
[Federal Register Volume 79, Number 220 (Friday, November 14, 2014)]
[Notices]
[Pages 68323-68327]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-26947]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73559; File No. SR-BATS-2014-018)


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Disapproving a Proposed Rule Change To Adopt Rule 14.11(k) to List 
Managed Portfolio Shares and to List and Trade Shares of Certain Funds 
of the Spruce ETF Trust

November 7, 2014
    On August 4, 2014, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to adopt new BATS Rule 14.11(k), which would permit the Exchange 
to list Managed Portfolio Shares, which are shares of actively managed 
exchange-traded funds (``ETFs'') for which the portfolio is disclosed 
quarterly, and to list and trade shares of certain funds of the Spruce 
ETF Trust (``Trust'') \3\ under proposed BATS Rule 14.11(k). The 
proposed rule change was published for comment in the Federal Register 
on August 13, 2014.\4\ The Commission received one comment letter on 
the proposal.\5\ On September 24, 2014, pursuant to Section 19(b)(2) of 
the Exchange Act,\6\ the Commission designated a longer period within 
which to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\7\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that the Trust, which would be the 
issuer of the funds, filed an Application for an Order under Section 
6(c) of the Investment Company Act of 1940 (``1940 Act'') and rules 
thereunder (File No. 812-13953), dated September 1, 2011 
(``Exemptive Application''). The Commission published notice of this 
application (``Notice of an Application for Exemptive Relief'') on 
October 21, 2014. See Investment Company Act Release No. 31301 (Oct. 
21, 2014), 79 FR 63964 (Oct. 27, 2014).
    \4\ See Securities Exchange Act Release No. 72787 (Aug. 7, 
2014), 79 FR 47488 (``Notice'').
    \5\ See Letter from Gary L. Gastineau, President, ETF 
Consultants.com, Inc., to Elizabeth M. Murphy, Secretary, 
Commission, dated Aug. 30, 2014 (``Comment Letter'').
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 73199, 79 FR 58844 
(September 30, 2014). The Commission designated November 11, 2014 as 
the date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
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    This Order disapproves the proposed rule change.

I. Description of the Proposal

    The Exchange proposes to: (1) Add new BATS Rule 14.11(k) which 
would permit the listing of Managed Portfolio Shares; and (2) list and 
trade shares (``Shares'') of the following funds (each a ``Fund'' and, 
collectively, the ``Funds'') under the proposed rule: Large Cap Fund, 
Large Cap Value Fund, Large Cap Growth Fund, Large/Mid Cap Fund, Large/
Mid Cap Value Fund, Large/Mid Cap Growth Fund, Large Cap Long-Short 
Fund, Large Cap Value Long-Short Fund, Large Cap Growth Long-Short 
Fund, Large/Mid Cap Long-Short Fund, and Large/Mid Cap Value Long-Short 
Fund, Large/Mid Cap Growth Long-Short Fund, and Large Cap Growth Active 
Insights Fund. The discussion below summarizes the Exchange's proposal, 
details of which are described in the Notice.\8\
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    \8\ See Notice, supra note 4.
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A. Proposed Listing Rules

    The Exchange's proposal would define the term ``Managed Portfolio 
Share'' as a security that (a) is issued by an investment company 
(``Investment Company'') organized as an open-end management investment 
company or similar entity, that invests in a portfolio of securities 
selected by the Investment Company's investment adviser consistent with 
the Investment Company's investment objectives and policies; (b) is 
issued in a predetermined Creation Unit \9\ size in

[[Page 68324]]

exchange for a cash amount equal to the next determined Net Asset Value 
(``NAV''),\10\ (c) pursuant to the ``Small Allotment Redemption 
Option,'' may be redeemed for cash by any Beneficial Owner \11\ in any 
size less than a Redemption Unit \12\ for a cash amount equal to the 
next determined NAV for at least 15 calendar days, in the event that 
for 10 consecutive Business Days, or such shorter period as determined 
by the issuer, the midpoint of the national best bid and offer at the 
time of the calculation of the NAV (the ``Bid/Ask Price''),\13\ for the 
security has a discount of 5% or greater from the NAV; and (d) when 
aggregated in a number of shares equal to a Redemption Unit, or 
multiples thereof, may be redeemed at an Authorized Participant's \14\ 
request, which each Authorized Participant would be paid through a 
blind trust established for its benefit a portfolio of securities and/
or cash with a value equal to the next determined NAV.
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    \9\ Under the proposal, a ``Creation Unit'' is a specified 
minimum number of Managed Portfolio Shares that an Authorized 
Participant may purchase from the issuer for the current net asset 
value.
    \10\ Depending on the context, the term ``NAV'' may refer to the 
NAV per Share, the NAV per Creation Unit, or the NAV of a fund.
    \11\ Under the proposal, a ``Beneficial Owner'' is defined as: 
(1) A natural person; (2) a trust established for the benefit of a 
natural person or a group of related family members; or (3) a tax 
deferred retirement plan where investments are selected by a natural 
person purchasing for its own account.
    \12\ Under the proposal, a ``Redemption Unit'' is a specified 
number of Managed Portfolio Shares that an Authorized Participant 
may sell to the issuer for the current NAV and which is also used 
for determining whether a Beneficial Owner may redeem for cash. See 
infra note 14.
    \13\ The records relating to Bid/Ask Prices would be retained by 
the Funds and its service providers.
    \14\ Certain large market participants, typically broker-
dealers, can become ``Authorized Participants'' with respect to the 
Funds. Each Authorized Participant would enter into a contractual 
relationship with a Fund or Funds, allowing it to engage in 
redemptions of Shares directly with the issuer.
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    Funds issuing Managed Portfolio Shares would be actively-managed, 
and in that respect would be similar to Managed Fund Shares, which are 
actively-managed funds listed and traded under BATS Rule 14.11(i). 
Managed Portfolio Shares, however, would differ from Managed Fund 
Shares in the following important respects. First, in contrast to 
Managed Fund Shares, for which a ``Disclosed Portfolio'' is required to 
be disseminated at least once daily,\15\ the portfolio for an issue of 
Managed Portfolio Shares would be disclosed at least quarterly in 
accordance with normal disclosure requirements otherwise applicable to 
open-end investment companies registered under the 1940 Act.\16\ 
Second, creations of Managed Portfolio Shares would generally be 
effected through a delivery of only cash, whereas creations of Managed 
Fund Shares are generally effected through an in-kind delivery of 
securities and cash. Third, in connection with the redemption of shares 
in Redemption Unit size, the in-kind delivery of any portfolio 
securities would generally be effected through a blind trust for the 
benefit of the redeeming Authorized Participant, and the blind trust 
would liquidate the portfolio securities pursuant to instructions from 
the Authorized Participant without disclosing the identity of those 
securities to the Authorized Participant. Fourth, pursuant to the Small 
Allotment Redemption Option, Beneficial Owners would be able to redeem 
shares for cash directly from a fund in any size less than a Redemption 
Unit at the fund's NAV in limited circumstances.
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    \15\ BATS Rule 14.11(i)(3)(B) defines the term ``Disclosed 
Portfolio'' as the identities and quantities of the securities and 
other assets held by the Investment Company that will form the basis 
for the Investment Company's calculation of NAV at the end of the 
business day. BATS Rule 14.11(i)(4)(B)(ii)(a) requires that the 
Disclosed Portfolio be disseminated at least once daily and that it 
be made available to all market participants at the same time.
    \16\ A mutual fund is required to file with the Commission its 
complete portfolio schedules for the second and fourth fiscal 
quarters on Form N-SAR under the 1940 Act, and is required to file 
its complete portfolio schedules for the first and third fiscal 
quarters on Form N-Q under the 1940 Act, within 60 days of the end 
of the quarter. Form N-Q requires funds to file the same schedules 
of investments that are required in annual and semi-annual reports 
to shareholders. These forms are available to the public on the 
Commission's Web site at www.sec.gov.
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    For each series of Managed Portfolio Shares, an estimated value, 
defined in the proposed rule as the ``Intraday Indicative Value'' 
(``IIV''), that reflects an estimated intraday value of a fund's 
portfolio would be disseminated. The IIV would be based upon all of a 
fund's holdings as of the close of the prior business day and would be 
widely disseminated by one or more major market data vendors at least 
every 15 seconds during the Exchange's Regular Trading Hours (normally, 
9:30 a.m. to 4:00 p.m., Eastern Time).
    The Exchange's proposal provides that the Exchange would file 
separate proposals under Section 19(b) of the Exchange Act before 
listing and trading any series of Managed Portfolio Shares.

B. Description of the Funds

    BlackRock Fund Advisors would be the investment adviser 
(``Adviser'') to the Funds.\17\ State Street Bank and Trust Company 
would be the administrator, custodian, and transfer agent for the Trust 
(``Custodian'' or ``Transfer Agent''). BlackRock Investments, LLC 
(``Distributor'') would serve as the distributor for the Trust.
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    \17\ BlackRock Fund Advisors is an indirect wholly owned 
subsidiary of BlackRock, Inc.
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    Under normal circumstances,\18\ each Fund would invest at least 80% 
of its net assets in a portfolio of long positions (or engage in 
borrowings for the purpose of establishing short positions for the 
Long-Short Funds) in U.S. equity securities.\19\ The Funds may in some 
instances also invest in non-U.S. equity securities with similar market 
capitalization, liquidity, and risk-return profiles to the U.S. equity 
securities eligible for investment. Each Fund would hold equity 
securities of at least 13 non-affiliated issuers, primarily from the 
1,200 largest U.S. stocks by market capitalization as determined by The 
Frank Russell Company annually. Generally, the Large/Mid Cap Funds 
would select securities from a universe of approximately the 1,200 
largest equity securities traded on U.S. exchanges and the Large Cap 
Funds would select securities from a universe of approximately the 
1,000 largest equity securities traded on U.S. exchanges.
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    \18\ The term ``under normal circumstances'' includes, but is 
not limited to, the absence of adverse market, economic, political, 
or other conditions, including extreme volatility or trading halts 
in the equity markets or the financial markets generally; 
operational issues causing dissemination of inaccurate market 
information; or force majeure type events such as systems failure, 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot, or labor disruption, or any similar intervening 
circumstance.
    \19\ Equity securities would include common stock, preferred 
stock, securities convertible into common stock and securities or 
other instruments whose price is linked to the value of common 
stock, which includes, but is not limited to, shares of other 
investment companies.
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    A Fund may, to a limited extent (under normal circumstances, less 
than 20% of the Fund's net assets), engage in transactions in futures 
contracts, forward contracts, options, and swaps.\20\ A Fund may also 
invest a portion of its assets in high-quality money market 
instruments.
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    \20\ Derivatives would include the following: treasury futures, 
equity index futures, currency futures, currency forwards, interest 
rate swaps, credit default swaps, total return swaps, equity index 
options, and single stock equity options. The derivatives, excluding 
currency forwards, would be exchange traded and/or centrally 
cleared. Each Fund's use of derivatives may be used to enhance 
leverage, but such leverage would never exceed 1/3 of a Fund's total 
assets.
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II. Summary of the Comment Letter

    The Commission received one letter opposing the proposed rule 
change, which raises several concerns.\21\ First,

[[Page 68325]]

the commenter asserts that there is a ``significant risk'' that the 
Internal Revenue Service (``IRS'') would deny the purported tax 
benefits of the Funds' distinctive in-kind redemption program.\22\ 
Therefore, the commenter recommends that approval of the proposal be 
conditioned on the issuer obtaining a favorable IRS determination of 
the tax treatment through a Private Letter Ruling.\23\
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    \21\ See supra note 5. The commenter notes that he has a 
retained economic interest in a product that may be competitive with 
Managed Portfolio Shares, and states that his views on the 
Exchange's filing ``may be considered subject to a conflict of 
interest.'' Comment Letter, supra note 5, at 1, n.1. He states that 
his comments are made in the public interest and to the best of his 
ability are not influenced by any conflict. See id.
    \22\ See id. at 4.
    \23\ See id.
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    In addition, the commenter predicts that, compared to most existing 
ETFs, the Shares would probably trade with significantly wider bid-ask 
spreads, with more variable premiums and discounts, or with both, 
because of what the commenter characterizes as the unreliability of the 
Funds' proposed method for ensuring secondary market trading 
efficiency. The commenter states that the Funds' market makers would 
have only indirect, and likely imperfect, information about Fund 
holdings.\24\ The commenter argues that effectively arbitraging the 
Funds would be significantly more difficult than the arbitrage for most 
existing foreign ETFs.\25\ The commenter also argues that there is no 
support for the Exchange's contention that existing ETFs holding 
portfolios of foreign securities, such as index-based ETFs holding 
Asian stocks, have demonstrated efficient pricing characteristics even 
though, because foreign stocks do not trade during the same hours as 
U.S. ETFs, the ETFs holding foreign stocks do not provide opportunities 
for riskless arbitrage transactions during much of the trading day.\26\ 
The commenter also cites a draft academic working paper \27\ for the 
propositions that market trading efficiency varies significantly by 
type and size of ETF; that funds with high share trading volumes, 
liquid underlying holdings, and efficient arbitrage mechanisms trade 
with relatively tight bid-ask spreads and more stable premiums and 
discounts; and that funds lacking these characteristics generally 
traded with wider spreads and more variable premiums and discounts.\28\
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    \24\ See id. at 7.
    \25\ See id.
    \26\ See id. at 9.
    \27\ ``Inefficiencies in the Pricing of Exchange-Traded Funds,'' 
Antti Petajisto, September 20, 2013, available at http://www.petajisto.net/.
    \28\ See Comment Letter, supra note 5, at 8.
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    The commenter also states its view that, for a number of reasons, 
the dissemination of an IIV by the Funds would likely prove ineffective 
in ensuring alignment of secondary market prices for the Shares with 
the values of the underlying portfolios. The commenter asserts that, 
during periods of rapid market movement, the use of last-sale prices to 
calculate an IIV, coupled with the dissemination of the IIV only every 
15 seconds, would mean that the IIV would be a lagging indicator of 
actual portfolio values.\29\ Additionally, the commenter asserts that 
the IIV may reflect clearly erroneous values for securities that have 
not yet opened for trading on a particular business day or that are 
subject to an intraday interruption in trading.\30\ The commenter also 
states that no one would stand behind a Fund's IIV to ensure timeliness 
and accuracy.\31\ The commenter predicts that, without a reliable IIV, 
the Shares cannot and would not trade acceptably in the secondary 
market.\32\
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    \29\ See id. at 9.
    \30\ See id. at 9-10.
    \31\ See id. at 10.
    \32\ See id.
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    The commenter predicts that frequent IIV errors would in turn cause 
``erroneous share trades'' to be executed.\33\ The commenter states 
that the proposal does not address the treatment of erroneous share 
trades resulting from a faulty IIV--namely, whether IIV errors and 
related erroneous trades would be detected by the Exchange, whether 
such trades would be cancelled, and whether the Exchange would apply a 
materiality standard for cancellations.\34\ The commenter argues that, 
as a condition of approval, the Exchange should be required to monitor 
the timeliness and accuracy of IIV dissemination and to implement 
procedures to address trades when an erroneous IIV has been 
disseminated.\35\
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    \33\ See id. at 12.
    \34\ See id.
    \35\ See id.
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    The commenter also predicts that the following elements of the 
proposed redemption arrangements would introduce additional costs and 
uncertainties for Authorized Participants:
     The Custodian would have a monopoly position as the sole 
eligible provider of trustee services for the blind trust;
     The Adviser, rather than the Authorized Participant, would 
negotiate the fees paid to the trustee;
     In contrast to existing ETFs, no Authorized Participant 
would have the potential ability to use its market knowledge and market 
position to enhance arbitrage profits (or offset arbitrage costs) by 
managing sales of the distributed securities to minimize market impact 
or to realize prices above the market close; and
     The Custodian, who stands in for the Authorized 
Participant in the sale of distributed securities, would have no 
apparent incentive to sell distributed securities with low market 
impact or at prices above the close and would experience little or no 
downside from doing the opposite.\36\
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    \36\ See id. at 11.
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    The commenter also asserts that redeeming Authorized Participants 
would be exposed to potential costs and risks associated with not being 
able to control disposition of significantly more concentrated 
redemption proceeds, and the commenter argues that these extra costs 
and risks associated with the blind trust arrangement would be passed 
through to shareholders transacting in the secondary market, reflected 
as wider bid-ask spreads, more volatile premiums and discounts for the 
Shares, or both.\37\
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    \37\ See id.
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    The commenter posits that the lack of portfolio transparency would 
favor market makers and other professional traders over other market 
participants, such as investors.\38\ Notwithstanding the public 
dissemination of the IIV, the commenter argues that market makers and 
other professional traders would have a significant indirect 
information advantage over other participants because of their ability 
to glean information about a Fund's holdings through sophisticated data 
analysis of changes in the IIV.\39\ In particular, the commenter 
asserts that IIV disclosures might enable market makers and 
professional traders to uncover a Fund's holdings and trading activity, 
rendering the Fund susceptible to the dilutive effects of front 
running.\40\ The commenter asserts that, prior to approval, the 
proposal should be amended to include: (1) A discussion of the steps to 
be taken to minimize reverse engineering risk; (2) a discussion of how 
the Funds propose to resolve the conflict between providing market 
makers with adequate information to support efficient Share trading and 
protecting against reverse engineering; and (3) representations that 
the Funds would adequately disclose reverse-engineering risk and the 
conflicts the

[[Page 68326]]

Funds face in seeking to provide for efficient market trading and 
protection against reverse engineering.\41\
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    \38\ See id. at 13.
    \39\ See id. at 13-14.
    \40\ See id. The commenter discusses certain factors determining 
a fund's susceptibility to reverse engineering using intraday 
valuations disseminated at 15 second intervals. See id. at 14.
    \41\ See id. at 14.
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    The commenter argues that the Commission should not grant the 
issuer's pending request for exemptive relief under the 1940 Act to 
maintain early Order Cut-Off Times for Fund redemptions, which are 
intended to facilitate the timely sale of distributed securities by the 
blind trusts that receive the proceeds of Authorized Participant 
redemptions and the efficient processing of redemptions by retail 
investors through the Small Allotment Redemption Option.\42\ The 
commenter questions how the early Order Cut-Off Times would impact 
secondary market trading and the Funds' proposed arbitrage 
mechanism.\43\
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    \42\ See id. at 15.
    \43\ See id.
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    The commenter posits that a principal purpose of including the 
Small Allotment Redemption Option in the proposal is to provide comfort 
to the Commission and market participants that investors would be able 
to redeem Shares with the Fund at or near NAV whenever secondary market 
trading prices are at a significant discount to NAV.\44\ The commenter 
argues that these provisions, as proposed, are inadequate for this 
purpose because: (1) Shares could trade at persistently wide discounts 
to NAV and still rarely, if ever, cause the Small Allotment Redemption 
Option to be invoked due to the triggering events thresholds; (2) the 
Small Allotment Redemption Option would be available only to a limited 
set of shareholders and would be restricted to redemptions of less than 
a Redemption Unit; (3) the expected early Order Cut-Off Time for 
redemptions under the Small Allotment Redemption Option means that an 
investor's ability to directly redeem Shares for cash would exist for 
only a portion of each business day; and (4) investors who redeem 
Shares would be subject to transaction fees imposed by the Fund of up 
to 2% and may also be subject to broker-dealer processing fees.\45\ The 
commenter recommends that the Commission impose the following 
conditions for approval: (1) Modification of the triggering events; 
\46\ (2) extension of eligibility for the Small Allotment Redemption 
Option to all shareholders and establishment (and disclosure) of a 
reasonable upper limit on the value of Shares that are eligible; (3) 
establishing the close of the Exchange's Regular Trading Hours as the 
Order Cut-off Time for redemptions under the Small Allotment Redemption 
Option; and (4) establishment of a cap on transaction fees that the 
Funds may charge on direct redemptions of Shares.\47\
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    \44\ See id. at 15-16.
    \45\ See id. at 16.
    \46\ See id. at 17.
    \47\ See id. at 20.
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    The commenter believes that the Funds would be permitted to hold 
investments that are not well-suited to the continuous dissemination of 
timely and accurate IIVs throughout the trading day.\48\ The commenter 
asserts that the Funds should: (1) Be required to limit their non-cash 
investments to U.S.-exchange-listed stocks with market caps of $5 
billion or greater (consistent with the general understanding of large- 
and medium-cap stocks; a universe of about 700 stocks currently); (2) 
not be permitted to invest in illiquid assets; and (3) not be permitted 
to employ investment leverage or hold short positions.\49\
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    \48\ See id.
    \49\ See id. at 21.
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    The commenter notes that the Exchange would permit trading in the 
Shares between 8:00 a.m. and 5:00 p.m., but that the IIV would only be 
disseminated during the Exchange's Regular Trading Hours, which are 
between 9:30 a.m. and 4:00 p.m. The commenter asserts that the proposal 
does not adequately address the significant risk that the prices of 
Shares bought or sold in the Pre-Opening Session (8:00 a.m. to 9:30 
a.m.) and After Hours Session (4:00 p.m. to 5:00 p.m.) would vary 
widely from underlying portfolio values because an updated IIVs would 
not be available.\50\ Therefore, the commenter suggests that trading in 
Shares should be limited to the Exchange's Regular Trading Hours.\51\
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    \50\ See id.
    \51\ See id.
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    The commenter states that, given the importance of the IIV to the 
decision-making process of current and prospective Fund investors, all 
Fund investors should have ongoing access to current IIV values.\52\ 
The commenter suggests that each Fund's current IIV be provided at no 
charge on a public Web site and made available to the public no later 
than it is made available to any other market participant.\53\ The 
commenter also suggests that the following information be published on 
the Funds' Web site: real time IIVs and historical IIV information; 
statistics regarding closing price premiums and discounts; statistics 
regarding intraday estimated premiums and discounts; statistics 
regarding bid-ask spreads; statistics regarding long or short equity 
market exposure and the amount of investment leverage employed; and 
statistics regarding transaction fees applicable to purchases of 
Shares, redemptions through the Small Allotment Redemption Option and 
Redemption Unit redemptions by Authorized Participants.\54\
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    \52\ See id.
    \53\ See id. at 21-22.
    \54\ See id. at 22-23.
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III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission shall 
approve a proposed rule change of a self-regulatory organization if the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder that are applicable to that organization.\55\ The Commission 
shall disapprove a proposed rule change if it does not make such a 
finding.\56\
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    \55\ 15 U.S.C. 78s(b)(2)(C)(i).
    \56\ 15 U.S.C. 78s(b)(2)(C)(ii).
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    After careful consideration, the Commission does not find that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange. In particular, the Commission does not 
find that the proposed rule change is consistent with Section 6(b)(5) 
of the Exchange Act, which requires that the rules of a national 
securities exchange be designed, among other things, to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
to protect investors and the public interest.\57\
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    \57\ 15 U.S.C. 78f(b)(5). In disapproving the proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    Before an ETF can list and trade on a national securities exchange, 
the ETF must have exemptive relief under the 1940 Act, and a national 
securities exchange must have effective rules in place to list and 
trade the ETF.\58\ As noted above, the Trust has filed an Exemptive 
Application under the 1940

[[Page 68327]]

Act.\59\ As stated in the Notice of an Application for Exemptive 
Relief, however, ``the Commission preliminarily believes that [the 
Trust's] proposed ETFs do not meet the standard for exemptive relief 
under section 6(c) of the [1940] Act,'' \60\ and accordingly, ``absent 
a request for a hearing that is granted by the Commission, the 
Commission intends to deny [the Trust's] request for an exemption under 
section 6(c) of the [1940] Act as not necessary or appropriate in the 
public interest and as not consistent with the protection of investors 
and the purposes fairly intended by the policy and provisions of the 
[1940] Act.'' \61\
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    \58\ Neither an ETF that has obtained 1940 Act exemptive relief 
but does not fall within Commission-approved exchange listing 
standards, nor an ETF that falls within Commission-approved listing 
standards but has been denied 1940 Act exemptive relief, can legally 
be listed and traded on a national securities exchange.
    \59\ See note 3 and accompanying text, supra. The Trust, the 
Advisor, and the Distributor submitted an application for an order 
under section 6(c) of the 1940 Act for an exemption from sections 
2(a)(32), 5(a)(1), 22(d) and 22(e) of the 1940 Act and rule 22c-1 
under the 1940 Act; under sections 6(c) and 17(b) of the 1940 Act 
for an exemption from sections 17(a)(1) and 17(a)(2) of the 1940 
Act; and under section 12(d)(1)(J) of the 1940 Act for an exemption 
from sections 12(d)(1)(A) and 12(d)(1)(B) of the 1940 Act.
    \60\ Notice of Application for Exemptive Relief, supra note 3, 
at 3.
    \61\ Id. at 31.
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    The purpose of the Exchange's proposed rule change is to allow the 
listing and trading of the proposed Funds and future funds of the same 
type. The Commission does not believe that approving this proposed rule 
change would be consistent with the requirement under the Exchange Act 
that an exchange's rules be consistent with the protection of investors 
and the public interest, because the Commission has stated its 
intention to deny the Trust's request for exemptive relief under the 
1940 Act and because denying this exemptive relief would mean that the 
Funds could not legally operate.\62\
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    \62\ The Commission's determinations under Section 6(c) of the 
1940 Act with respect to the Funds are preliminary and could change 
if a hearing were requested, the Commission were to grant the 
request, and persuasive new information were presented. Under 
Section 19(b)(2) of the Exchange Act, however, the Commission must 
approve, disapprove, or institute proceedings to disapprove this 
proposed rule change by November 11, 2014, and it must do so on the 
basis of the facts as they currently exist, irrespective of any 
information that might be presented to or considered by the 
Commission at a later date in the context of its final determination 
under Section 6(c) of the 1940 Act.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find that 
the proposed rule change is consistent with the requirements of the 
Exchange Act and the rules and regulations thereunder applicable to a 
national securities exchange, and in particular, with Section 6(b)(5) 
of the Exchange Act.\63\
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    \63\ Having found for the reasons explained above that the 
Exchange's proposed rule change is not consistent with the 
requirements of the Exchange Act, the Commission does not believe it 
is necessary to address each of the particular objections raised by 
the commenter who opposes the proposed rule change.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that the proposed rule change (SR-BATS-2014-018) be, and 
it hereby is, disapproved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\64\
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    \64\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-26947 Filed 11-13-14; 8:45 am]
BILLING CODE 8011-01-P


