
[Federal Register Volume 80, Number 200 (Friday, October 16, 2015)]
[Notices]
[Pages 62576-62578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-26329]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76117; File No. TP 15-19]


Order Granting Limited Exemptions From Exchange Act Rule 10b-17 
and Rules 101 and 102 of Regulation M to PowerShares DWA Tactical 
Sector Rotation Portfolio Pursuant to Exchange Act Rule 10b-17(b)(2) 
and Rules 101(d) and 102(e) of Regulation M

October 8, 2015.
    By letter dated October 8, 2015 (the ``Letter''), as supplemented 
by conversations with the staff of the Division of Trading and Markets, 
counsel for PowerShares Exchange-Traded Fund Trust II (the ``Trust''), 
on behalf of the Trust, PowerShares DWA Tactical Sector Rotation 
Portfolio (the ``Fund''), any national securities exchange on or 
through which shares issued by the Fund (``Shares'') may subsequently 
trade, Invesco Distributors, Inc. (the ``Distributor''), and persons or 
entities engaging in transactions in Shares (collectively, the 
``Requestors''), requested exemptions, or interpretive or no-action 
relief, from Rule 10b-17 of the Securities Exchange Act of 1934, as 
amended (``Exchange Act''), and Rules 101 and 102 of Regulation M, in 
connection with secondary market transactions in Shares and the 
creation or redemption of aggregations of Shares of at least 50,000 
shares (``Creation Units'').
    The Trust is registered with the Securities and Exchange Commission 
(``Commission'') under the Investment Company Act of 1940, as amended 
(``1940 Act''), as an open-end management investment company. The Fund 
seeks to track the performance of the underlying index, the Dorsey 
Wright[supreg] Sector 4 Index (the ``Index'').

[[Page 62577]]

The Fund intends to operate as an ``ETF of ETFs'' by seeking to track 
the performance of its underlying Index through, under normal 
circumstances, investing at least 90% of its total assets in the ETFs 
that comprise the Index, and may include U.S. Treasury Bills.\1\ Except 
for the fact that the Fund will operate as an ETF of ETFs, the Fund 
will operate in a manner identical to the ETFs that are included in the 
Index.
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    \1\ At any point, the Index comprises up to four PowerShares 
ETFs from a set of nine eligible PowerShares ETFs. During market 
periods when fewer than four eligible PowerShares ETFs demonstrate 
sufficient relative strength, however, the Index may hold up to a 
100% cash position, represented by U.S. Treasury Bills with a 
duration ranging from 0-180 days, in an amount equal to the weight 
of the PowerShares ETFs that would otherwise be included in the 
Index.
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    The Requestors represent, among other things, the following:
     Shares of the Fund will be issued by the Trust, an open-
end management investment company that is registered with the 
Commission;
     The Trust will continuously redeem Creation Units at net 
asset value (``NAV''), and the secondary market price of the Shares 
should not vary substantially from the NAV of such Shares;
     Shares of the Fund will be listed and traded on the NASDAQ 
Stock Market LLC or another exchange in accordance with exchange 
listing standards that are, or will become, effective pursuant to 
Section 19(b) of the Exchange Act (the ``Exchange''); \2\
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    \2\ Further, the Letter states that should the Shares also trade 
on a market pursuant to unlisted trading privileges, such trading 
will be conducted pursuant to self-regulatory organization rules 
that have become effective pursuant to Section 19(b) of the Exchange 
Act.
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     All ETFs in which the Fund is invested will meet all 
conditions set forth in a relevant class relief letter,\3\ will have 
received individual relief from the Commission, or will be able to rely 
upon individual relief even though they are not named parties (for 
example, a no-action letter);
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    \3\ Exchange Act Rel. No. 67215 (June 19, 2012); 77 FR 37941 
(June 25, 2012); Letter from Catherine McGuire, Esq., Chief Counsel, 
Division of Market Regulation, to the Securities Industry 
Association Derivative Products Committee (November 21, 2005); 
Letter from Racquel L. Russell, Branch Chief, Division of Market 
Regulation, to George T. Simon, Esq., Foley & Lardner LLP (June 21, 
2006); Letter from James A. Brigagliano, Acting Associate Director, 
Division of Market Regulation, to Stuart M. Strauss, Esq., Clifford 
Chance US LLP (October 24, 2006); Letter from James A. Brigagliano, 
Associate Director, Division of Market Regulation, to Benjamin 
Haskin, Esq., Willkie Farr & Gallagher LLP (April 9, 2007); Letter 
from Josephine Tao, Assistant Director, Division of Trading and 
Markets, to Domenick Pugliese, Esq., Paul, Hastings, Janofsky & 
Walker LLP (June 27, 2007); see also Staff Legal Bulletin No. 9, 
``Frequently Asked Questions About Regulation M'' (April 12, 2002) 
(regarding actively-managed ETFs).
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     At least 70% of the Fund is comprised of component 
securities that will meet the minimum public float and minimum average 
daily trading volume thresholds under the ``actively-traded 
securities'' definition found in Regulation M for excepted securities 
during each of the previous two months of trading prior to formation of 
the Fund;
     All the components of the Index will have publicly 
available last sale trade information;
     The intra-day proxy value of the Fund per share and the 
value of the Index will be publicly disseminated by a major market data 
vendor throughout the trading day;
     On each business day before the opening of business on the 
Exchange, the Fund's custodian, through the National Securities 
Clearing Corporation, will make available the list of the names and the 
numbers of securities and other assets of the Fund's portfolio that 
will be applicable that day to creation and redemption requests;
     The Exchange or other market information provider will 
disseminate (i) continuously every 15 seconds throughout the trading 
day, through the facilities of the consolidated tape, the market value 
of a Share, and (ii) every 15 seconds throughout the trading day, a 
calculation of the intra-day indicative value of a Share;
     The arbitrage mechanism will be facilitated by the 
transparency of the Fund's portfolio and the availability of the intra-
day indicative value, the liquidity of securities held by the Fund, and 
the ability to acquire such securities, as well as the arbitrageurs' 
ability to create workable hedges;
     The Fund will invest solely in liquid securities;
     The Fund will invest in securities that will facilitate an 
effective and efficient arbitrage mechanism and the ability to create 
workable hedges;
     The Trust believes that arbitrageurs are expected to take 
advantage of price variations between the Fund's market price and its 
NAV; and
     A close alignment between the market price of Shares and 
the Fund's NAV is expected.

Regulation M

    While redeemable securities issued by an open-end management 
investment company are excepted from the provisions of Rules 101 and 
102 of Regulation M, the Requestors may not rely upon those exceptions 
for the Shares.\4\ However, we find that it is appropriate in the 
public interest and is consistent with the protection of investors to 
grant a conditional exemption from Rules 101 and 102 to persons who may 
be deemed to be participating in a distribution of Shares of the Fund 
as described in more detail below.
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    \4\ While ETFs operate under exemptions from the definitions of 
``open-end company'' under Section 5(a)(1) of the 1940 Act and 
``redeemable security'' under Section 2(a)(32) of the 1940 Act, the 
Fund and its securities do not meet those definitions.
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Rule 101 of Regulation M

    Generally, Rule 101 of Regulation M is an anti-manipulation rule 
that, subject to certain exceptions, prohibits any ``distribution 
participant'' and its ``affiliated purchasers'' from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase 
any security that is the subject of a distribution until after the 
applicable restricted period, except as specifically permitted in the 
Rule. Rule 100 of Regulation M defines ``distribution'' to mean any 
offering of securities that is distinguished from ordinary trading 
transactions by the magnitude of the offering and the presence of 
special selling efforts and selling methods. The provisions of Rule 101 
of Regulation M apply to underwriters, prospective underwriters, 
brokers, dealers, or other persons who have agreed to participate or 
are participating in a distribution of securities. The Shares are in a 
continuous distribution, and, as such, the restricted period in which 
distribution participants and their affiliated purchasers are 
prohibited from bidding for, purchasing, or attempting to induce others 
to bid for or purchase extends indefinitely.
    Based on the representations and the facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company that will continuously redeem at the NAV Creation 
Unit size aggregations of the Shares of the Fund and that a close 
alignment between the market price of Shares and the Fund's NAV is 
expected, the Commission finds that it is appropriate in the public 
interest, and consistent with the protection of investors to grant the 
Trust an exemption under paragraph (d) of Rule 101 of Regulation M with 
respect to the Fund, thus permitting persons participating in a 
distribution of Shares of the Fund to bid for or purchase such Shares 
during their participation in such distribution.\5\
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    \5\ Additionally, we confirm the interpretation that a 
redemption of Creation Unit size aggregations of Shares of the Fund 
and the receipt of securities in exchange by a participant in a 
distribution of Shares of the Fund would not constitute an ``attempt 
to induce any person to bid for or purchase[] a covered security 
during the applicable restricted period'' within the meaning of Rule 
101 of Regulation M and therefore would not violate that rule.

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[[Page 62578]]

Rule 102 of Regulation M

    Rule 102 of Regulation M prohibits issuers, selling security 
holders, and any affiliated purchaser of such person from bidding for, 
purchasing, or attempting to induce any person to bid for or purchase a 
covered security during the applicable restricted period in connection 
with a distribution of securities effected by or on behalf of an issuer 
or selling security holder.
    Based on the representations and the facts presented in the Letter, 
particularly that the Trust is a registered open-end management 
investment company that will redeem at the NAV Creation Unit size 
aggregations of Shares of the Fund and that a close alignment between 
the market price of Shares and the Fund's NAV is expected, the 
Commission finds that it is appropriate in the public interest, and 
consistent with the protection of investors to grant the Trust an 
exemption under paragraph (e) of Rule 102 of Regulation M with respect 
to the Fund, thus permitting the Fund to redeem Shares of the Fund 
during the continuous offering of such Shares.

Rule 10b-17

    Rule 10b-17, with certain exceptions, requires an issuer of a class 
of publicly traded securities to give notice of certain specified 
actions (for example, a dividend distribution) relating to such class 
of securities in accordance with Rule 10b-17(b). Based on the 
representations and the facts presented in the Letter, and subject to 
the conditions below, the Commission finds that it is appropriate in 
the public interest, and consistent with the protection of investors, 
to grant the Trust a conditional exemption from Rule 10b-17 because 
market participants will receive timely notification of the existence 
and timing of a pending distribution, and thus the concerns that the 
Commission raised in adopting Rule 10b-17 will not be implicated.\6\
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    \6\ We also note that timely compliance with Rule 10b-
17(b)(1)(v)(a) and (b) would be impractical in light of the Fund's 
nature because it is not possible for the Fund to accurately project 
ten days in advance what dividend, if any, would be paid on a 
particular record date.
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Conclusion

    It is hereby ordered, pursuant to Rule 101(d) of Regulation M, that 
the Trust, based on the representations and facts presented in the 
Letter, is exempt from the requirements of Rule 101 with respect to the 
Fund, thus permitting persons who may be deemed to be participating in 
a distribution of Shares of the Fund to bid for or purchase such Shares 
during their participation in such distribution.
    It is further ordered, pursuant to Rule 102(e) of Regulation M, 
that the Trust, based on the representations and the facts presented in 
the Letter, is exempt from the requirements of Rule 102 with respect to 
the Fund, thus permitting the Fund to redeem Shares of the Fund during 
the continuous offering of such Shares.
    It is further ordered, pursuant to Rule 10b-17(b)(2), that the 
Trust, based on the representations and the facts presented in the 
Letter and subject to the conditions below, is exempt from the 
requirements of Rule 10b-17 with respect to the transactions in the 
Shares of the Fund.
    This exemptive relief is subject to the following conditions:
     The Trust will comply with Rule 10b-17, except for Rule 
10b-17(b)(1)(v)(a) and (b); and
     The Trust will provide the information required by Rule 
10b-17(b)(1)(v)(a) and (b) to the Exchange as soon as practicable 
before trading begins on the ex-dividend date, but in no event later 
than the time when the Exchange last accepts information relating to 
distributions on the day before the ex-dividend date.
    This exemptive relief is subject to modification or revocation at 
any time the Commission determines that such action is necessary or 
appropriate in furtherance of the purposes of the Exchange Act. This 
exemption is based on the facts presented and the representations made 
in the Letter. Any different facts or representations may require a 
different response. Persons relying upon this exemptive relief shall 
discontinue transactions involving the Shares of the Fund, pending 
presentation of the facts for the Commission's consideration, in the 
event that any material change occurs with respect to any of the facts 
or representations made by the Requestors, and as is the case with all 
preceding letters, particularly with respect to the close alignment 
between the market price of Shares and the Fund's NAV. In addition, 
persons relying on this exemption are directed to the anti-fraud and 
anti-manipulation provisions of the Exchange Act, particularly Sections 
9(a), 10(b), and Rule 10b-5 thereunder. Responsibility for compliance 
with these and any other applicable provisions of the federal 
securities laws must rest with the persons relying on this exemption. 
This Order should not be considered a view with respect to any other 
question that the proposed transactions may raise, including, but not 
limited to, the adequacy of the disclosure concerning, and the 
applicability of other federal or state laws to, the proposed 
transactions.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(6) and (9).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-26329 Filed 10-15-15; 8:45 am]
 BILLING CODE 8011-01-P


