
[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34729-34743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14890]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75165; File No. S7-11-15]


Request for Comment on Exchange-Traded Products

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
seeking public comment on topics related to the listing and trading of 
exchange-traded products on national securities exchanges and sales of 
these products by broker-dealers.

DATES: Comments should be received by August 17, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml);
     Send an email to rule-comments@sec.gov, including File 
Number S7-11-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov), following the instructions for submitting 
comments.

Paper Comments

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

All submissions should refer to File Number S7-11-15. 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 of submission. The Commission will post all 
comments on the Commission's Web site (http://www.sec.gov). Comments 
are also 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. 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 
publicly available.

FOR FURTHER INFORMATION CONTACT: Edward Cho, Special Counsel, at (202) 
551-5508; Christopher Chow, Special Counsel, at (202) 551-5622; or 
Sarah Schandler, Special Counsel, at (202) 551-7145, Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-7010.

Table of Contents

I. Discussion
    A. Introduction
    B. The Types of ETPs
    C. How Existing ETPs Function
    1. Purchases, Sales, Creations, and Redemptions
    2. Arbitrage Between an ETP's Market Price and Its NAV
    D. The Commission's Oversight of Exchange-Traded Products
    1. Exchange Act Exemptive and No-Action Relief for Existing ETPs
    2. Exchange Listing Standards and the Rule 19b-4 Process
    3. Broker-Dealer Sales Practices
II. Request For Comment
    A. Arbitrage and Market Pricing
    B. Exchange Act Exemptions and No-Action Positions
    C. Exchange Listing Standards
    D. Broker-Dealer Sales Practices and Investor Understanding and 
Use of ETPs
    E. Other

I. Discussion

A. Introduction

    Exchange-traded products (``ETPs'') constitute a diverse class of 
financial products that seek to provide investors with exposure to 
financial instruments, financial benchmarks, or investment strategies 
across a wide range of asset classes. ETP trading occurs on national 
securities exchanges and other secondary markets that are regulated by 
the Commission under the Securities Exchange Act of 1934 (``Exchange 
Act''),\1\ making ETPs widely available to market participants, from 
individual investors to institutional investors, including hedge funds 
and pension funds.
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    \1\ 15 U.S.C. 78a et seq. Once listed on a national securities 
exchange, ETP shares also can be traded on Alternative Trading 
Systems (as defined in Rule 300 of Regulation ATS, 17 CFR 242.300) 
or in other over-the-counter transactions.
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    The Commission approved the listing and trading of shares of the 
first ETP--the SPDR S&P 500 ETF (``SPY'')--in 1992.\2\ Since the SPY 
began trading on January 22, 1993, there has been enormous growth in 
the number, aggregate market capitalization, and variety of ETPs. The 
chart below depicts the growth of ETPs, both in number and market 
capitalization, since 1993.
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    \2\ See Securities Exchange Act Release No. 31591 (Dec. 11, 
1992), 57 FR 60253 (Dec. 18, 1992) (SR-Amex-92-18) (order approving 
the adoption of listing standards for Portfolio Depositary Receipts 
and the listing and trading of shares of SPY pursuant to those 
listing standards).
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    As reflected in Figure 1 (below), from 2006 to 2013, the total 
number of ETPs listed and traded as of year end rose by an average of 
160 per year, with a net increase of more than 200 in both 2007 and 
2011. By comparison, from 1993 to 2005, the total number of ETPs listed 
and traded as of year end rose by an average of just 17 per year, with 
a net increase of 60 in 2000. The total market capitalization of ETPs 
has also grown substantially, nearly doubling since the end of 2009. 
Much of this growth has been in index-based ETPs.

[[Page 34730]]

[GRAPHIC] [TIFF OMITTED] TN17JN15.001

    As of December 31, 2014, there were 1,664 U.S.-listed ETPs, and 
they had an aggregate market capitalization of just over $2 
trillion.\4\ Trading in these ETPs makes up a significant portion of 
secondary-market equities trading. For example, during 2014, trading in 
U.S.-listed ETPs made up about 16.7% of U.S. equity trading by share 
volume and 25.7% of U.S. equity trading by dollar volume.\5\
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    \3\ The figures underlying this chart were produced by an 
analysis by Commission staff of year-end market data obtained 
through subscriptions to Morningstar Direct and Bloomberg 
Professional services.
    \4\ These figures reflect an analysis by Commission staff of 
market data obtained through subscriptions to Morningstar Direct and 
Bloomberg Professional services.
    \5\ These figures reflect an analysis by Commission staff of 
market data obtained through the Commission's Market Information 
Data and Analytics System (``MIDAS''). The staff's analysis of MIDAS 
data also shows that approximately 32.4% of the trading activity (by 
share volume) in ETPs during 2014 took place on trading venues other 
than national securities exchanges, which is roughly comparable to 
the approximately 35.2% of share volume in all equity trading that 
took place off an exchange in 2014.
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    There has also been significant growth in the range of investment 
strategies that ETPs pursue. These strategies have expanded from 
exchange-traded funds (``ETFs'') that track equity indices (such as the 
original SPY) to include, among other things: (i) ETPs that track other 
types of indices (such as those based on fixed-income securities or on 
derivatives contracts on commodities and currencies); (ii) actively 
managed ETPs that hold portfolios of equities, fixed-income 
instruments, foreign securities, commodities, currencies, futures, 
options, or other over-the-counter or exchange-traded derivatives; \6\ 
(iii) leveraged, inverse, and inverse leveraged ETPs; \7\ and (iv)

[[Page 34731]]

ETPs employing market volatility, hedging, or options-based 
strategies.\8\
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    \6\ See, e.g., Securities Exchange Act Release Nos. 50603 (Oct. 
28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22) (order 
approving the adoption of listing standards for Equity Gold Shares 
and the listing and trading of shares of the streetTRACKS Gold 
Trust, which was subsequently renamed the SPDR Gold Trust); 60064 
(June 8, 2009), 74 FR 28315 (June 15, 2009) (SR-NYSEArca-2009-30) 
(order granting approval for the listing and trading of shares of 
the iShares Diversified Alternatives Trust); 68390 (Dec. 10, 2012), 
77 FR 74540 (Dec. 14, 2012) (SR-BATS-2012-042) (order granting 
approval for the listing and trading of shares of the Sovereign 
Screened Global Bond Fund); 68871 (Feb. 8, 2013), 78 FR 11238 (Feb. 
15, 2013) (SR-NYSEArca-2012-138) (order granting approval for the 
listing and trading of shares of the PIMCO Foreign Currency Strategy 
Exchange-Traded Fund); 68972 (Feb. 22, 2013), 78 FR 13721 (Feb. 28, 
2013) (SR-NASDAQ-2012-147) (order granting approval for the listing 
and trading of shares of the First Trust High Yield Long/Short ETF); 
70209 (Aug. 15, 2013), 78 FR 51769 (Aug. 21, 2013) (SR-NYSEArca-
2013-60) (order granting approval to list and trade shares of the 
Market Vectors Low Volatility Commodity ETF and Market Vectors Long/
Short Commodity ETF); and 71378 (Jan. 23, 2014), 79 FR 4786 (Jan. 
29, 2014) (SR-NYSEArca-2013-137) (order granting approval to list 
and trade shares of the Merk Gold Trust).
    \7\ Leveraged ETPs seek to achieve performance results, over a 
specified period, that are a multiple or an inverse multiple of the 
performance of the index or benchmark they track. Inverse ETPs (also 
called ``short'' funds) seek to deliver the opposite of the 
performance of the index or benchmark they track. Like traditional 
ETPs, some leveraged and inverse ETPs track broad indices, some are 
sector-specific, and others are linked to commodities, currencies, 
or some other benchmark. See U.S. Securities and Exchange 
Commission, Leveraged and Inverse ETFs: Specialized Products with 
Extra Risks for Buy-and-Hold Investors, available at http://www.sec.gov/investor/pubs/leveragedetfs-alert.htm; see also 
Securities Exchange Act Release No. 52553 (Oct. 3, 2005), 70 FR 
59100 (Oct. 11, 2005) (SR-Amex-2004-62) (order granting approval for 
the adoption of listing standards to accommodate leveraged ETFs and 
for the listing and trading of shares of the xtraShares Trust).
    \8\ For example, recent ETPs have included an ETF that seeks to 
track the performance of the CBOE S&P 500 VIX Tail Hedge Index, see 
Securities Exchange Act Release No. 67485 (July 23, 2012), 77 FR 
44291 (July 27, 2012) (SR-NYSEArca-2012-50); an ETF that writes 
covered call options on underlying ETPs that it owns, see Securities 
Exchange Act Release No. 67552 (Aug. 1, 2012), 77 FR 47131 (Aug. 7, 
2012) (SR-NYSEArca-2012-55); an ETF that holds long and short 
positions in underlying ETFs and ETNs, see Securities Exchange Act 
Release No. 67559 (Aug. 1, 2012), 77 FR 47482 (Aug. 8, 2012) (SR-
NYSEArca-2012-57); an ETF that holds a portfolio including equities, 
equity futures, and volatility-related instruments, see Securities 
Exchange Act Release No. 68158 (Nov. 5, 2012), 77 FR 67412 (Nov. 9, 
2012) (SR-NYSEArca-2012-101); and an ETF that seeks to track the 
performance of an index of over-the-counter put options on volatile 
stocks, see Securities Exchange Act Release No. 69373 (Apr. 15, 
2013), 78 FR 23601 (Apr. 19, 2013) (SR-NYSEArca-2012-108).
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    The increasing scope and complexity of ETP investment strategies in 
recent years have led to an increase in the number and complexity of 
requests by issuers for exemptive relief under the Exchange Act (to 
allow ETPs to be offered for sale on exchanges) and in the number and 
complexity of proposed rule changes filed with the Commission by 
exchanges seeking to establish listing standards for the securities of 
new ETPs. Accordingly, the Commission believes that this is an 
opportune time to seek public comment on topics associated with its 
oversight of the listing and trading of ETPs on national securities 
exchanges.\9\
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    \9\ The Commission has previously sought comment on topics 
related to exchange-traded funds, most recently in 2008. See 
Exchange-Traded Funds, Investment Company Act Release No. 28193 
(Mar. 11, 2008), 73 FR 14618 (Mar. 18, 2008) (proposed rule), 
available at http://www.sec.gov/rules/proposed/2008/33-8901.pdf. The 
Commission has not adopted the rule that was proposed in the 2008 
release.
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B. The Types of ETPs

    Although ETPs constitute a diverse class of financial products, for 
purposes of this Request for Comment they are classified into three 
broad categories.\10\
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    \10\ Recently, the Commission approved an exchange proposal to 
adopt rules that provide for the listing and trading of Exchange-
Traded Managed Fund Shares (``ETMFs''), which would operate 
differently from existing ETPs. See Securities Exchange Act Release 
No. 73562 (Nov. 7, 2014), 79 FR 68309 (Nov. 14, 2014) (SR-NASDAQ-
2014-020) (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 the Listing and Trading of 
Exchange-Traded Managed Fund Shares) (``ETMF Approval Order''). No 
ETMFs are currently listed or traded on an exchange, and this 
Request for Comment does not therefore address their listing and 
trading.
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Exchange-Traded Funds (ETFs)
    The first, and largest, category comprises ETFs, which are open-end 
fund vehicles or unit investment trusts that are registered as 
investment companies under the Investment Company Act of 1940 (``1940 
Act'').\11\ Like an open-end fund, an ETF pools the assets of multiple 
investors and invests those assets according to its investment 
objective and principal investment strategies, and each share of an ETF 
represents an undivided interest in the underlying assets of the ETF. 
However, unlike open-end funds--shares of which are purchased or 
redeemed at the fund's current net asset value (``NAV''),\12\ which is 
typically calculated at the end of the trading day--ETF shares may be 
bought or sold by investors throughout the day through a broker-dealer 
at a market-determined price.\13\
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    \11\ 15 U.S.C. 80a-1 et seq.
    \12\ The NAV of an investment company is the net value of all 
the assets and liabilities in the investment company's portfolio 
divided by the number of the shares issued by the investment 
company.
    \13\ Closed-end funds are also registered 1940 Act investment 
companies that issue securities that are traded on an exchange, and 
they may pursue investment strategies similar to those of ETFs. The 
trading of closed-end funds differs from that of ETFs, however, in 
that closed-end funds do not operate with the creation and 
redemption mechanism that, as described below, helps to keep an 
ETF's market price closely tied to the value of the assets it holds. 
See infra at Section I.C.
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Non-1940 Act Pooled Investment Vehicles
    The second category comprises ETPs that, generally, are trust or 
partnership vehicles that are not registered under the 1940 Act because 
they do not invest primarily in securities. Examples of ETPs in this 
category include those that physically hold a precious metal or that 
hold a portfolio of futures or other derivatives contracts on certain 
commodities or currencies. Offerings of securities issued by ETPs in 
this second category are registered only under the Securities Act of 
1933 (``Securities Act'') \14\ and are not also registered under the 
1940 Act.
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    \14\ 15 U.S.C. 77a et seq.
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Exchange-Traded Notes (ETNs)
    The third category comprises exchange-traded notes (``ETNs''). ETNs 
are senior debt instruments issued by financial institutions, and they 
pay a return based on the performance of a ``reference asset''--an 
asset, market benchmark, or other investment strategy, such as the 
return on the S&P 500 Index, the performance of commodities or 
commodity indices, or the performance of the common stock of an 
individual public company. Unlike the other two categories of ETPs 
described above, ETNs are not pooled vehicles, and they do not hold an 
underlying portfolio of securities, futures, over-the-counter 
derivatives, or other assets. Offerings of ETNs are registered under 
the Securities Act, and the performance of the reference assets 
generally determines the amount owed by the issuer of the ETN to the 
holder of the ETN at maturity.
Market Statistics
    To provide a general overview of the distribution of market 
capitalization and trading volume across broad categories of ETPs, the 
table below shows the number of ETP products (by underlying or 
reference asset and by type of ETP), their aggregate market 
capitalization, and the total value traded as of year end 2014.

                      ETPs by Underlying or Reference Asset Type, as of Year End 2014 \15\
----------------------------------------------------------------------------------------------------------------
                                                                                                   Total value
         Underlying or reference asset or strategy               Number       Total market cap   traded in 2014
                                                                                 (millions)        (millions)
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Asset Allocation..........................................                36            $7,435           $14,380
    ETF...................................................                34             7,402            14,344
    ETN...................................................                 2                33                36
Alternative Strategies....................................               330            42,985         1,952,802
    ETF...................................................               209            31,865         1,296,485
    Non-1940 Act Pooled Investment Vehicles...............                25             4,727           142,465

[[Page 34732]]

 
    ETN...................................................                96             6,392           513,852
Commodities...............................................               118            55,366           406,728
    ETF...................................................                 7               213               810
    1940 Act Pooled Investment............................
Vehicles..................................................                38            50,880           390,213
    ETN...................................................                73             4,273            15,705
International Equity......................................               367           380,023         2,497,521
    ETF...................................................               361           376,941         2,495,865
    ETN...................................................                 6             3,082             1,657
Municipal Bond............................................                32            14,273            20,186
    ETF...................................................                32            14,273            20,186
Sector Equity.............................................               297           304,588         2,782,522
    ETF...................................................               281           293,673         2,764,385
    ETN...................................................                16            10,915            18,137
Taxable Bond..............................................               217           290,245         1,000,086
    ETF...................................................               214           290,219         1,000,037
    ETN...................................................                 3                26                49
U.S. Equity...............................................               267           909,677         8,581,038
    ETF...................................................               252           907,557         8,579,330
    ETN...................................................                15             2,119             1,707
                                                           -----------------------------------------------------
    Grand Total...........................................             1,664         2,004,591        17,255,263
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C. How Existing ETPs Function
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    \15\ These figures reflect an analysis by Commission staff of 
market data obtained through subscriptions to Morningstar Direct and 
Bloomberg Professional services. Figures are as of the last trading 
day of 2014.
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1. Purchases, Sales, Creations, and Redemptions
    Most investors in an ETP buy and sell the ETP's securities in the 
secondary market, at a market-determined price, with other market 
participants, including other investors, broker-dealers, and market 
makers, on the other side of the transaction. The ETP securities that 
are listed for trading on an exchange (``ETP Securities'') are either 
(i) shares issued by the ETP or (ii) in the case of ETNs (which are, as 
noted above, debt instruments issued by a financial institution), the 
debt instruments themselves.
    Although most investors can buy or sell ETP Securities only in the 
secondary market through a broker-dealer, certain large market 
participants, typically broker-dealers, can become authorized 
participants (``Authorized Participants'') with respect to most 
ETPs.\16\ Each Authorized Participant enters into a contractual 
relationship with the ETP issuer that allows it to engage in purchases 
and redemptions of ETP Securities directly with that issuer.
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    \16\ ETNs, as credit instruments issued by a financial 
institution, do not have Authorized Participants.
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    For almost all ETPs,\17\ the issuance and redemption of ETP 
Securities operates in essentially the same manner.\18\ ETPs generally 
issue ETP Securities only in large aggregations or blocks (for example, 
50,000 ETP shares) called creation units (``Creation Units''). Most 
ETPs are structured so that an Authorized Participant will purchase a 
Creation Unit with a portfolio deposit (``Portfolio Deposit''), which 
is a basket of assets (and sometimes cash) that generally reflects the 
composition of the ETP's portfolio.\19\ The ETP makes public the 
contents of the Portfolio Deposit before the beginning of the trading 
day.\20\ Because the purchase price of a Creation Unit and its 
aggregate NAV must be equal, an amount of cash will be exchanged 
between the Authorized Participant and the ETP at the time of purchase 
when necessary to balance the value of the Portfolio Deposit with that 
of the Creation Unit. After purchasing a Creation Unit, an Authorized 
Participant may hold the ETP Securities or sell (or lend) some or all 
of them to investors in the secondary market.
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    \17\ ETNs may or may not be redeemable, and they employ 
different calculations and procedures to issue and redeem ETN units 
based on the value or performance of the underlying reference asset 
or benchmark. The issuance and redemption process for ETNs is 
generally performed by institutional investors, as issuers require 
issuance or redemption to occur in large blocks of ETNs (e.g., 
25,000 to 50,000 ETNs). ETNs are issued and redeemed (where 
redeemable) solely for cash.
    \18\ Some ETPs, however, do not permit regular creations after 
the initial public offering of the ETP, allowing only ETP 
redemptions. See, e.g., Securities Exchange Act Release No. 66930 
(May 7, 2012), 77 FR 27817 (May 11, 2012) (SR-NYSEArca 2012-18) 
(APMEX Physical--1 oz. Gold Redeemable Trust).
    \19\ Some issuers may allow or require Creation Units to be 
created for cash only.
    \20\ In most cases, ETPs publish the contents of their Portfolio 
Deposit through the National Securities Clearing Corporation 
(``NSCC''). The NSCC provides its members with several methods to 
access this information. See http://www.dtcc.com/clearing-services/equities-trade-capture/etf.aspx.
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    Similarly, for most ETPs, when an Authorized Participant wishes to 
redeem ETP Securities, it presents a Creation Unit to the ETP for 
redemption and receives in return a redemption basket (``Redemption 
Basket''), the contents of which are made public by the ETP before the 
beginning of the trading day. The Redemption Basket (which is usually, 
but not always, the same as the Portfolio Deposit) typically consists 
of securities or commodities and a small amount of cash.\21\ As with 
purchases from the ETP, redemptions to the ETP are priced at NAV,\22\ 
and an amount of cash will be exchanged when necessary to balance the 
value of the Redemption Basket with that of the Creation Unit.
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    \21\ Some issuers may allow or require cash-only Redemption 
Baskets.
    \22\ Certain ETPs that hold physical commodities and are not 
ETFs redeem Creation Units, at the Authorized Participant's option, 
either for commodities with a value equal to the NAV of the Creation 
Unit or for cash at less than the NAV of the Creation Unit. See, 
e.g., Securities Exchange Act Release No. 66930, supra note 18.
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    When creation and redemption transactions occur wholly or partly 
``in kind''--in other words, when securities constituting the ETP's 
portfolio are exchanged for ETP Securities and vice versa--certain 
benefits can accrue to the ETP and its investors. In-kind exchanges 
generally result in lower trading expenses (because securities received 
or

[[Page 34733]]

delivered in kind do not need to be purchased or sold in the market by 
the ETP, thus avoiding brokerage fees) and lower taxable gains to 
shareholders (because appreciated securities are not sold but are 
delivered in kind to redeeming Authorized Participants).
2. Arbitrage Between an ETP's Market Price and Its NAV
    Because of the creation and redemption mechanisms, most existing 
ETPs present market participants, including Authorized Participants, 
market makers, and institutional investors, with opportunities to 
engage in arbitrage, which generally helps to prevent the market price 
of ETP Securities from diverging significantly from the value of the 
ETP's underlying or reference assets.\23\ Although most ETPs calculate 
and disseminate their official NAV only once per day as of the close of 
regular trading hours, market participants can use other methods during 
the trading day to calculate or approximate the value of the assets 
underlying or referenced by a share of an ETP.\24\
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    \23\ Arbitrage for ETNs may operate differently from that for 
other existing ETPs, because the in-kind creation and redemption 
process for most ETPs differs from the cash-only issuance and 
redemption process for ETNs. The Commission seeks comment on the 
operation of arbitrage for ETNs. See infra at Section II.A (Question 
8).
    \24\ ETNs do not calculate a NAV because they do not hold an 
underlying portfolio of assets. See supra Section I.B. See also 
infra note 26.
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    For example, exchange listing standards require every currently 
traded, actively managed ETP to make daily disclosure of its entire 
portfolio.\25\ Current exchange listing standards do not require 
similar disclosures for index-based ETPs, but the make-up and value of 
the underlying indices are widely available, and most index-based ETPs, 
as a matter of practice, make daily disclosure of their portfolios. 
With this information, market participants can access pricing data 
about an ETP's portfolio assets and perform their own calculations of 
the per-share value of that portfolio.
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    \25\ See, e.g., NYSE Arca Equities Rule 8.600(d)(2)(B)(i). An 
actively managed ETP does not seek to track the return of a 
particular securities index. Instead, an actively managed ETP's 
investment adviser selects investments designed to meet a particular 
investment objective or policy.
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    In addition, exchange listing standards require existing ETPs to 
publicly disseminate during the trading day an intraday indicative 
value (``IIV''), which is designed to provide investors with 
information on the value of the investments held by the ETP (or, in the 
case of an ETN, the reference assets).\26\ The IIV is typically 
calculated and disseminated at least every 15 seconds during the 
trading day and is typically disseminated over the Consolidated Tape or 
via an exchange data feed. The IIV may or may not be based on the 
entire portfolio held by an ETP, and it may or may not be equal to the 
per-share value of an ETP's underlying portfolio or reference 
assets.\27\
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    \26\ See, e.g., NYSE Arca Equities Rule 5.2(j)(3), Commentary 
.01(c). The IIV is also referred to as an ``Indicative Optimized 
Portfolio Value,'' ``Intraday Value,'' or ``Portfolio Indicative 
Value.'' Most ETN issuers also make publicly available on their Web 
sites or through third-party vendors a value called the closing 
indicative value, which is determined as of the close of each 
trading day. The closing indicative value, in contrast to the 
intraday indicative value, represents the value of the ETN at that 
point in time and is used to calculate the amounts due to investors 
at maturity or on redemption.
    \27\ For example, the IIV for some ETPs is based on the current 
value of the securities or cash required to be deposited in exchange 
for a creation unit, which may differ from the composition of 
portfolio holdings on any given day. See, e.g., Securities Exchange 
Act Release No. 67320 (June 29, 2012), 77 FR 39763 (July 5, 2012) 
(SR-NYSEArca-2012-44) (order granting approval for the listing and 
trading of shares of the iShares Strategic Beta U.S. Large Cap Fund 
and iShares Strategic Beta U.S. Small Cap Fund). The IIV for certain 
other ETPs is based on the current value of some, but not all, 
assets held in the investment portfolio. See, e.g., Securities 
Exchange Act Release No. 61881 (Apr. 9, 2010), 75 FR 20028 (Apr. 16, 
2010) (SR-NYSEArca-2010-14) (order granting approval to list and 
trade partnership units of the United States Brent Oil Fund, LP, a 
commodity pool that seeks to track changes in Brent crude oil 
futures traded on the ICE Futures Exchange and that calculates and 
disseminates an IIV based solely on these futures contracts, 
excluding other crude-oil-related investments held in the 
portfolio).
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    A simplified example of ``riskless'' arbitrage will help to clarify 
how the arbitrage process for existing ETPs is intended to work. If the 
shares of an ETP that uses an in-kind creation and redemption process 
begin to trade at a discount to the value of the underlying portfolio 
at any point during the trading day, arbitrageurs can capture this 
difference (minus expenses) by: (i) Purchasing ETP Securities in the 
secondary market in an amount equal to a Creation Unit while 
simultaneously selling short the securities or commodities in the 
Redemption Basket; (ii) redeeming the Creation Unit with the ETP at the 
end-of-day NAV (either as an Authorized Participant or through a 
relationship with an Authorized Participant), thereby receiving the 
securities or commodities in the Redemption Basket; and (iii) using the 
contents of the Redemption Basket to close out the arbitrageur's short 
position. Purchasing the ETP Securities and selling short the 
securities or commodities in the Redemption Basket also apply market 
pressure that tends, all other things being equal, to bring the ETP 
Security's market price closer to the value of the underlying portfolio 
assets.
    Similarly, if the shares of this same ETP begin to trade at a 
premium to the value of the underlying portfolio, arbitrageurs may 
profit by: (i) Selling short the ETP Securities; (ii) purchasing the 
securities or commodities that make up the Portfolio Deposit; (iii) 
exchanging the Portfolio Deposit for a Creation Unit through an 
Authorized Participant; and then (iv) using the ETP Securities in the 
Creation Unit to close out the short position. Again, the sales of the 
ETP Securities and the purchases of the contents of the Portfolio 
Deposit apply market pressure that tends, all other things being equal, 
to bring the price of the ETP Securities closer to the value of the 
underlying portfolio assets.
    Market participants can also engage in arbitrage activities that do 
not necessarily require them to engage in creations or redemptions. For 
example, if a market participant believes that an ETP is overvalued 
relative to its underlying or reference assets, the market participant 
may sell ETP Securities; buy the underlying or reference assets; and, 
if the trading prices move toward parity, close out the positions in 
both the ETP Securities and the underlying or reference assets. The 
market participant would thereby realize a profit from the relative 
movement of those trading prices without engaging in an ETP creation. 
Similarly, a market participant could buy ETP Securities and sell the 
underlying or reference assets in an attempt to profit when an ETP 
Security is trading at a discount to its underlying or reference 
assets. As discussed above, the trading of an ETP Security and its 
underlying or reference assets applies market pressure that may bring 
the prices of the ETP Security and those assets closer together.

D. The Commission's Oversight of Exchange-Traded Products \28\
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    \28\ In addition to the exemptive or no-action relief provided 
with respect to the Exchange Act rules and regulations described 
infra, in 1998 and 1999 the Commission's staff provided no-action 
relief under Section 13(d) of the Exchange Act, 15 U.S.C. 78m(d), 
and Section 16(a) of the Exchange Act, 15 U.S.C. 78p(a), to certain 
funds registered under the 1940 Act with respect to the required 
filing of ownership reports by insiders and five percent beneficial 
owners of the shares of the ETFs. See Letter from James J. Moloney, 
Division of Corporation Finance, and Evan Geldzahler, Division of 
Investment Management, Securities and Exchange Commission, to Sam 
Scott Miller, Orrick, Herrington & Sutcliffe LLP, 1998 SEC No.-Act. 
LEXIS 1050 (Dec. 14, 1998) (providing no-action relief under Section 
13(d) of the Exchange Act); Letter from Anne M. Krauskopf, Division 
of Corporation Finance, and Evan Geldzahler, Division of Investment 
Management, Securities and Exchange Commission, to Stuart M. 
Strauss, Gordon, Altman, Butowsky, Weitzen, Shalov & Wein, 1999 SEC 
No-Act. LEXIS 500 (May 6, 1999) (``Select Sector SPDR Trust 
Letter'') (providing no-action relief under Section 16(a) of the 
Exchange Act). This no-action relief was based, in large part, on 
the representation that the trading prices of the ETFs did not 
deviate materially from their NAV. See id. Having stated its views 
on whether insiders and five percent beneficial owners of ETPs must 
file ownership reports under Sections 16(a) and 13(d) of the 
Exchange Act, the Division staff stated that it would not respond to 
further requests for no-action relief in this area unless the 
request presented a ``novel or unusual issue.'' See Select Sector 
SPDR Trust Letter, 1999 SEC No-Act. LEXIS 500, *9.
---------------------------------------------------------------------------

    Before ETP Securities can be listed and traded on a national 
securities

[[Page 34734]]

exchange, those securities and their issuer must comply with, or obtain 
exemptions from, several provisions of the securities laws. First, as 
with other securities, the offer and sale of ETP Securities must be 
registered under the Securities Act.\29\ In addition, in the case of 
ETFs, certain relief from the requirements of the 1940 Act is 
necessary,\30\ because ETFs differ from other open-end investment 
companies in that they issue and redeem shares only in Creation Units 
and their shares trade in the secondary market at market prices.
---------------------------------------------------------------------------

    \29\ For ETPs that are not registered under the 1940 Act, 
offerings of ETP Securities require the filing of a registration 
statement on Form S-1 or Form S-3, depending on the issuer. 
Depending on the form type used to register the offering, the staff 
of the Division of Corporation Finance may review the disclosures 
included in the registration statement and may issue comments. ETN 
offerings in many cases are made through takedowns off of effective 
shelf registration statements. For ETFs registered under the 1940 
Act, offerings require the filing of a registration statement on 
Form N-1A. The staff of the Division of Investment Management 
reviews the information disclosed in the Form N-1A and may issue 
comments requesting that the issuer revise or expand its disclosures 
before the registration statement becomes effective.
    \30\ For an ETF to operate, it must first obtain 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 from Rule 
22c-1 thereunder, and under Sections 6(c) and 17(b) for an exemption 
from Sections 17(a)(1) and 17(a)(2) of the 1940 Act.
---------------------------------------------------------------------------

    While ETPs are governed by various provisions of the securities 
laws, including the Securities Act and, in certain cases, the 1940 Act, 
the focus of this Request for Comment is on the listing of ETP 
Securities on an exchange and the trading of ETP Securities on 
exchanges and other venues. Therefore, in issuing this Request for 
Comment, the Commission seeks public comment relating specifically to 
the oversight of ETPs under the provisions of the Exchange Act and the 
rules thereunder, including both (i) the exemptive and no-action relief 
granted to ETPs under the Exchange Act and (ii) the requirement that a 
national securities exchange have Commission-approved listing standards 
applicable to the ETP Securities being traded.
1. Exchange Act Exemptive and No-Action Relief for Existing ETPs
    The trading of ETP Securities on an exchange generally will require 
that the issuer obtain exemptive or no-action relief from various 
provisions of, or rules promulgated under, the Exchange Act. As 
explained more fully below, the normal operation of an ETP would 
usually violate these provisions absent relief.
a. Regulation M
    Regulation M proscribes certain activities that may increase a 
security's offering price (and so increase the offering proceeds); 
stabilize the market price of an offered security in order to avoid a 
price decline during the sales period or in the immediate aftermarket; 
or induce or attempt to induce prospective investors to buy in the 
aftermarket.\31\ Rules 101 and 102 of Regulation M generally prohibit 
distribution participants, issuers, selling security holders, and their 
affiliated purchasers from purchasing, bidding for, or attempting to 
induce others to purchase or bid for covered securities during the 
restricted period of a distribution of securities.\32\ Because most 
ETPs are in continuous distribution, meaning that they are continually 
creating and distributing new securities, this restricted period 
usually extends indefinitely.\33\ Absent relief, the purchase of ETP 
Securities by an Authorized Participant (who would be considered a 
distribution participant), or by the issuer in the redemption process, 
would violate Rules 101 and 102 of Regulation M.
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    \31\ See Amendments to Regulation M: Anti-Manipulation Rules 
Concerning Securities Offerings, Securities Exchange Act Release No. 
50831 (Dec. 9, 2004), 69 FR 75774 (Dec. 17, 2004) (S7-41-04) 
(proposed rule).
    \32\ 17 CFR 242.101 and 242.102. See also 17 CFR 242.100 
(defining ``distribution participants,'' ``selling security 
holder,'' ``affiliated purchaser,'' and other terms for purposes of 
Regulation M). In addition to being promulgated under the Exchange 
Act, Rules 101 and 102 of Regulation M are also promulgated under 
the Securities Act and under the 1940 Act. See Anti-Manipulation 
Rules Concerning Securities Offerings, Securities Exchange Act 
Release No. 38067 at n. 10 (Dec. 20, 1996), 62 FR 520, 521 n. 10 
(Jan. 3, 1997) (S7-11-96).
    \33\ See 17 CFR 242.100 (definition of ``Restricted Period'').
---------------------------------------------------------------------------

    When it has granted relief with respect to Regulation M, the 
Commission has relied upon representations from ETPs that the 
continuing existence of effective and efficient arbitrage mechanisms 
help ensure that the secondary market price of ETP Securities does not 
vary substantially from the ETP's NAV or underlying index value.\34\ 
The relief is based in part on an ETP issuer's representation that the 
continuing existence of effective and efficient arbitrage mechanisms 
makes it difficult to manipulate distributions of ETP Securities. 
Relief for classes of ETPs relies on similar bases.\35\ The 
consideration of effective and efficient arbitrage mechanisms for 
purposes of Regulation M, and the Commission's overall consideration of 
ETPs, can take into account not only the end-of-day differences between 
an ETP Security's closing market price and the ETP's NAV, but also any 
intra-day premiums or discounts between the secondary market price of 
an ETP Security and the value of its underlying portfolio or reference 
assets.
---------------------------------------------------------------------------

    \34\ See, e.g., Letter from W. John McGuire, Morgan, Lewis & 
Bockius LLP, to Josephine Tao, Division of Trading and Markets, 
Securities and Exchange Commission, re: AdvisorShares Trust 
Actively-Managed ETF WCM/BNY Mellon Focused Growth ADR (June 18, 
2010) (representing that a close alignment between market price and 
NAV is expected for the relevant ETP due in part to an effective and 
efficient arbitrage mechanism), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2010/advisorshares061810.pdf. See 
also Letter from Josephine Tao, Division of Trading and Markets, 
Securities and Exchange Commission, to W. John McGuire, Morgan, 
Lewis & Bockius LLP, re: AdvisorShares Trust Actively-Managed ETF 
WCM/BNY Mellon Focused Growth ADR (June 18, 2010), available at 
http://www.sec.gov/divisions/marketreg/mr-noaction/2010/advisorshares061810.pdf.
    \35\ See Letter from James A. Brigagliano, Division of Trading 
and Markets, Securities and Exchange Commission, to Stuart M. 
Strauss, Clifford Chance US LLP, re: Class Relief for Exchange 
Traded Index Funds (Oct. 24, 2006) (``Equity Index-Based ETF 
Letter'') (noting that relief is only appropriate when the secondary 
market price of the ETF's shares does not vary substantially from 
NAV), available at http://www.sec.gov/divisions/marketreg/mr-noaction/etifclassrelief102406-msr.pdf.
---------------------------------------------------------------------------

    In granting relief, the Commission also has relied on 
representations by ETP issuers that the characteristics of their 
proposed ETPs will mitigate against the types of abuses that Regulation 
M is intended to address.\36\ In the case of ETFs, for example, this 
includes representations that the shares are issued by an open-end 
investment company or unit investment trust registered with the 
Commission under the 1940 Act and that the index underlying an index-
based ETP has at least 20 different component securities to promote 
sufficient diversification. It also includes representations that those 
components have publicly available trade information, to facilitate the

[[Page 34735]]

availability of sufficient information for arbitrage.\37\
---------------------------------------------------------------------------

    \36\ See supra note 31 and accompanying text.
    \37\ See, e.g., Equity Index-based ETF Letter, supra note 35. 
Broadly speaking, ETP sponsors seeking relief make the same 
representations as those made by similar products that have 
previously been granted relief.
---------------------------------------------------------------------------

b. Exchange Act Section 11(d)(1) and Rule 11d1-2
    Section 11(d)(1) of the Exchange Act generally prohibits a broker-
dealer from extending or maintaining credit, or arranging for the 
extension or maintenance of credit, on shares of new-issue securities 
if the broker-dealer participated in the distribution of the new-issue 
securities within the preceding 30 days.\38\ The Commission's view is 
that, because ETP Securities are distributed in a continuous manner, 
broker-dealers that sell these securities are thereby participating in 
the ``distribution'' of a new issue for purposes of Section 
11(d)(1).\39\ Further, if an ETF held a portfolio composed solely or 
largely of newly issued securities, there is a risk that Authorized 
Participants--rather than lending on, or arranging for lending on, the 
newly issued securities directly--could use the ETF structure to avoid 
the new-issue lending restriction.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78k(d)(1).
    \39\ See, e.g., Letter from Catherine McGuire, Division of 
Trading and Markets, Securities and Exchange Commission, to 
Securities Industry Association (Nov. 21, 2005), available at http://www.sec.gov/divisions/marketreg/mr-noaction/sia112105.htm.
---------------------------------------------------------------------------

    The Commission has granted ETP issuers exemptions from, and the 
staff has issued no-action positions regarding, Section 11(d)(1) in 
circumstances in which these evasion concerns are reduced because: (i) 
the portfolio is sufficiently diversified that evasion becomes 
impractical; \40\ (ii) the portfolio is composed of securities that are 
not subject to Section 11(d)(1) (e.g., government securities); \41\ or 
(iii) the portfolio is not composed of securities at all (e.g., the 
product is an ETP that invests in commodities).\42\
---------------------------------------------------------------------------

    \40\ See, e.g., Letter from Catherine McGuire, Division of 
Trading and Markets, Securities and Exchange Commission, to 
Securities Industry Association (Nov. 21, 2005) (conditionally 
exempting from Section 11(d)(1) an ETF that consists of a basket of 
twenty or more component securities, with no one component security 
constituting more than 25% of the total value of the ETF), available 
at http://www.sec.gov/divisions/marketreg/mr-noaction/sia112105.htm; 
Letter from Joseph Furey, Division of Trading and Markets, 
Securities and Exchange Commission, to W. John McGuire, Morgan, 
Lewis & Bockius LLP, re: AdvisorShares Madrona & Meidell ETFs (June 
16, 2011) (``Madrona & Meidell Letter'') (providing conditional 
staff no-action relief to ETFs whose portfolios consist of other 
diversified ETFs), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2011/advisorsharesmadrona061611.pdf.
    \41\ See, e.g., Letter from James A. Brigagliano, Division of 
Market Regulation, Securities and Exchange Commission, to Richard F. 
Kadlick, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, re: MACRO 
Securities Depositor, LLC (Dec. 22, 2006) (``MACRO Securities 
Depositor Letter'') (providing conditional staff no-action relief), 
available at http://www.sec.gov/divisions/marketreg/mr-noaction/macro122206-11d1.pdf.
    \42\ See, e.g., Letter from James A. Brigagliano, Division of 
Market Regulation, Securities and Exchange Commission, to Michael 
Schmidtberger, Sidley Austin Brown & Wood LLP, re: DB Commodity 
Index Tracking Fund (Jan. 19, 2006) (``DB Commodity Index Tracking 
Fund Letter'') (providing conditional staff no-action relief), 
available at http://www.sec.gov/divisions/marketreg/mr-noaction/commodityidxtf011906.htm.
---------------------------------------------------------------------------

c. Exchange Act Rule 10b-10
    Rule 10b-10 under the Exchange Act \43\ requires broker-dealers to 
provide their customers with certain disclosures at or before the 
completion of a securities transaction, including the identity, price, 
and number of shares or units (or principal amount) of the security 
purchased or sold. As described above, ETP Securities are issued and 
redeemed only in Creation Units of a minimum size, and a Portfolio 
Deposit or Redemption Basket may comprise dozens or hundreds of 
securities. Because it would be administratively burdensome for broker-
dealers to provide transaction confirmations for each security in a 
Portfolio Deposit or Redemption Basket, the Commission has issued 
exemptive relief from Rule 10b-10 to permit broker-dealers to omit this 
information with respect to ETPs, provided that (i) the Creation Unit 
is sufficiently large (at least 25,000 shares and $500,000), (ii) it is 
probable that creation and redemption transactions are entered into 
only by sophisticated investors, and (iii) the broker-dealer provides 
the omitted confirmation information to customers upon request.\44\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.10b-10.
    \44\ See, e.g., Letter from Catherine McGuire to Securities 
Industry Association, supra note 40.
---------------------------------------------------------------------------

d. Exchange Act Rule 10b-17
    Rule 10b-17 under the Exchange Act generally requires issuers to 
give notice 10 days in advance of certain specified actions (e.g., a 
dividend distribution, stock split, or rights offering) relating to 
their securities, in accordance with the procedures laid out in the 
rule.\45\ Generally this rule is relevant to an ETP when it must 
distribute cash--for example, income from fixed-income holdings or cash 
from a realized investment gain--to its shareholders. Because some ETP 
Securities are continuously being issued or redeemed, issuers have 
represented that it is impractical to project, and to provide, some of 
the information required by Rule 10b-17 ten days in advance.\46\ 
According to these issuers, particularly difficult are the requirements 
for the issuer to disclose (i) in the case of a distribution in cash, 
the amount of cash to be paid or distributed per share, and (ii) in the 
case of a distribution in the same security, the amount of the 
securities outstanding immediately before and immediately after the 
dividend or distribution and the rate of the dividend or 
distribution.\47\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.10b-17.
    \46\ See e.g., Letter from Jeremy Senderowicz, Dechert LLP, to 
Josephine Tao, Division of Trading and Markets, Securities and 
Exchange Commission, re: ALPS ETF Trust, ALPS/GS Momentum Builder 
Growth Markets Equities and U.S. Treasuries Index ETF, ALPS/GS 
Momentum Builder Multi-Asset Index ETF, and ALPS/GS Momentum Builder 
Asia Ex-Japan Equities and U.S. Treasuries Index ETF (Dec. 18, 
2012), available at http://www.sec.gov/rules/exorders/2012/34-68459-letter.pdf.
    \47\ These disclosures are required by 17 CFR 240.10b-
17(b)(1)(v)(a) and (b).
---------------------------------------------------------------------------

    When the Commission has granted exemptions to permit these 
distributions to occur without ETP issuers providing 10-day advance 
notice of the two items of information noted above, this relief has 
been conditioned on the issuer providing the two items of information 
to the national securities exchange on which the ETP Securities are 
registered (pursuant to Section 12 of the Exchange Act) as soon as 
practicable before trading begins on the ex-dividend date, but in no 
event later than the time (on the day before the ex-dividend date) the 
exchange last accepts information relating to distributions.\48\ The 
Commission has granted these exemptions because, other than receiving a 
delayed notice of these two items of information, market participants 
will have timely notice of the existence and timing of a pending 
distribution, as required by Rule 10b-17.\49\ Further, under the terms 
of the exemption, the timing of the availability of the two items of 
information should allow market participants time to update their 
systems to reflect the accurate price of the ETP Securities before 
trading begins on the ex-dividend date.\50\
---------------------------------------------------------------------------

    \48\ See, e.g., Order Granting a Limited Exemption from Exchange 
Act Rule 10b-17, Securities Exchange Act Release No. 67215 (June 19, 
2012), 77 FR 37941 (June 25, 2012) (TP-11-07) (``10b-17 Actively 
Managed ETP Exemption'').
    \49\ See id.
    \50\ See id.
---------------------------------------------------------------------------

e. Exchange Act Rule 14e-5
    Rule 14e-5 under the Exchange Act \51\ is designed to prevent the 
manipulation

[[Page 34736]]

of tender offers. In particular, Rule 14e-5 prohibits ``covered 
persons'' \52\ from purchasing or arranging to purchase any securities 
subject to a tender offer except as part of that tender offer.\53\ This 
prohibition is in effect from the announcement of the tender offer 
until the expiration of the tender offer. An Authorized Participant 
acting as the dealer-manager of a tender offer for a component security 
is a covered person for purposes of Rule 14e-5.\54\
---------------------------------------------------------------------------

    \51\ 17 CFR 240.14e-5.
    \52\ For purposes of Exchange Act Rule 14e-5, a ``covered 
person'' is defined as: (i) The offeror and its affiliates; (ii) the 
offeror's dealer-manager and its affiliates; (iii) any advisor to 
any of the persons specified in (i) or (ii) whose compensation is 
dependent on the completion of the offer; and (iv) any person 
acting, directly or indirectly, in concert with any of the persons 
specified in (i), (ii), or (iii) in connection with any purchase or 
arrangement to purchase the securities or any related securities. 
See 17 CFR 240.14e-5(c)(3).
    \53\ Rule 14e-5 is designed to protect investors by preventing 
an offeror from extending greater or different consideration to some 
security holders outside the offer, while other security holders are 
limited to the offer's terms, and by ensuring that large security 
holders do not demand greater consideration. See Securities Exchange 
Act Release No. 8712 (Oct. 8, 1969), 34 FR 15838 (Oct. 15, 1969) 
(order adopting Rule 10b-13, which was later redesignated as Rule 
14e-5 in Securities Exchange Act Release No. 42055 (Oct. 22, 1999), 
64 FR 61408 (Nov. 10, 1999)). In addition, Rule 14e-5 prevents 
purchases outside the offer that, depending on the conditions in the 
market and the nature of the purchases, may be fraudulent or 
manipulative in nature, such as purchases that are used to defeat a 
tender offer by driving the market price above the offer price or by 
otherwise reducing the number of shares tendered below the stated 
minimum. See id.
    \54\ See 17 CFR 240.14e-5(c)(3)(ii).
---------------------------------------------------------------------------

    The Commission has granted relief to various entities with respect 
to the application of Rule 14e-5 so that Authorized Participants may 
redeem Creation Units and purchase ETP Securities even though component 
securities may be subject to a Rule 14e-5 restricted period.\55\ ETP 
issuers generally seek relief on the basis that: (i) Acquiring 
individual securities held by an ETP through redemptions of the ETP's 
securities would be impractical and inefficient; (ii) facilitating a 
tender offer in a particular security included in a Portfolio Deposit 
by means of purchasing all of the specific portfolio securities 
constituting the Portfolio Deposit would be inefficient; and (iii) 
applying the Rule 14e-5 prohibition would impede the valid and useful 
market and arbitrage activity that would assist secondary market 
trading and improve the pricing efficiency of ETP Securities.\56\ 
Moreover, the issuers generally represent that the type of trading 
described above does not result in the abuses that Rule 14e-5 was 
designed to prevent.\57\ As a condition of the relief that has been 
issued, the issuer of ETP Securities generally also represents that the 
purchases or redemptions would not, in fact, be used to facilitate a 
tender offer.
---------------------------------------------------------------------------

    \55\ See, e.g., Equity Index-Based ETF Letter, supra note 35, at 
6. The entities to which relief has been granted include open-end 
investment companies that issue ETP Securities, the listing exchange 
and any other national securities exchange on or through which the 
ETP Securities may subsequently trade, and persons or entities 
engaging in transactions in ETP Securities.
    \56\ See, e.g., Letter from W. John McGuire, Bingham McCutchen 
LLP, to Michele M. Anderson and David Orlic, Division of Corporation 
Finance, Securities and Exchange Commission, re: SSgA Active ETF 
Trust (July 3, 2013), available at http://www.sec.gov/divisions/corpfin/cf-noaction/2013/ssga-active-etf-trust-14e5.pdf.
    \57\ See supra note 53.
---------------------------------------------------------------------------

f. Exchange Act Rules 15c1-5 and 15c1-6
    Rule 15c1-5 under the Exchange Act \58\ requires a broker-dealer to 
disclose to its customers if it has a control relationship with an 
issuer prior to a customer's purchase or sale of the issuer's 
securities. Rule 15c1-6 under the Exchange Act \59\ requires a broker-
dealer to disclose to its customer, at or before the completion of a 
transaction, that the broker-dealer is participating in the primary or 
secondary distribution of the securities that it is selling or 
purchasing for the customer's account. Because applying these rules to 
all the securities in a creation or redemption transaction would be 
administratively burdensome for broker-dealers, and because creations 
and redemptions are consummated at prices that are fixed by the ETP, 
there appears to be little potential for a broker-dealer to manipulate 
the price of the securities in the creation and redemption 
transactions.\60\ Therefore, the staff has stated that it will not 
recommend enforcement action to the Commission with respect to 
Authorized Participants' compliance with Rules 15c1-5 and 15c1-6 in 
creation and redemption transactions if a broker-dealer executes 
transactions in shares of ``Qualifying ETFs'' without disclosing any 
control relationship with an issuer of a security in the Portfolio 
Deposit or Redemption Basket.\61\ The staff has similarly stated that 
it will not recommend enforcement action if a broker-dealer executes 
transactions in shares of Qualifying ETFs without disclosing its 
participation or interest in a primary or secondary distribution of a 
security included within the Portfolio Deposit or Redemption 
Basket.\62\
---------------------------------------------------------------------------

    \58\ 17 CFR 240.15c1-5.
    \59\ 17 CFR 240.15c1-6.
    \60\ See, e.g., Letter from Catherine McGuire to Securities 
Industry Association, supra note 40.
    \61\ A ``Qualifying ETF'' was initially limited to an ETF 
meeting certain conditions, including that it is issued by an open-
end investment company or unit investment trust registered with the 
Commission under the 1940 Act; that it is listed and traded on a 
national securities exchange; that it comprises twenty or more 
diversified component securities, with no one component security 
constituting more than 25% of the total value of the ETF; and that 
it is managed to track a particular index, all components of which 
are publicly available. Id. Subsequent staff no-action positions 
have provided no-action relief to more ETPs with respect to 
treatment as Qualifying ETFs. See, e.g., DB Commodity Index Tracking 
Fund Letter, supra note 42 (certain commodity-based exchange-traded 
trusts); MACRO Securities Depositor Letter, supra note 41 (an ETP 
holding government securities); Letter from Brian A. Bussey, 
Division of Trading and Markets, Securities and Exchange Commission, 
to W. Thomas Conner and Eric C. Freed, Sutherland Asbill & Brennan 
LLP, re: Ameristock ETF Trust (June 29, 2007) (certain fixed income 
ETFs), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/ameristock062907-msr.pdf; Letter from James A. 
Brigagliano, Division of Trading and Markets, Securities and 
Exchange Commission, to Kathleen H. Moriarty, Carter, Ledyard & 
Milburn, re: Proshares Trust (Jan. 24, 2007) (certain ETFs tracking 
a multiple, inverse, or multiple inverse of an index), available at 
http://www.sec.gov/divisions/marketreg/mr-noaction/2007/proshares012407-msr.pdf; Letter from Josephine J. Tao, Division of 
Trading and Markets, Securities and Exchange Commission, to Richard 
F. Morris, Deputy General Counsel, WisdomTree Asset Management, Inc. 
(May 9, 2008) (certain actively-managed ETFs not tied to an index), 
available at http://www.sec.gov/divisions/marketreg/mr-noaction/2008/wisdomtree050908-msr.pdf; and Madrona & Meidell Letter, supra 
note 40 (certain ETFs whose portfolios consist of other diversified 
ETFs).
    \62\ Id.
---------------------------------------------------------------------------

g. Class Relief
    In connection with the application of the Exchange Act provisions 
described above, the Commission has issued a number of ``class'' 
exemptions to the trading of ETP Securities.\63\ Class exemptions for 
ETPs from the Exchange Act provisions discussed above are generally 
issued only if the Commission and the staff have had experience with 
individual exemptions and no-action positions and have determined that 
class relief is appropriate.\64\ In the case of exemptions, the 
Commission must also determine that a class exemption meets the 
statutory standard of being necessary or appropriate in the public 
interest and consistent with the protection of investors.\65\ An ETP 
relying on a class exemption or no-action position must meet all of the 
conditions of the relevant Commission order or staff letter for the 
life of the product (or until the relief is no longer necessary), just 
as if the ETP had obtained its own individual relief. Class exemptions 
or no-action positions have been issued for equity index-based

[[Page 34737]]

ETFs,\66\ commodity-based investment vehicles that are not registered 
under the 1940 Act,\67\ fixed-income index-based ETFs,\68\ 
``combination'' index-based ETFs,\69\ ETNs,\70\ and actively-managed 
ETFs.\71\ These orders and no-action positions cover a number of the 
Exchange Act rules and regulations described above.\72\
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    \63\ See, e.g., Equity-Index Based ETF Letter, supra note 35.
    \64\ See Letter from Catherine McGuire to Securities Industry 
Association, supra note 40.
    \65\ See 15 U.S.C. 78mm(a)(1).
    \66\ See Equity Index-Based ETF Letter, supra note 35.
    \67\ See Letter from Racquel L. Russell, Division of Trading and 
Markets, Securities and Exchange Commission, to George T. Simon, 
Foley & Lardner LLP, re: CurrencyShares British Pound Sterling Trust 
et al. (June 21, 2006), available at http://www.sec.gov/divisions/marketreg/mr-noaction/currencyshares062106-10a1.pdf.
    \68\ See Letter from James A. Brigagliano, Division of Trading 
and Markets, Securities and Exchange Commission, to Benjamin J. 
Haskin, Willkie Farr & Gallagher LLP, re: Class Relief for Fixed 
Income ETFs (Apr. 9, 2007), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/fietfclassrelief040907-msr.pdf.
    \69\ See Letter from Josephine Tao, Division of Trading and 
Markets, Securities and Exchange Commission, to Domenick Pugliese, 
Paul, Hastings, Janofsky and Walker LLP, re: Combination ETFs (June 
27, 2007), available at http://www.sec.gov/Archives/edgar/vprr/07/9999999997-07-047147.
    \70\ See, e.g., Letter from Josephine Tao, Division of Trading 
and Markets, Securities and Exchange Commission, to Arthur S. Long, 
Davis Polk & Wardwell LLP, re: Deutsche Bank AG ETNs (Oct. 12, 2007) 
(``ETN No-action Letter''), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/dbab101207.pdf.
    \71\ See 10b-17 Actively Managed ETP Exemption, supra note48, 
and Division of Trading and Markets: Staff Legal Bulletin No. 9 
``Frequently Asked Questions About Regulation M'' (as revised Sep. 
10, 2010) (regarding Regulation M), available at http://www.sec.gov/interps/legal/mrslb9.htm.
    \72\ See supra Sections I.D.1.a through I.D.1.f.
---------------------------------------------------------------------------

2. Exchange Listing Standards and the Rule 19b-4 Process
    Before ETP Securities can trade on a national securities exchange, 
that exchange must agree to list the ETP Securities for trading on its 
market, and it must have Commission-approved initial and continued 
listing standards that permit listing of that type or ``class'' of ETP 
Security.\73\ ETP listing standards can be broadly categorized as 
either generic or non-generic.
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    \73\ See 15 U.S.C. 78s(b) and 17 CFR 240.19b-4. The Exchange Act 
also permits an exchange to trade a security that is listed on 
another exchange. The non-listing exchange that trades the security 
is said to extend ``unlisted trading privileges'' (or ``UTP'') to 
the security. See Section 12(f) of the Exchange Act, 15 U.S.C. 
78l(f); Exchange Act Rule 12f-5 (17 CFR 240.12f-5) (providing that 
an exchange shall not extend UTP to a security unless the exchange 
has in effect a rule or rules providing for transactions in the 
class or type of security to which the exchange extends UTP).
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    Generic listing standards permit an exchange to list and trade 
specific ETP Securities of a broader class of ETPs without filing a 
product-specific proposed rule change with the Commission.\74\ When 
listing ETP Securities in this way, however, exchanges are required to 
file a notice with the Commission within five business days after 
trading commences.\75\ Examples of ETP classes for which generic 
listing standards exist include what are commonly called index-based 
ETFs (which the exchanges' rules call Investment Company Units, Index-
Fund Shares, Portfolio Depositary Receipts, or security-based Trust 
Issued Receipts), and certain ETNs (which the exchanges' rules call 
Index-Linked Securities or Linked Securities).\76\
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    \74\ See 17 CFR 240.19b-4(e)(1). In 1998, the Commission issued 
a final rule setting forth the standards under which exchanges can 
list and trade ``new derivatives securities products'' (a category 
that encompasses ETPs) under ``generic listing standards.'' See 
Amendments to Rule Filing Requirements for Self-Regulatory 
Organizations Regarding New Derivative Securities Products, 
Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 
70952 (Dec. 22, 1998) (S7-13-98).
    \75\ See 17 CFR 240.19b-4(e)(2)(ii). The required notice is 
filed on Form 19b-4(e). 17 CFR 249.820.
    \76\ See, e.g., Securities Exchange Act Release Nos. 42787 (May 
15, 2000), 65 FR 33598 (May 24, 2000) (SR-Amex-2000-14) (approving 
generic listing standards for ETFs called Portfolio Depositary 
Receipts and Index Fund Shares); 45718 (Apr. 9, 2002), 67 FR 18965 
(Apr. 17, 2002) (SR-NYSE-2002-07) (approving generic listing 
standards for Trust Issued Receipts); and 55687 (May 1, 2007), 72 FR 
25824 (May 7, 2007) (SR-NYSE-2007-27) (approving generic listing 
standards for Index-Linked Securities). See also, e.g., BATS Rules 
14.11(b) (Portfolio Depositary Receipts), 14.11(c) (Index Fund 
Shares), 14.11(d) (ETNs), and 14.11(f) (Trust Issued Receipts), 
available at http://batstrading.com/resources/regulation/rule_book/BATS_Exchange_Rulebook.pdf; NASDAQ Rules 5705 (Index Fund Shares and 
Portfolio Depositary Receipts), 5710 (ETNs), and 5720 (Trust Issued 
Receipts), available at http://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode=chp%5F1%5F1%5F4%5F3&manual=%2Fnasdaq%2Fmain%2Fnasdaq%2Dequityrules%2F; NYSE Arca Equities Rules 5.2(j)(3) 
(Investment Company Units), 5.2(j)(6) (ETNs), 8.100 (Portfolio 
Depositary Receipts), and 8.200 (Trust Issued Receipts), available 
at http://nysearcarules.nyse.com/PCX/.
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    Generic ETP listing standards approved by the Commission contain 
quantitative criteria with respect to components included in the ETP's 
underlying or reference index or benchmark. With respect to underlying 
indices, these quantitative criteria provide minimum thresholds 
regarding trading volume, market capitalization, number of index 
components, and index concentration limits.\77\ To mitigate the 
potential for manipulation and other trading abuses, and to help 
maintain a fair and orderly market for the ETP Securities, these 
quantitative criteria are designed to help ensure a minimum degree of 
liquidity and diversification for the underlying or reference 
securities, assets, or instruments.
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    \77\ For example, with respect to equity-index-based ETFs, the 
generic listing standards generally contain the following 
requirements with respect to the underlying index: (1) That each 
component have a minimum market value; (2) that each component have 
a minimum monthly trading volume over the most recent six-month 
period; (3) that the index observe certain concentration limits 
(e.g., that no component may exceed 30% of the weight of the index 
and that the five most heavily weighted components may not exceed 
65% of the weight of the index); (4) that there be a minimum number 
of components in the index; and (5) that each component either be an 
exchange-listed NMS stock or, if a non-U.S. stock, be listed and 
traded on an exchange that has last-sale reporting. See, e.g., BATS 
Rule 14.11(c); NASDAQ Rule 5705; NYSE Arca Equities Rule 5.2(j)(3), 
Commentary .01. With respect to ETNs, the generic listing standards 
also include minimum requirements relating to the issuer of the 
securities (e.g., minimum tangible net worth and minimum amount of 
assets), which are designed to mitigate issuer credit risk. See, 
e.g., BATS Rule 14.11(d); NASDAQ Rule 5710; NYSE Arca Equities Rule 
5.2(j)(6).
---------------------------------------------------------------------------

    Non-generic listing standards permit an exchange to list and trade 
a specific ETP Security (within a class of ETPs) only after the 
exchange has filed and the Commission has approved a proposed rule 
change that is specific to the new ETP Security.\78\ Because of their 
security-specific nature, non-generic listing standards typically do 
not contain generalized quantitative criteria for the components 
included in an ETP's underlying or reference index or benchmark.
---------------------------------------------------------------------------

    \78\ The ETP product classes that have non-generic listing 
standards include the following: Trust Issued Receipts based on 
investments in ``investment shares'' or ``financial instruments,'' 
Commodity-Based Trust Shares, Commodity Index Trust Shares, 
Commodity Futures Trust Shares, Partnership Units, Paired Trust 
Shares, Trust Units, Managed Fund Shares, Managed Trust Securities, 
and Trust Certificates. See, e.g., BATS Rules 14.11(e)(3) (Trust 
Certificates), 14.11(e)(4) (Commodity-Based Trust Shares), 
14.11(e)(6) (Commodity Index Trust Shares), 14.11(e)(7) (Commodity 
Futures Trust Shares), 14.11(e)(8) (Partnership Units), 14.11(e)(9) 
(Trust Units), 14.11(e)(10) (Managed Trust Securities), and 14.11(i) 
(Managed Fund Shares); NASDAQ Rules 5711(c) (Trust Certificates), 
5711(d) (Commodity-Based Trust Shares), 5711(f) (Commodity Index 
Trust Shares), 5711(g) (Commodity Futures Trust Shares), 5711(h) 
(Partnership Units), 5711(i) (Trust Units), 5711(j) (Managed Trust 
Securities), and 5735 (Managed Fund Shares); NYSE Arca Equities 
Rules 8.200 (Commentary .02) (Trust Issued Receipts based on 
investment shares or financial instruments), 8.201 (Commodity-Based 
Trust Shares), 8.203 (Commodity Index Trust Shares), 8.204 
(Commodity Futures Trust Shares), 8.300 (Partnership Units), 8.400 
(Paired Trust Shares), 8.500 (Trust Units), 8.600 (Managed Fund 
Shares), 8.700 (Managed Trust Securities).
---------------------------------------------------------------------------

    Exchanges seeking to adopt listing standards applicable to a new 
ETP product class--or to list and trade specific ETP Securities 
pursuant to existing non-generic listing standards for an ETP product 
class--are required to file proposed rule changes under Section 
19(b)(1) of the Exchange Act \79\ and Rule 19b-4 thereunder.\80\ Once 
an

[[Page 34738]]

exchange files a proposed rule change that complies with the Exchange 
Act, the rules thereunder, and the form governing such filings, 
statutory deadlines apply to Commission consideration of the filing.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 78s(b).
    \80\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Section 19(b)(2) of the Exchange Act, as amended by the Dodd-Frank 
Act,\81\ effectively requires the Commission to publish notice of a 
proposed rule change within 15 days of filing.\82\ In general, for 
proposals that must be approved by the Commission before they may take 
effect (such as a filing concerning a new ETP), the Commission is 
required to take action within 45 days (which can be extended by the 
Commission or the exchange for another 45 days) after the date of 
publication of the proposal in the Federal Register.\83\ The Commission 
may, however, institute proceedings to determine whether to disapprove 
a proposal, in which case the Commission is required to take final 
action to approve or disapprove a proposed rule change no later than 
240 days after the proposal is published in the Federal Register.\84\ 
If the Commission fails to meet any of the deadlines for final action 
on a proposed rule change, that proposed rule change is, pursuant to 
the Exchange Act, deemed to have been approved by the Commission.\85\
---------------------------------------------------------------------------

    \81\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. 111-203, Sec.  916(a), 124 Stat. 1376, 1833-34 (2010).
    \82\ 15 U.S.C. 78s(b)(2)(E).
    \83\ Certain proposed rule changes are entitled to become 
``immediately effective'' upon filing, without prior Commission 
approval. See 15 U.S.C. 78s(b)(3)(A) and 17 CFR 240.19b-4(f) 
(setting forth certain limited conditions under which a proposed 
rule change may take effect immediately upon filing with the 
Commission).
    \84\ See 15 U.S.C. 78s(b)(2)(B)(ii).
    \85\ 15 U.S.C. 78s(b)(2)(D).
---------------------------------------------------------------------------

    To approve an exchange's proposed rule change, the Commission must 
find that the proposed rule change is consistent with the applicable 
requirements of the Exchange Act and the rules and regulations 
thereunder.\86\ The requirements imposed by the Exchange Act include 
those set forth in Section 6(b)(5), which provides that the rules of an 
exchange must be designed to do the following: (i) Prevent fraudulent 
and manipulative acts and practices; (ii) promote just and equitable 
principles of trade; (iii) foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities; (iv) remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and (v) in general, 
to protect investors and the public interest.\87\ With respect to the 
listing standards for ETP Securities, most exchange filings in 
connection with proposed rule changes include a general description of 
the following: (i) the ETP and its permitted investments or reference 
assets; (ii) how the ETP will seek to meet its investment objective; 
(iii) whether and to what extent information is available to investors 
about the pricing and valuation of the ETP Securities, the ETP's 
underlying assets, and the relevant index or reference assets; \88\ 
(iv) how the exchange will monitor trading in the ETP Securities; and 
(v) the information that will be available to investors about the ETP 
Securities.\89\
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    \86\ 15 U.S.C. 78s(b)(2)(C).
    \87\ 15 U.S.C. 78f(b)(5). In addition, the proposed rule change 
must not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers or to regulate by virtue of 
any authority conferred by the Exchange Act matters not related to 
the purposes of the Exchange Act or the administration of the 
exchange. Id.
    \88\ For index-based ETPs, exchange rules generally require that 
the underlying or reference index or benchmark be calculated and 
disseminated throughout the trading day. The frequency of 
dissemination depends on whether the components are U.S. equities, 
foreign equities, or fixed-income securities. See, e.g., Commentary 
.01(b)(2) to NYSE Arca Equities Rule 5.2(j)(3) (requiring that the 
current index value be widely disseminated every 15 seconds during 
the exchange's Core Trading Session for investment company units 
that track a U.S. equity index and every 60 seconds for investment 
company units that track an international or global equity index); 
Commentary .02(b)(ii) to NYSE Arca Equities Rule 5.2(j)(3) 
(requiring that the current index value for investment company units 
that track a fixed-income index be disseminated at least once per 
day). For ETNs, exchange rules generally require that the value of 
the reference assets be calculated and disseminated throughout the 
trading day. See, e.g., NYSE Arca Equities Rule 
5.2(j)(6)(B)(II)(1)(b)(ii) (requiring that the value of the 
commodity reference asset be calculated and widely disseminated on 
at least a 15-second basis during the exchange's Core Trading 
Session for commodity-linked securities). As noted above, most ETN 
issuers also make publicly available a closing indicative value that 
is determined as of the close of each trading day. See supra note 
26.
    \89\ Exchanges are required by their listing standards to 
distribute information circulars or bulletins to exchange members 
relating to the listing of ETP Securities. See, e.g., NYSE Arca 
Equities Rules 5.1(a)(2), 5.2(j)(3) Commentary .01(g), 8.100(c), and 
8.600 Commentary .05. The information to be contained in these 
circulars is generally specified in a Commission order approving the 
listing and trading of new ETP Securities and typically includes: 
(a) The special characteristics and risks associated with trading 
ETP Securities; (b) the procedures for creations and redemptions of 
ETP Securities; (c) the exchange requirements relating to the 
members' obligations to learn the essential facts in connection with 
every customer prior to trading ETP Securities and other suitability 
requirements, such as information contained in guidance issued by 
FINRA with respect to the trading and sales of leveraged and 
inverse-leveraged ETPs and other complex securities products; (d) 
how information regarding the IIV is disseminated and the risks 
involved in trading ETP Securities outside of regular trading hours 
when an updated IIV is not calculated or available; (e) applicable 
prospectus delivery requirements; and (f) other information (e.g., 
fees and expenses of the ETP and the time at which the NAV will be 
calculated and published daily). See, e.g., Securities Exchange Act 
Release Nos. 65136 (Aug. 15, 2011), 76 FR 52037, 52040 (Aug. 19, 
2011) (SR-NYSEArca-2011-24); 68390 (Dec. 10, 2012), 77 FR 74540, 
74543 (Dec. 14, 2012) (SR-BATS-2012-042); and 70829 (Nov. 7, 2013), 
78 FR 68482, 68485 (Nov. 14, 2013) (SR-NASDAQ-2013-122).
---------------------------------------------------------------------------

3. Broker-Dealer Sales Practices
    Broker-dealers, which are registered with and regulated by the 
Commission under the Exchange Act, are also subject to regulation by 
the self-regulatory organizations (``SROs'') to which they belong--
e.g., FINRA and the exchanges. Both federal and SRO regulations impose 
duties on broker-dealers when dealing with their customers and, in 
particular, when recommending the purchase or sale of securities by 
their customers.\90\ These duties include making suitable 
recommendations, engaging in fair and balanced communications with the 
public, disclosing conflicts of interest, and receiving fair 
compensation both in agency and principal transactions.\91\
---------------------------------------------------------------------------

    \90\ See e.g., Exchange Act Section 15(c) and FINRA Rule 2111.
    \91\ See, e.g., A Joint Report of the SEC and CFTC on 
Harmonization of Regulation, at 8 (Oct. 16, 2009), http://www.sec.gov/news/press/2009/cftcjointreport101609.pdf (``Under the 
federal securities laws and SRO rules, broker-dealers are required 
to deal fairly with their customers. This includes having a 
reasonable basis for recommendations given the customer's financial 
situation (suitability), engaging in fair and balanced 
communications with the public, . . . disclosing conflicts of 
interest, and receiving fair compensation both in agency and 
principal transactions. In addition, the SEC's suitability approach 
requires BDs [i.e., broker-dealers] to determine whether a 
particular investment recommendation is suitable for a customer, 
based on customer-specific factors and factors relating to the 
securities and investment strategy. A BD must investigate and have 
adequate information regarding the security it is recommending and 
ensure that its recommendations are suitable based on the customer's 
financial situation and needs. The suitability approach in the 
securities industry is premised on the notion that securities have 
varying degrees of risk and serve different investment objectives, 
and that a BD is in the best position to determine the suitability 
of a securities transaction for a customer. Disclosure of risks 
alone is not sufficient to satisfy a broker-dealer's suitability 
obligation.'')
---------------------------------------------------------------------------

    In addition, a broker-dealer that recommends buying, holding, or 
selling an ETP, or an investment strategy involving an ETP, may be 
subject to additional or heightened scrutiny regarding ETPs with 
respect to brokerage customers, as described in FINRA guidance 
regarding complex products and non-traditional ETPs.\92\
---------------------------------------------------------------------------

    \92\ See FINRA Notice to Members (``FINRA NTM'') 12-03 (Jan. 
2012) (Heightened Supervision of Complex Products). See also FINRA 
NTM 10-51 (Oct. 2010) (Sales Practice Obligations for Commodity 
Futures-Linked Securities); FINRA NTM 09-73 (Dec. 2009) (FINRA 
Reminds Firms of their Sales Practice Obligations Relating to 
Principal-Protected Notes); FINRA NTM 09-31 (June 2009) (FINRA 
Reminds Firms of Sales Practice Obligations Relating to Leveraged 
and Inverse Exchange-Traded Funds); FINRA NTM 08-81 (Dec. 2008) 
(FINRA Reminds Firms of their Sales Practice Obligations with Regard 
to the Sale of Securities in a High Yield Environment); NASD Notice 
to Members (``NASD NTM'') 05-59 (Sept. 2005) (NASD Provides Guidance 
Concerning the Sale of Structured Products); and NASD NTM 03-71 
(Nov. 2003) (NASD Reminds Members of Obligations When Selling Non-
Conventional Instruments).

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[[Page 34739]]

II. Request for Comment

    The Commission is soliciting public comment to help inform its 
review of the listing and trading of new, novel, or complex ETPs, 
including requests by ETPs for exemptive and no-action relief under the 
Exchange Act and filings by exchanges to adopt listing standards 
applicable to ETPs. The Commission is also soliciting comment regarding 
the ways in which broker-dealers, which are regulated under the 
Exchange Act, market these products, especially to retail investors. 
Finally, the Commission seeks comment on investor understanding of the 
nature and uses of ETPs, particularly by retail investors.
    The Commission periodically has solicited public comment on issues 
relating to ETFs since their inception over two decades ago. In 2001, 
the Commission issued a Concept Release on Actively Managed Exchange-
Traded Funds.\93\ That release sought comment on a number of issues 
relating to actively managed ETFs, focusing in particular on the 
operation of actively managed ETFs as open-end investment companies and 
on the exemptive relief under the 1940 Act that would be required for 
such funds.\94\ Then, in 2008, the Commission proposed and sought 
comment on a rule that would exempt ETFs from certain provisions of the 
1940 Act and permit certain ETFs to begin operating without the need to 
obtain an exemptive order under the 1940 Act.\95\ Once again, the focus 
of that release was on the operation of ETFs as open-end investment 
companies under the 1940 Act and on the exemptive relief provided to 
such funds under the 1940 Act.\96\
---------------------------------------------------------------------------

    \93\ Concept Release: Actively Managed Exchange-Traded Funds, 
Investment Company Act Release No. IC-25258 (Nov. 8, 2001), 66 FR 
57614 (Nov. 15, 2001) (S7-20-01), available at http://www.sec.gov/rules/concept/ic-25258.htm.
    \94\ In response, the Commission received 20 comment letters, 
which are available on the Commission's Web site at http://www.sec.gov/rules/concept/s72001.shtml.
    \95\ See Exchange-Traded Funds (proposed rule), supra note 9.
    \96\ In response to these proposals, the Commission received 25 
comment letters, which are available on the Commission's Web site at 
http://www.sec.gov/comments/s7-07-08/s70708.shtml.
---------------------------------------------------------------------------

    Here, the Commission seeks comment on the treatment of a broader 
group of products--ETPs, rather than just ETFs--and the Commission 
seeks public comment specifically with respect to its oversight of ETPs 
under the Exchange Act. As noted above, ETP trading makes up a 
significant percentage of equity trading in the United States.\97\ And, 
while the Commission has gained extensive experience and familiarity 
with the topics discussed in the questions below, the Commission 
believes that it would be beneficial to engage broader public comment 
on these important topics.
---------------------------------------------------------------------------

    \97\ See supra note 5 and accompanying text.
---------------------------------------------------------------------------

    To inform the Commission's review of new, novel, or complex ETPs 
under the Exchange Act, commenters are invited to provide their views 
regarding the listing and trading of ETP Securities, such as the manner 
in which ETP Securities are initially listed on a national securities 
exchange, the manner in which ETP Securities trade in the secondary 
market, and the exemptive or no-action relief that has been granted to 
ETPs under the Exchange Act. Commenters are further invited to provide 
their views regarding how broker-dealers (which are regulated under the 
Exchange Act) recommend and sell ETPs to investors, how broker-dealers 
fulfill their obligations to investors when they recommend and sell 
ETPs, and investors' understanding and use of ETPs. Commenters should 
be as specific as possible in their responses, explain the reasoning 
supporting those responses, and provide supporting data wherever 
possible.

A. Arbitrage and Market Pricing

    As discussed above, existing ETPs trade at market prices rather 
than at a price based on NAV. When providing exemptive or no-action 
relief under the Exchange Act, the Commission and its staff have 
analyzed and relied upon the representations from ETP issuers regarding 
the continuing existence of effective and efficient arbitrage to help 
ensure that the secondary market prices of ETP Securities do not vary 
substantially from the value of their underlying portfolio or reference 
assets.
    In the Commission's experience, the deviation between the daily 
closing price of ETP Securities and their NAV, averaged across broad 
categories of ETP investment strategies and over time periods of 
several months, has been relatively small. For example, the average 
absolute value of the daily difference between the NAV and the closing 
market price during a six-month period ending in December 2014 was just 
0.21% for ETPs based on U.S. equities indices and 0.38% for actively 
managed ETPs based on U.S. equities.\98\ The respective figures for 
index-based and actively managed ETPs based on U.S. fixed-income 
securities were 0.26% and 0.19%.\99\
---------------------------------------------------------------------------

    \98\ The average of the absolute value of these differences is 
used because the closing market price of an ETP can deviate either 
above or below its NAV on any given day, and a calculation that 
allowed positive deviations to offset negative deviations would 
understate the extent of the deviations.
    \99\ Figures in this paragraph represent an analysis by 
Commission staff of market data obtained through a subscription to 
Bloomberg Professional services.
---------------------------------------------------------------------------

    Other types of ETPs have had a somewhat higher deviation between 
NAV and their closing price. For example, ETPs based on international 
indices had an average absolute value of daily difference of 0.52% 
between NAV and the closing price, while actively managed ETPs based on 
international fixed-income securities had an average absolute value of 
daily difference of 0.44% between NAV and the closing price during the 
six-month period studied.\100\ These numbers, however, represent only 
broad averages with respect to end-of-day differences, and intraday 
premiums or discounts between an ETP's market price and the value of 
its portfolio or reference assets (or, for certain ETNs, the value of 
the note according to its terms) can be greater under certain 
circumstances.\101\ Moreover, these numbers represent broad averages, 
and the Commission seeks public comment and data in response to the 
specific questions below.
---------------------------------------------------------------------------

    \100\ The figures in this paragraph reflect an analysis by the 
staff of the Office of Analytics and Research in the Division of 
Trading and Markets of market data obtained through a subscription 
to Bloomberg Professional services.
    \101\ As an extreme example, during the so-called ``Flash 
Crash'' of May 6, 2010, many ETP Securities temporarily traded at 
significant discounts to their IIV, even though their prices 
recovered before the end of the day. See Findings Regarding the 
Market Events of May 6, 2010, Report of the Staffs of the CFTC and 
SEC to the Joint Advisory Committee on Emerging Regulatory Issues 
(Sept. 30, 2010), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
---------------------------------------------------------------------------

    The Commission seeks comment with respect to all aspects of the 
arbitrage mechanism for ETPs, including the nature, extent, and 
potential causes of premiums and discounts across the wide range of ETP 
strategies and holdings. Additionally, in connection with its review of 
the listing and trading of ETPs, the Commission seeks comment on the 
trading of ETPs investing in less-liquid assets,\102\

[[Page 34740]]

including fixed-income instruments, during periods of market stress.
---------------------------------------------------------------------------

    \102\ As used in this release, ``liquidity'' generally refers to 
the ability of a market participant to buy or sell an asset 
immediately without significantly affecting the market price for 
that asset. Although certain fixed-income instruments, such as on-
the-run U.S. Treasury securities, trade in markets with substantial 
liquidity, fixed-income instruments generally trade with less 
liquidity than equity securities.
---------------------------------------------------------------------------

    1. Arbitrage mechanisms are designed to keep intraday trading 
prices of ETP Securities equal (or nearly equal) to the contemporaneous 
value of the underlying portfolio or reference assets. Do these 
mechanisms work better for some types or categories of ETPs? To what 
extent do arbitrage mechanisms help ensure efficient market pricing for 
ETPs throughout periods of market volatility, including times of market 
stress?
    2. Do commenters believe that there are other mechanisms besides 
arbitrage mechanisms that do, or could, help ensure efficient market 
pricing of ETPs? Do other factors play a role in efficient market 
pricing of ETPs? If so, what are these mechanisms or factors, and how 
effective are they? Are these mechanisms or factors more effective for 
certain types or categories of ETPs? To what extent are these 
mechanisms or factors effective during periods of market volatility?
    3. What characteristics of an ETP facilitate or hinder the 
alignment of secondary market share prices with the value of the 
underlying portfolio or reference assets? What characteristics of an 
ETP's underlying or reference assets facilitate or hinder the alignment 
of secondary market share prices with the value of the underlying 
portfolio or reference assets? Does liquidity in the market for an 
ETP's underlying or reference assets affect arbitrage, and if so, how 
and to what extent? Does the availability of current and historical 
pricing information, as well as trading history, for the underlying or 
reference assets affect arbitrage, and if so, how and to what extent? 
To what extent does the availability of correlated hedges for the ETP's 
underlying or reference assets affect arbitrage and pricing efficiency? 
To what extent does an ETP's use of a sampling methodology (investing 
in a subset of the components of an index) to track an index affect 
arbitrage and pricing efficiency? Does the use of over-the-counter 
instruments by an ETP affect the opportunity for market makers or other 
participants to engage in arbitrage, and if so, how and to what extent? 
Do non-synchronous market hours between an ETP and its underlying 
assets (e.g., international equities) affect the pricing of an ETP and 
the opportunity for arbitrage, and if so, how? Does the use of cash-
only creation or redemption baskets and variable cash fees affect 
efficient market pricing, and if so, how?
    4. How closely do investors or other market participants expect the 
intraday trading price of ETP Securities to be aligned with the 
contemporaneous value of their underlying portfolio or reference 
assets? Do these expectations differ depending on the type of ETP, the 
nature of the underlying assets, or market conditions? What methods, if 
any, do investors use to determine whether the intraday trading price 
of ETP Securities closely tracks the value of their underlying 
portfolio or reference assets?
    5. Do market participants conduct analyses of how well intraday 
prices of ETP Securities track the value of their underlying portfolio 
or reference assets? If so, how much weight do market participants 
place on such analyses?
    6. Under what circumstances might the prices of ETP Securities not 
track (on an intraday, temporary end-of-day, or permanent basis) the 
value of their underlying portfolio or reference assets? Are there 
circumstances in which the price of an ETP's Securities, though 
different from its NAV, might be a more accurate measure of the value 
of the ETP's underlying assets? What are the implications for investors 
(both individual and institutional) and other market participants if 
intraday prices for ETP Securities do not closely track the value of 
their underlying portfolio or reference assets, either on an intraday, 
temporary end-of-day or permanent basis?
    7. To what extent do arbitrage mechanisms affect trading in an 
ETP's underlying or reference assets? Does the answer vary depending on 
whether the underlying or reference assets are equities, fixed-income 
securities, commodities, derivatives, or another type of asset? If so, 
how?
    8. To what extent do ETNs offer opportunities for arbitrage? How do 
market participants engage in arbitrage for ETNs? How is arbitrage 
affected by ETN issuers' ability to suspend and restart issuances of 
notes at their discretion? How are arbitrage opportunities affected 
when an issuer suspends the issuance of its ETNs? Are certain ETNs 
easier or more difficult to arbitrage due to the nature of the ETN's 
reference asset or index, and, if so, which ones?
    9. As noted above, the IIV for an ETP is generally designed to 
provide investors information during the trading day on the value of 
the ETP's portfolio (or, in the case of an ETN, on the value of a 
reference asset or index). The IIV may be subject to various 
calculation methodologies. How does the calculation of IIV vary, if at 
all, among ETPs? Does the calculation methodology depend on the class 
or type of ETP, and if so, how? Does the calculation methodology depend 
on the nature of the underlying portfolio or reference assets, and if 
so, how? Are certain IIV calculation methodologies more or less useful 
for investors, market makers, or other market participants?
    10. To what extent do market participants make use of the IIV for 
an ETP based on less-liquid securities? If underlying assets trade 
infrequently or are priced only at the end of the trading day for 
purposes of NAV calculation, does an IIV that is disseminated every 15 
seconds (as is currently the case) contain useful pricing information? 
Would a different dissemination frequency be more appropriate, and if 
so, what would that be?
    11. Do investors or other market participants use intraday or 
closing indicative values for ETNs? If so, for what purpose? How does 
the intraday or closing indicative value differ from the market value 
of an ETN or its redemption amount?
    12. How much disclosure about the contents of an ETP's underlying 
portfolio is necessary for arbitrage to function efficiently to keep 
the market price of an ETP aligned with the contemporaneous value of 
its underlying or reference portfolio? Please explain.
    13. In the absence of daily portfolio disclosure for an ETP, could 
other mechanisms enable market makers or other market participants to 
make efficient markets in that ETP? If so, what are those mechanisms 
and how would they function? What, if any, information disclosure, 
characteristics of the ETP, or other circumstances would be necessary 
for those mechanisms to function?
    14. Under what circumstances would an ETP suspend creations? Under 
what circumstances could an ETP (other than a 1940-Act registered ETF) 
suspend redemptions? What effect does this or could this have on 
arbitrage mechanisms or the market value of these products? How might 
suspension of creations or redemptions affect the ETP's continued 
compliance with the conditions of its exemptive and no-action relief 
under the Exchange Act? How would an ETP issuer be likely to respond to 
the suspension of creation or redemption activity by one or more of its 
Authorized Participants?
    15. How do arbitrage mechanisms work in the case of ETPs with less-
liquid underlying or reference assets? Are arbitrage mechanisms for 
ETPs with less-liquid underlying or reference assets effective and 
efficient in aligning

[[Page 34741]]

share prices with the value of the underlying portfolio or reference 
assets?
    16. To what extent do arbitrage mechanisms help ensure efficient 
market pricing throughout rising and falling markets, including times 
of market stress, for ETPs with underlying or reference assets that are 
less-liquid? Do periods of market stress affect arbitrage mechanisms 
for such ETPs, and if so, how? Could there be a point at which the 
amount of ETP Securities outstanding relative to the amount of 
underlying or reference assets outstanding results in an imbalance that 
inhibits the redemption process during periods of market stress?
    17. To what extent, if any, does trading activity in ETP Securities 
affect price discovery, price correlation, liquidity, or volatility in 
the ETP's underlying or reference assets? What role, if any, do ETP 
Securities that are based on less-liquid underlying securities have in 
providing additional price discovery for the underlying securities?
    18. Should the listing exchange for an ETP have an obligation to 
monitor the effectiveness of that ETP's arbitrage mechanism? If yes, 
what should be the nature of that obligation?

B. Exchange Act Exemptions and No-Action Positions

    The Commission believes it is useful and timely to examine the 
application of Rules 101 and 102 of Regulation M in the context of 
ETPs--particularly those ETPs with an underlying trust or other 
collection of underlying assets--given the increasing complexity of ETP 
investment strategies and the expansion of the types of underlying and 
reference assets and benchmarks. The Commission solicits comment on 
approaches for preventing manipulation of an ETP Securities 
distribution by persons who may have an incentive to do so in light of 
the nature, variety, and complexity of ETP investment strategies and 
ETP markets.
    19. The staff has issued no-action relief from Rules 101 and 102 of 
Regulation M to ETNs in part on the basis of assumptions that the 
secondary market price for such products should not vary substantially 
from the value of the relevant reference index.\103\ Given that the 
secondary market price of an ETN can substantially deviate from its 
reference assets when the issuer of that ETN suspends issuances, how 
should Rules 101 and 102 of Regulation M apply to such products? Should 
relief from these rules be limited to ETNs where there is a clear, 
independent index, where there is no limitation on issuances or 
redemptions, or where an ETN's secondary market price does not vary 
substantially from the relevant reference index? What effect would such 
a change have? Are there any other relevant factors in this context? 
Are there any risks in maintaining the current relief for ETNs? What 
are the benefits of the relief? How should the Commission balance the 
risks against any benefits resulting from the ability of Authorized 
Participants to suspend issuances or redemptions? Should relief for 
ETNs contain different conditions than relief for other ETPs?
---------------------------------------------------------------------------

    \103\ See, e.g., ETN No-action Letter, supra note 70.
---------------------------------------------------------------------------

    20. Because ETPs are in continuous distribution, they generally 
need, on an ongoing basis, to meet the conditions of the Regulation M 
relief that has been extended to them and to meet the representations 
made in seeking relief under Regulation M.\104\ What would an ETP do if 
it could no longer meet one or more of these conditions or 
representations and could no longer rely on the relief? In such 
situations, would the ETP halt creations or, for ETPs not registered 
under the 1940 Act, redemptions? What effect would that have on the 
market for that ETP's securities? What would be the effect if this 
resulted in a halt or suspension of trading activity in the ETP 
Securities, or in the ETP Securities being delisted? How would 
investors be affected?
---------------------------------------------------------------------------

    \104\ Conditions and representations concerning relief under 
Regulation M are discussed in section I.D.1.a, supra.
---------------------------------------------------------------------------

    21. What purchasing activities do distribution participants (such 
as Authorized Participants) engage in during the distribution of ETP 
Securities? Are these activities limited to the purchasing of shares to 
accumulate a redemption unit, or are there other reasons for 
distribution participants to engage in purchases of ETP Securities?
    The Commission also invites comment on the conditions pertaining to 
ETPs' exemptions from, and the criteria relied on by the staff in no-
action positions regarding, Section 11(d)(1) of the Exchange Act and 
Exchange Act Rules 10b-10, 11d1-2, 14e-5, 15c1-5, and 15c1-6.
    22. How well do the conditions of the ETPs' exemptions and the 
staff no-action relief from Section 11(d)(1) and Rule 11d1-2 
thereunder, as discussed in section I.D.1.b above, achieve Section 
11(d)(1)'s purpose of prohibiting broker-dealers from using favorable 
margin arrangements to aid in the distribution of securities in which 
they have an interest? Could different conditions be more effective at 
achieving this purpose?
    23. How often do ETP investors request detailed confirmation 
information, as discussed in Section I.D.1.c above, in creation and 
redemption transactions as provided for in the Commission's exemptions 
from Rule 10b-10 and the related staff no-action positions? What is the 
cost to broker-dealers of providing this information? Has the 
availability of modern information technology reduced these costs? Who 
bears those costs? Do ETP investors use and benefit from this 
information, and if so, how? What would be the effect of eliminating 
the exemptions and no-action relief from Rule 10b-10, thereby requiring 
broker-dealers to provide detailed confirmations to ETP purchasers in 
all transactions? What would be the effect of eliminating the 
requirement to send this information to ETP investors upon request? 
Could different conditions achieve the purposes of Rule 10b-10 at less 
cost or burden to broker-dealers? If so, what trade-offs would there 
be, if any?
    24. Has Rule 14e-5, discussed in Section I.D.1.e above, affected 
the structure of ETPs and, if so, in what ways?
    25. Authorized Participants generally have no-action relief from 
the requirements in Rules 15c1-5 and 15c1-6, as discussed in Section 
I.D.1.f above, to disclose the Authorized Participants' control 
relationships or interest in the distribution of securities that 
compose Portfolio Deposits and Redemption Baskets. Given the large 
number of securities included in many ETPs, would investors realize any 
benefit from receiving this information in creation and redemption 
transactions? What would be the cost of providing this information in 
all transactions or, alternatively, upon an ETP investor's request, and 
who would bear those costs? Has the availability of modern information 
technology made it easier or less costly to provide such information? 
Could different conditions for ``Qualifying ETFs''\105\ achieve the 
purposes of those rules at less cost or burden to broker-dealers? If 
so, what trade-offs would there be, if any?
---------------------------------------------------------------------------

    \105\ See note 62, supra.
---------------------------------------------------------------------------

C. Exchange Listing Standards

    26. The exchanges (as SROs) and the Commission both have 
responsibilities with respect to determining whether the proposed 
listing and trading of ETP Securities is consistent with the Exchange 
Act and the rules and

[[Page 34742]]

regulations thereunder.\106\ Do commenters believe that these 
independent obligations, in practice, complement each other? Do 
commenters believe that these obligations overlap each other? To the 
extent that these obligations overlap, how do commenters believe they 
should be allocated between the exchanges and the Commission?
---------------------------------------------------------------------------

    \106\ Exchanges seeking to adopt listing standards applicable to 
a new ETP product class--or to list and trade specific ETP 
Securities pursuant to existing non-generic listing standards for an 
ETP product class--are required to file proposed rule changes on 
Form 19b-4. See 17 CFR 249.819. The instructions to Form 19b-4 state 
that an exchange filing the form must provide ``a statement of the 
purpose of the proposed rule change and its basis under the 
[Exchange] Act and the rules and regulations thereunder applicable 
to the [exchange]'' and this statement ``should be sufficiently 
detailed and specific to support a finding that the proposed rule 
change is consistent with the requirements of the [Exchange] Act and 
the rules and regulations thereunder. . . .'' To approve an 
exchange's proposed rule change, the Commission must find that the 
proposed rule change is consistent with the applicable requirements 
of the Exchange Act and the rules and regulations thereunder. 15 
U.S.C. 78s(b)(2)(C). See also supra notes 79-89 and accompanying 
text.
---------------------------------------------------------------------------

    27. Do the business practices of an exchange with respect to 
attracting, listing, and trading ETP Securities differ from an 
exchange's business practices with respect to more traditional equity 
listing services? If so, how do these business practices align with the 
existing regulatory framework for exchanges as SROs?
    28. Are current exchange listing standards (including standards 
with respect to component eligibility, diversification, and pricing) 
effective, given the increasing complexity of ETP investment strategies 
and the expansion of the types of underlying and reference assets and 
benchmarks? For example, do existing listing standards adequately 
address the use by ETPs of non-exchange-listed derivatives or of 
leverage?
    29. Given the increasing complexity of ETP investment strategies 
and the expansion of the types of underlying or reference assets and 
benchmarks, what types of information do commenters believe would 
assist the Commission in evaluating whether a proposed rule filing by 
an exchange to list and trade a specific ETP is consistent with the 
Exchange Act?
    30. Should certain characteristics of an ETP receive particular 
emphasis in the Commission's evaluation of whether a proposed rule 
filing related to that ETP is consistent with the Exchange Act? If so, 
which ones? For example, should the Commission's evaluation focus on 
the nature, characteristics, or liquidity of the specific investments, 
holdings, indices, or reference assets of the ETP and on the public 
availability of information about these underlying or reference assets? 
Should the Commission's evaluation focus on the effectiveness or 
efficiency of the creation and redemption process in facilitating 
arbitrage opportunities with respect to an ETP? What other factors, if 
any, should the Commission consider in its evaluation of whether a 
proposed rule filing related to an ETP is consistent with the Exchange 
Act?
    31. Exchange listing standards for ETP Securities often contain 
both initial listing criteria and continuing listing criteria. The 
initial listing criteria include requirements that must be met when ETP 
Securities are initially listed on an exchange. The continuing listing 
criteria include requirements that must be met on an ongoing basis. 
Should exchange listing standards always contain both initial and 
continuing listing criteria? Should initial and continuing listing 
standards for ETP Securities be substantially identical?
    32. What, if any, is the appropriate role of an exchange that lists 
ETP Securities with respect to monitoring creation and redemption 
activity? For example, should the exchange be informed of an ETP's 
decision to suspend creations or redemptions during the trading day? If 
so, should the exchange be required to alert its members, investors, 
and other market participants?
    33. What, if any, is the appropriate role of an exchange that lists 
ETP Securities with respect to monitoring or overseeing the calculation 
of IIV or NAV?
    34. Do market participants believe that certain types of ETPs are 
more susceptible to manipulation than others? If so, please explain. To 
what extent, if at all, does the nature, characteristics, liquidity, or 
volatility of an ETP's underlying or reference assets affect the ETP's 
susceptibility to manipulation?

D. Broker-Dealer Sales Practices and Investor Understanding and Use of 
ETPs

    The Commission seeks comment on the use of ETPs by investors and 
the ways in which ETPs are recommended or sold to investors, 
particularly retail investors. In particular, the Commission seeks 
comment on the extent to which individual investors buy or sell ETPs 
with complex investment strategies based on the recommendation of a 
broker-dealer and the extent to which individual investors understand 
the nature and operation of such ETPs. The Commission also seeks 
comment on how broker-dealers meet their obligations to customers when 
recommending ETPs. While the questions below focus on broker-dealer 
sales practices, the Commission recognizes that investment advisers 
also play a role in the purchase or sale of ETPs by investors. 
Consequently, the Commission invites commenters to address the role of 
investment advisers in their responses, where applicable.
    35. Do individual investors tend to buy and hold ETP Securities? 
Does the answer depend on the type of ETP (e.g., investment objective, 
structure, or type of underlying asset)? Do investments by individual 
investors tend to be solicited or unsolicited? Please explain and 
provide data where available. If solicited, are solicitations limited 
to certain categories of investors (e.g., retail investors or high-net-
worth individuals) and certain types of ETPs? If so, which categories 
of investors receive solicitations and how are the parameters of the 
category determined--e.g., net worth, income, investment experience, 
options trading eligibility? In addition, which types of ETPs are 
recommended and what are the parameters being used to determine whether 
those ETPs should be recommended? Are individual investors purchasing 
ETPs on the basis of recommendations by brokers?
    36. How effective are the suitability requirements applicable to 
brokerage accounts in addressing broker-dealer sales practices for ETPs 
in light of the breadth of available ETP options and the growing 
complexity of ETP investment strategies?
    37. What methods do, or could, broker-dealers employ to meet their 
sales-practice and suitability obligations for ETP Securities?
    38. Do investors have access to sufficient information to 
understand ETPs, how ETP Securities trade, the costs associated with 
trading ETP Securities, and how their prices and valuations are 
determined, particularly as ETPs encompass increasingly complex 
benchmarks, asset classes, and investment strategies? What is the 
source of information (e.g., exchanges, broker-dealers, market 
intermediaries, prospectuses, SEC releases, or investor alerts) 
available to investors? Are there ways to better enable investors to 
access information about the listing and trading of ETP Securities? If 
yes, what are they?
    39. What roles, if any, should the exchanges have in communicating 
information about ETP Securities to their members, their members' 
customers, and the general public? Should the answer depend on whether 
the exchange is the listing exchange or

[[Page 34743]]

an exchange that trades the ETP pursuant to unlisted trading 
privileges?
    40. How do broker-dealers communicate information about ETP 
Securities to their customers? Are investors introduced to ETPs through 
information provided generally by broker-dealers (e.g., posted on a 
broker-dealer's Web site for all investors to consider)? Do broker-
dealers provide information to investors regarding the type of investor 
for which a specific product is suitable and what holding periods are 
appropriate? Are there any other ways that broker-dealers should 
communicate information relevant to the ETP Securities to their 
customers? Do broker-dealers restrict or otherwise limit access by 
certain types of investors to certain types of ETP Securities? If so, 
please describe these restrictions.
    41. Do broker-dealer communications concerning ETPs provide enough 
information for a retail investor to evaluate the facts concerning 
ETPs? Do the communications disclose the risks and benefits potentially 
associated with ETPs? Are those disclosures reasonably understandable 
for retail investors, and are they presented in a balanced manner? What 
types of broker-dealer communications about ETPs are most effective?
    42. Are there specific aspects of ETP trading that should be 
communicated to investors to better inform their investment decisions 
(e.g., the specific risks of investing in certain products or that 
certain products may not be suitable for certain types of investors)? 
Are there types of risks in particular ETPs that should be highlighted? 
If so, in what way, and who should have the responsibility for 
communicating that information? When should that information be 
communicated (e.g., prior to making recommendations or prior to 
accepting a customer order)?
    43. Should broker-dealers have additional responsibility to make 
available or provide information to investors about the risks of 
investing in ETPs with complex strategies prior to making a 
recommendation or accepting a customer order for such securities? What 
costs would broker-dealers incur in providing such information? Who 
would bear those costs? What costs do broker-dealers currently incur in 
providing information to customers about ETPs? Who bears those costs?
    44. Do broker-dealer communications to investors about ETPs present 
any performance data? If so, how is that data presented? What types of 
disclosures accompany the performance data?
    45. Are there aspects of ETP arbitrage mechanisms that should be 
prominently disclosed to investors? If so, how and where? Do investors 
understand the arbitrage mechanisms of ETPs, and, if so, do they 
consider the effectiveness and efficiency of these mechanisms when 
making an investment decision? If so, how?
    46. Do broker-dealers use the term ``ETF'' to describe all types of 
ETPs (as opposed to only those products registered under the 1940 Act)? 
If so, is this confusing to investors?
    47. What use do investors or other market participants make of 
publicly available information such as the index value, IIV, NAV, or 
portfolio holdings of an ETP? Does the answer depend on the type of 
market participant? If so, why do certain market participants use 
certain information? If market participants do not use certain 
information, why not? Do the answers depend on the type of underlying 
asset?
    48. Do investors understand what an ETP's IIV represents and what 
it does not? For example, do they understand that the IIV is not a 
``real-time'' update of the NAV and that it is not the price at which 
they can purchase ETP Securities? Do investors understand how the IIV 
calculation method can differ from the method used to calculate NAV? Do 
investors understand that IIV may be a lagging indicator of actual 
portfolio values during periods of rapid price movements? Please 
describe the basis for any views expressed regarding the understanding 
of investors.
    49. Do investors' expectations of the nature of the liquidity, the 
bid-ask spreads, and the market prices of an ETP holding less-liquid 
underlying securities differ from their expectations of the 
characteristics of those underlying securities? If so, in what ways do 
investors expect ETPs based on less-liquid securities to trade 
differently than the underlying securities themselves?

E. Other

    50. The Commission notes that, over the years, there have been ETPs 
that have closed after being listed and traded for some period of time. 
What are the consequences to investors of the closure and liquidation 
or termination of an ETP?
    51. How are the types and complexity of the investment strategies 
and investment objectives of ETPs, and the nature of the market for 
ETPs, likely to develop in the future? How might these changes affect 
the listing and trading of ETP Securities? How might these changes 
affect any underlying securities held by an ETP--for example with 
respect to liquidity, volatility, and capital formation?
    52. As noted above, the total market capitalization of ETPs has 
grown significantly, nearly doubling since the end of 2009. What do 
commenters believe are the main reasons for this growth? Do commenters 
expect significant growth in the number, variety, and market 
capitalization of ETPs to continue? If such growth continues, how might 
that affect the exchanges' listing and trading of ETP Securities? How 
might this growth affect investors, broker-dealers, or other market 
participants?
    53. The Commission provides market structure research, interactive 
data visualization tools, and advanced market metrics on its Market 
Structure Data and Analysis Web site, http://www.sec.gov/marketstructure/index.html. Users of the Web site and its data can, 
among other things, compare quoting and trading characteristics of ETPs 
to those of other equity securities. Have commenters drawn any 
observations or conclusions from this data about the listing and 
trading of ETPs? What effects, if any, does market structure have on 
the quoting and trading of ETPs? What effects, if any, does the quoting 
and trading of ETPs have on the general characteristics of current 
equity market structure? Do any specific aspects of current equity 
market structure facilitate or hinder the fair and efficient quoting 
and trading of ETPs? What types of additional information or data would 
commenters like to see regarding the quoting and trading 
characteristics of ETPs?
    The Commission welcomes all comments and encourages commenters to 
discuss any other questions, issues, concerns, or data regarding the 
listing and trading of ETP Securities on national securities exchanges.

    By the Commission.
    Dated: June 12, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-14890 Filed 6-16-15; 8:45 am]
 BILLING CODE 8011-01-P


