day. All 
ETMF bids, offers, and trades will be reported intraday in real-time by 
the Exchange to the Consolidated Tape and separately disseminated to 
member firms and market data services through a proprietary Nasdaq data 
feed.
    The opposing commenter raises several concerns about the potential 
for NAV-Based Trading to lead to investor confusion. Specifically, the 
opposing commenter believes that investors will be confused because 
they will not be trading at current market prices.\91\ In addition, the 
opposing commenter believes that investors will be confused by the 
proxy price format.\92\ The Commission believes that Nasdaq and Eaton 
Vance have made a number of representations regarding steps that will 
be taken to diminish the risk of investor confusion. For example, 
Nasdaq has committed to providing certain information regarding NAV-
Based Trading to Nasdaq's members and other market participants. The 
Exchange will provide members with a detailed explanation of NAV-Based 
Trading through a Trading Alert and will inform members of the special 
characteristics and risks associated with trading ETMF Shares in an 
information circular--both to be issued prior to the commencement of 
ETMF trading.\93\
---------------------------------------------------------------------------

    \91\ See Precidian Letter at 2, supra note 11.
    \92\ See Precidian Letter at 4-5, supra note 11.
    \93\ See Notice, supra note 3.
---------------------------------------------------------------------------

    Also with regard to the public availability of ETMF trading 
information, the Exchange represents that information regarding NAV-
Based Trading prices and volumes will be continuously available for 
ETMFs on a real-time basis throughout each trading day on brokers' 
computer terminals and through established electronic market data 
services.\94\ Additionally, to avoid investor confusion, the Exchange 
and organizations offering ETMFs will work with the Exchange's member 
firms and providers of market data services to ensure that 
representations of intraday bids, offers, and execution prices 
consistently follow an ``NAV plus or minus'' display format.\95\ 
Further, the Commission notes that Nasdaq has represented that all 
ETMFs listed on the Exchange will have a unique identifier associated 
with their ticker symbols to clearly indicate that the Shares are 
traded using NAV-Based Trading.
---------------------------------------------------------------------------

    \94\ Id.
    \95\ Id.
---------------------------------------------------------------------------

    With regard to the public availability of information on ETMFs for 
investors and other market participants, Eaton Vance represents that it 
will educate market participants about the features of ETMFs, the 
potential risks and benefits of investing in ETMFs, the features of 
NAV-Based Trading, and the distinction between IIV and NAV by posting 
educational materials on its Web site and by including disclosure in 
fund prospectuses and marketing literature.\96\ Further, Eaton Vance 
states that it is committed, along with distribution partners among 
major broker-dealers, registered investment advisors, and other fund 
sponsors to support and provide the marketplace with the materials, 
education, and training to ensure a successful ETMF investor 
experience.\97\
---------------------------------------------------------------------------

    \96\ See Eaton Vance Letter at 3, supra note 8.
    \97\ See Eaton Vance Letter at 4, supra note 8.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns expressed by the opposing 
commenter regarding investor understanding of how ETMFs will be priced 
and how they will trade.\98\ As described above, however, the Exchange 
makes detailed representations regarding the education and information 
that will be available regarding ETMFs and the manner in which NAV-
Based Trading will occur. Given all of the above representations, which 
are designed to address concerns about investor understanding of the 
products and how they will trade, the Commission believes that the 
proposal to allow for the listing and trading of ETMFs is consistent 
with the protection of investors and the public interest.
---------------------------------------------------------------------------

    \98\ As noted above, the opposing commenter also stated its 
belief that ETMFs would likely not provide tax benefits and may cost 
more to operate than existing ETFs, while other commenters stated 
their views that ETMFs could offer investors a tax-efficient 
alternative to mutual funds and lower costs. See supra notes 25-30 
and accompanying text. Similar to other investment decisions, 
investors will need to determine whether the tax-efficiency and 
costs are appropriate for them based on the particular facts and 
circumstances.
---------------------------------------------------------------------------

    The opposing commenter also believes that NAV-Based Trading will 
cause all brokerage firms, vendors, the Consolidated Tape, and 
quotation system operators to have to significantly alter their 
systems.\99\ The Commission recognizes that the implementation of NAV-
Based Trading will necessitate some system modifications. Eaton Vance 
states its view, based on its extensive discussions with broker-dealers 
and providers of market data services, that system modifications to 
accommodate the introduction of ETMF trading will be modest and can be 
achieved in a timely manner.\100\ Nasdaq represents that the use of a 
proxy price format to facilitate NAV-Based Trading and to report 
intraday bids, offers, and trades for ETMFs to the Consolidated Tape 
will help to minimize the number of system modifications needed.\101\ 
As such, the Commission notes that the Consolidated Tape should not 
require any changes to accommodate the trading of ETMFs. With respect 
to customer and brokerage order entry screens, the Commission notes 
that participating in ETMF trading is voluntary and only broker-dealers 
and market participants

[[Page 68318]]

interested in trading ETMF Shares will need to perform any system 
changes.
---------------------------------------------------------------------------

    \99\ See Precidian Letter at 5, supra note 11.
    \100\ See Eaton Vance Response Letter at 5, supra note 11.
    \101\ See Notice at notes 12-13 and accompanying text, supra 
note 3.
---------------------------------------------------------------------------

    The opposing commenter raises a concern that the pricing of ETMF 
Shares at the end of the day may cause funding problems for investor 
brokerage accounts and may cause difficulties for broker-dealers in 
calculating their net capital.\102\ While the Commission recognizes 
that NAV-Based Trading presents certain issues for brokers to address 
with respect to managing their customer accounts and their net capital, 
the Commission does not believe that these issues are unique or 
insurmountable. For example, there are current order types, such as the 
market-on-close order type, where the final trade price is not 
determined until the end of the trading day, and broker-dealers have 
been able to implement procedures to manage their customer accounts and 
their net capital, despite the lack of an intraday trade price.
---------------------------------------------------------------------------

    \102\ See Precidian Letter at 3-4, supra note 11.
---------------------------------------------------------------------------

    Finally, the opposing commenter raises a concern that inclusion of 
foreign stocks in an ETMF's portfolio will create problems in 
calculating the ETMF's NAV.\103\ The opposing commenter states its view 
that, if a portfolio includes stocks that trade in different time 
zones, it may be impossible to accurately set the NAV until the foreign 
market opens for trading.\104\ In response, Eaton Vance states that, 
comparable to mutual funds that contain foreign securities, ETMFs 
holding foreign securities would use fair value pricing procedures to 
determine the NAV.\105\ The Commission agrees that ETMFs holding 
foreign securities would be able to use fair value pricing procedures 
to determine the NAV. However, the Commission notes that Nasdaq is not, 
at this time, proposing to list and trade any specific ETMF Shares 
under its ETMF listing standards and that, as required under proposed 
Nasdaq Rule 5745(b)(1), the Exchange must file separate proposals under 
Section 19(b) of the Act to list and trade ETMF Shares on Nasdaq.
---------------------------------------------------------------------------

    \103\ See Precidian Letter at 3-4, supra note 11.
    \104\ See id. at 3, supra note 11.
    \105\ See Eaton Vance Response Letter at 4, supra note 11.
---------------------------------------------------------------------------

    The Commission further believes that the corresponding changes to 
other existing Nasdaq Rules appropriately accommodate the listing and 
trading of ETMF Shares on the Exchange and provide additional clarity 
regarding the applicability of Nasdaq Rules and therefore are 
consistent with the Act.
    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the rule 
and regulations thereunder applicable to a national securities 
exchange.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
to the proposed rule change is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-020 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-020. 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 the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2014-020 and should 
be submitted on or before December 5, 2014.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    As discussed above, the Exchange submitted Amendment No. 1 to 
confirm that all ETMFs listed on the Exchange will have a unique 
identifier associated with their ticker symbols and that, in the 
systems used to transmit and process transactions in ETMF Shares, an 
ETMF's next-determined NAV will be represented by a proxy price.\106\ 
Previously, the filing stated that Nasdaq expects all ETMFs listed on 
the Exchange to have a unique identifier associated with their ticker 
symbols and that Nasdaq expects an ETMF's next-determined NAV to be 
represented by a proxy price. Additionally, the Exchange removed 
references to ETMF entry and annual fees as the Exchange intends to 
address such fees in a separate filing.\107\ The Commission believes 
that Amendment No. 1 provides certainty with respect to the ticker 
symbol and proxy price aspects of the proposed rule change. The 
Commission further believes that Amendment No. 1 does not materially 
affect the substance of the proposed rule change or raise any novel or 
unique regulatory issues. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act,\108\ for approving the 
proposed rule change, as modified by Amendment No. 1, prior to the 30th 
day after the date of publication of notice in the Federal Register.
---------------------------------------------------------------------------

    \106\ See supra note 10.
    \107\ See id.
    \108\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\109\ that the proposed rule change (SR-NASDAQ-2014-020), as 
modified by Amendment No. 1 thereto, be, and it hereby is, approved on 
an accelerated basis.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26949 Filed 11-13-14; 8:45 am]
BILLING CODE 8011-01-P


