
[Federal Register Volume 81, Number 99 (Monday, May 23, 2016)]
[Notices]
[Pages 32376-32381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-12028]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77845; File No. SR-NYSEArca-2016-08]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change, as Modified by Amendment No. 1 Thereto, To Adopt NYSE Arca 
Equities Rule 8.900 To Permit Listing and Trading of Managed Portfolio 
Shares and To Permit Listing and Trading of Shares of Fifteen Issues of 
the Precidian ETFs Trust

May 17, 2016.
    On January 27, 2016, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to: (1) Adopt NYSE Arca Equities Rule 8.900; and 
(2) approve the listing and trading of shares (``Shares'') of fifteen 
issues of the Precidian ETFs Trust (``Trust''). The proposed rule 
change was published for comment in the Federal Register on February 
18, 2016.\3\ On March 9, 2016, the Exchange filed Amendment No. 1 to 
the proposed rule change.\4\ The Commission has received four comments 
on the proposed rule change.\5\ This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1 
thereto.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76944 (Feb. 11, 
2016), 81 FR 8269 (``Notice'').
    \4\ In Amendment No. 1 to the proposed rule change, the Exchange 
corrected the citations to the Trust's Form N-1A and Exemptive 
Application, which were misstated in the proposal. Because Amendment 
No. 1 is technical in nature and does not materially alter the 
substance of the proposed rule change or raise any novel regulatory 
issues, it is not subject to notice and comment. Amendment No. 1 to 
the proposed rule change is available on the Commission's Web site 
at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-1.pdf.
    \5\ See Letter from Gary L. Gastineau, President, ETF 
Consultants.com, Inc., to Brent J. Fields, Secretary, Commission, 
dated Mar. 10, 2016 (``Gastineau Letter''); Letter from David Nadig 
(Mar. 31, 2016) (``Nadig Letter''); Letter from Andrew M. Gross, Jr. 
(Apr. 5, 2016) (``Gross Letter''); Letter from Andrew M. Gross, Jr. 
(Apr. 5, 2016) (``Gross Letter''); Letter from Joseph A. Sullivan, 
Chairman and Chief Executive Officer, Legg Mason Global Asset 
Management, to Mary Jo White, Chair, Commission (Apr. 15, 2016) 
(``Sullivan Letter''). The comment letters are available on the 
Commission's Web site at: https://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608.shtml.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Exchange's Description of the Proposed Rule Change

    The Exchange proposes to adopt new NYSE Arca Equities Rule 8.900, 
which would govern the listing and trading of ``Managed Portfolio 
Shares.'' \7\ The Exchange also proposes to list and trade the Shares 
of the following funds under proposed NYSE Arca Equities Rule 8.900: 
(1) Precidian U.S. Managed Volatility Fund; (2) Precidian Strategic 
Value; (3) Precidian Large Cap Value; (4) Precidian Focused Dividend 
Strategy; (5) Precidian U.S. Large Cap Growth; (6) Precidian U.S. Core 
Equity; (7) Precidian U.S. Mid Cap Growth; (8) Precidian Total Return; 
(9) Precidian High Dividend Yield; (10) Precidian Small Cap Dividend 
Value; (11) Precidian Multi-factor Small Cap Core; (12) Precidian 
Multi-factor Small Cap Growth; (13) Precidian Large Cap Core Plus 130/
30; (14) Precidian Mid Cap Core Plus 130/30; and (15) Precidian Small 
Cap Core Plus 130/30 (each a ``Fund,'' and collectively the ``Funds''). 
In addition, the Exchange proposes to amend NYSE Arca Equities Rule 
7.34 (Trading Sessions), which relates to securities traded on the 
Exchange during the Core Trading Session, to add a reference to 
proposed NYSE Arca Equities Rule 8.900.
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    \7\ Proposed NYSE Arca Equities Rule 8.900(c)(1) defines the 
term ``Managed Portfolio Share'' as a security that (a) is issued by 
a registered investment company organized as an open-end management 
investment company (``Investment Company'') or similar entity, that 
invests in a portfolio of securities selected by the Investment 
Company's investment adviser consistent with the Investment 
Company's investment objectives and policies; and (b) when 
aggregated in a number of shares equal to a Redemption Unit (as 
defined herein) or multiples thereof, may be redeemed at the request 
of an authorized participant (as defined in the Investment Company's 
Form N-1A filed with the Commission), which authorized participant 
will be paid though a confidential account established for its 
benefit a portfolio of securities and/or cash with a value equal to 
the next determined net asset value (``NAV'').
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A. Key Features of Managed Portfolio Shares

    While Investment Companies issuing Managed Portfolio Shares would 
be actively-managed, and in that respect would be similar to those 
issuing Managed Fund Shares,\8\ Managed Portfolio Shares would differ 
from Managed Fund Shares in the following respects.
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    \8\ Managed Fund Shares are shares of actively-managed 
Investment Companies listed and traded under NYSE Arca Equities Rule 
8.600.
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     First, issues of Managed Fund Shares are required to 
disseminate their ``Disclosed Portfolio'' at least once daily.\9\ By 
contrast, the portfolio for an issue of Managed Portfolio Shares would 
be disclosed only quarterly.
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    \9\ NYSE Arca Equities Rule 8.600(c)(2) defines the term 
``Disclosed Portfolio'' as the identities and quantities of the 
securities and other assets held by the Investment Company that will 
form the basis for the Investment Company's calculation of net asset 
value at the end of the business day. NYSE Arca Equities Rule 
8.600(d)(2)(B)(i) requires that, for Managed Fund Shares, the 
Disclosed Portfolio will be disseminated at least once daily and 
will be made available to all market participants at the same time.
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     Second, in connection with the redemption of shares in 
``Redemption Unit'' size (as described below), the delivery of any 
portfolio securities in kind would only be effected through a 
``Confidential Account'' (as described below) for the benefit of the 
redeeming authorized participant without disclosing the identity of the 
securities to the authorized participant.
     Third, for each series of Managed Portfolio Shares, a 
Verified Intraday Indicative Value (``VIIV'') would be disseminated by 
one or more major market-data vendors every second during the 
Exchange's Core Trading Session (normally, 9:30 a.m. to 4:00 p.m., 
Eastern Time (``E.T.'')).\10\ The Exchange states that dissemination of 
the VIIV will allow investors to determine the estimated intra-day 
value of the underlying portfolio of a series of Managed Portfolio 
Shares and will provide a close estimate of that value throughout the 
trading day.\11\
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    \10\ Proposed NYSE Arca Equities Rule 8.900(c)(2) defines the 
VIIV as the estimated indicative value of a Managed Portfolio Share 
based on all of the issuer's holdings as of the close of business on 
the prior business day, priced and disseminated in one second 
intervals, and subject to validation by a pricing verification agent 
of the Investment Company that is responsible for comparing multiple 
independent pricing sources to establish the accuracy of the VIIV. 
The specific methodology for calculating the VIIV will be disclosed 
on each Fund's Web site.
    \11\ According to the Exchange, the VIIV should not be viewed as 
a ``real-time'' update of the NAV per Share of each Fund, because 
the VIIV may not be calculated in the same manner as the NAV, which 
will be computed once a day, generally at the end of the business 
day.
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B. Arbitrage of Managed Portfolio Shares

    The Exchange asserts that market makers will be able to make 
efficient and liquid markets priced near the VIIV even without daily 
disclosure of a

[[Page 32377]]

Fund's underlying portfolio, as long as a VIIV is disseminated every 
second and market makers have knowledge of a Fund's means of achieving 
its investment objective. According to the Exchange, market makers 
would have knowledge of a Fund's means of achieving its investment 
objective by employing risk-management techniques such as ``statistical 
arbitrage.'' \12\ The Exchange also states that market makers will make 
efficient markets in Managed Portfolio Shares by establishing a 
Confidential Account (as defined herein), monitoring the VIIV for 
arbitrage opportunities, and effecting transactions in the Shares and 
the Fund's (unknown) portfolio securities, as described below.
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    \12\ According to the Exchange, statistical arbitrage enables a 
trader to construct an accurate proxy for another instrument, 
allowing the trader to hedge the other instrument or buy or sell the 
instrument when it is cheap or expensive in relation to the proxy. 
Statistical analysis permits traders to discover correlations based 
purely on trading data without regard to other fundamental drivers. 
These correlations are a function of differentials, over time, 
between one instrument or group of instruments and one or more other 
instruments. Once the nature of these price deviations has been 
quantified, a universe of securities is searched in an effort to, in 
the case of a hedging strategy, minimize the differential. Once a 
suitable hedging proxy has been identified, a trader can minimize 
portfolio risk by executing the hedging basket. The trader then can 
monitor the performance of this hedge throughout the trade period 
making correction where warranted.
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    According to the Exchange, if an authorized participant believes 
that Shares of a Fund are trading at a price that is higher than the 
value of the underlying portfolio--for example, if the market price for 
the Shares is higher than the VIIV--then the authorized participant may 
sell Shares of the Fund short and instruct its ``Trusted Agent'' \13\ 
to buy portfolio securities for its Confidential Account. When the 
market price of the Shares falls in line with the value of the 
portfolio, the authorized participant can then close out its positions 
in both the Shares and the portfolio securities. According to the 
Exchange, the authorized participant's purchase of the portfolio 
securities into its Confidential Account, combined with the sale of 
Shares, may also create downward pressure on the price of Shares and/or 
upward pressure on the price of the portfolio securities, bringing the 
market price of Shares and the value of a Fund's portfolio securities 
closer together.
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    \13\ Proposed Commentary .04 to NYSE Arca Equities Rule 8.900 
requires that authorized participants and non-authorized participant 
market makers redeeming Managed Portfolio Shares sign an agreement 
with an agent (``Trusted Agent'') to establish a confidential 
account (``Confidential Account''), for the benefit of such 
authorized participant or non-authorized participant market maker, 
that will receive all consideration from the issuer in a redemption. 
A Trusted Agent may not disclose the consideration received in a 
redemption except as required by law or as provided in the 
Investment Company's Form N-1A, as applicable.
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    Similarly, according to the Exchange, an authorized participant 
could buy Shares and instruct the Trusted Agent to sell the underlying 
portfolio securities from its Confidential Account in an attempt to 
profit when a Fund's Shares are trading at a discount to its portfolio. 
According to the Exchange, the authorized participant's purchase of a 
Fund's Shares in the secondary market, combined with the sale of the 
portfolio securities from its Confidential Account, may also create 
upward pressure on the price of Shares and/or downward pressure on the 
price of portfolio securities, driving the market price of Shares and 
the value of a Fund's portfolio securities closer together. The 
Exchange states that, Precidian Funds LLC (``Adviser''), the investment 
adviser to the Trust, avers that this process is identical to how many 
authorized participants currently arbitrage existing traditional ETFs, 
except for the use of the Confidential Account.
    According to the Exchange, a market maker that is not an authorized 
participant would also be able to establish a Confidential Account and 
could engage in arbitrage activity without using the creation or 
redemption processes described above. If such a market maker believes 
that a Fund is overvalued relative to its underlying assets, the 
Exchange states, that market maker could sell Shares short and instruct 
its Trusted Agent to buy portfolio securities in its Confidential 
Account and then wait for the trading prices to move toward parity and 
close out the positions in both the Shares and the portfolio securities 
to realize a profit from the relative movement of their trading prices. 
Similarly, according to the Exchange, this market maker could buy 
Shares and instruct the Trusted Agent to sell the underlying portfolio 
securities in an attempt to profit when a Fund's Shares are trading at 
a discount to a Fund's underlying or reference assets.

C. The Creation and Redemption Procedures

    The Exchange states that, generally, Shares will be purchased and 
redeemed on an in-kind basis, so that, except where the purchase or 
redemption will include cash under the limited circumstances described 
in the Registration Statement, purchasers will be required to purchase 
Creation Units by making an in-kind deposit of specified instruments 
(``Deposit Instruments''), and shareholders redeeming their Shares will 
receive an in-kind transfer of specified instruments (``Redemption 
Instruments''). On any given Business Day, the names and quantities of 
the instruments that constitute the Deposit Instruments and the names 
and quantities of the instruments that constitute the Redemption 
Instruments will be identical, and these instruments may be referred 
to, in the case of either a purchase or a redemption, as the ``Creation 
Basket.''
    In the case of a redemption, a Fund's custodian (``Custodian'') 
will typically deliver securities to the Confidential Account on a pro 
rata basis with a value approximately equal to the value of the Shares 
tendered for redemption at the Cut-Off time. The Custodian will make 
delivery of the securities by appropriate entries on its books and 
records transferring ownership of the securities to the authorized 
participant's Confidential Account, subject to delivery of the Shares 
redeemed. The Trusted Agent of the Confidential Account will in turn 
liquidate, hedge, or otherwise manage the securities based on 
instructions from the authorized participant.\14\
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    \14\ An authorized participant will issue execution instructions 
to the Trusted Agent and be responsible for all associated profit or 
losses. Like a traditional ETF, the authorized participant has the 
ability to sell the basket securities at any point during normal 
trading hours.
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    If the Trusted Agent is instructed to sell all securities received 
at the close on the redemption date, the Trusted Agent will pay the 
liquidation proceeds net of expenses, plus or minus any cash balancing 
amount, to the authorized participant through DTC.\15\ The redemption 
securities that the Confidential Account receives is expected to mirror 
the portfolio holdings of a Fund pro rata.
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    \15\ According to the Exchange, under applicable provisions of 
the Internal Revenue Code, the authorized participant is expected to 
be deemed a ``substantial owner'' of the Confidential Account 
because it receives distributions from the Confidential Account. As 
a result, the Exchange states, all income, gain, or loss realized by 
the Confidential Account will be directly attributed to the 
authorized participant. The Exchange also states that, in a 
redemption, the authorized participant will have a basis in the 
distributed securities equal to the fair market value at the time of 
the distribution, and any gain or loss realized on the sale of those 
Shares will be taxable income to the authorized participant.
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F. Availability of Information

    Each Fund will be required to file with the Commission its complete 
portfolio schedules for the second and fourth fiscal quarters on Form 
N-SAR under the 1940 Act, and to file its complete portfolio schedules 
for the first and third fiscal quarters on Form

[[Page 32378]]

N-Q under the 1940 Act, within 60 days of the end of the quarter. Form 
N-Q requires funds to file the same schedules of investments that are 
required in annual and semi-annual reports to shareholders. The Trust's 
SAI and each Fund's shareholder reports will be available free upon 
request from the Trust. These documents and forms may be viewed on-
screen or downloaded from the Commission's Web site at www.sec.gov.
    In addition, the VIIV, as defined in proposed NYSE Arca Equities 
Rule 8.900(c)(3), will be widely disseminated by one or more major 
market-data vendors at least every second during the Exchange's Core 
Trading Session. The VIIV, which is approximate value of each Fund's 
investments on a per Share basis, will be disseminated every second 
during the Exchange's Core Trading Session through the facilities of 
the CTA. According to the Exchange, the VIIV will include all accrued 
income and expenses of a Fund and will assure that any extraordinary 
expenses, booked during the day, that would be taken into account in 
calculating a Fund's NAV for that day are also taken into account in 
calculating the VIIV. For purposes of the VIIV, securities held by a 
Fund will be valued throughout the day based on the mid-point between 
the disseminated current national best bid and offer. According to the 
Exchange, by utilizing the mid-point pricing for purposes of VIIV 
calculation, stale prices are eliminated and more accurate 
representation of the real-time value of the underlying securities is 
provided to the market. Specifically, according to the Exchange, 
quotations based on the mid-point of bid/ask spreads more accurately 
reflect current market sentiment by providing real time information on 
where market participants are willing to buy or sell securities at that 
point in time. Using quotations rather than last-sale information 
addresses concerns regarding the staleness of pricing information of 
less actively traded securities. The Exchange represents that, because 
quotations are updated more frequently than last-sale information 
especially for inactive securities, the VIIV will be based on more 
current and accurate information. The Exchange also represents that the 
use of quotations will also dampen the impact of any momentary spikes 
in the price of a portfolio security.
    Each Fund will utilize two independent pricing sources to provide 
two independent sources of pricing information. Each Fund will also 
utilize a ``Pricing Verification Agent'' and establish a computer-based 
protocol that will permit the Pricing Verification Agent to 
continuously compare the two data streams from the independent pricing 
agents sources on a real time basis.\16\ A single VIIV will be 
disseminated publicly for each Fund; however, the Pricing Verification 
Agent will continuously compare the public VIIV against a non-public 
alternative intra-day indicative value to which the Pricing 
Verification Agent has access. If it becomes apparent that there is a 
material discrepancy between the two data streams, the Exchange will be 
notified and have the ability to halt trading in a Fund until the 
discrepancy is resolved.\17\ Each Fund's Board will review the 
procedures used to calculate the VIIV and maintain its accuracy as 
appropriate, but not less than annually. The specific methodology for 
calculating the VIIV will be disclosed on each Fund's Web site.
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    \16\ A Fund's Custodian will provide, on a daily basis, the 
constituent basket file comprised of all securities plus any cash to 
the independent pricing agent(s) for purposes of pricing.
    \17\ Proposed Rule 8.900(d)(2)(C) provides that, upon 
notification to the Corporation by the Investment Company or its 
agent that (i) the prices from the multiple independent pricing 
sources to be validated by the Investment Company's pricing 
verification agent differ by more than 25 basis points for 60 
seconds in connection with pricing of the VIIV, or (ii) that the 
VIIV of a series of Managed Portfolio Shares is not being priced and 
disseminated in one-second intervals, as required, the Corporation 
will halt trading in the Managed Portfolio Shares as soon as 
practicable. The halt in trading would continue until the Investment 
Company or its agent notifies the Corporation that the prices from 
the independent pricing sources no longer differ by more than 25 
basis points for 60 seconds or that the VIIV is being priced and 
disseminated as required. The Investment Company or its agent would 
be responsible for monitoring that the VIIV is being priced and 
disseminated as required and whether the prices to be validated from 
multiple independent pricing sources differ by more than 25 basis 
points for 60 seconds.
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III. Summary of Comment Letters

    The Commission has received four comment letters on the proposed 
rule change.\18\
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    \18\ See supra note 5.
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    A. Gastineau Letter.\19\ The commenter opposes approval of the 
proposed rule change and recommends imposition of a number of 
requirements in the event the proposed rule change and the Exemptive 
Application are approved. Preliminarily, the commenter offers an 
opinion regarding the standard of review that should be applied, 
stating that, because this would be a new and potentially ground 
breaking less-transparent ETF structure, the Commission should apply a 
meaningfully higher standard until the Commission is completely 
comfortable with the state of the ETF market.
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    \19\ The Gastineau Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-2.pdf.
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    Generally, the commenter asserts that market makers will face 
significant impediments to successfully arbitraging the Shares, and he 
predicts that this will lead to the Shares trading at wider bid-ask 
spreads and more variable premiums/discounts than actively-managed ETFs 
available today.
    In evaluating the Exchange's statements regarding VIIVs, the 
commenter asserts that their utility should be compared not to the IIVs 
of existing ETFs but rather to the independently derived, real-time 
estimates of underlying fund value that ETF market makers use to 
identify arbitrage opportunities and manage the risk of holding ETF 
positions today (``MM IIVs''). The commenter asserts that, because 
existing actively managed ETFs (and most index ETFs) provide full daily 
disclosure of their current portfolio, their market makers have access 
to far better information about the current value of Fund holdings than 
the proposed VIIVs would provide and, correspondingly, VIIVs will be 
significantly less precise than MM IIVs. The commenter also asserts 
that MM IIVs include significant information that would not be 
reflected in VIIVs, noting:
     In calculating VIIVs, Fund securities would be valued 
based on the midpoint between the current national best bid and offer 
quotations. The commenter characterizes the bid-ask midpoint as a 
``fairly crude valuation metric'' that does not capture important 
trading information incorporated into MM IIVs, such as the current bid-
ask spread, the depth of the current order book on the bid and offer 
side of the market, and the predominance of current trading between 
bid-side and offer-side transactions.
     VIIVs would be calculated and disseminated every second 
and, while this interval may seem sufficient, MM IIVs are updated in 
fractions of a second (milliseconds or microseconds).
     The VIIV verification process would leave significant room 
for dissemination of erroneous values. For example, a Fund's Pricing 
Verification Agent would take no action to address observed 
discrepancies in VIIV input prices until the calculated Fund values 
differ by at least 25 bps for 60 seconds. The commenter characterizes 
that disparity as ``huge,'' asserting that it would be wider than the 
customary bid-ask spread of most domestic equity ETFs.
     The VIIV process would not address all potential intraday 
valuation errors. The commenter describes that corporate actions must 
be accurately reflected in the VIIV, which can be challenging, and

[[Page 32379]]

market makers would not be able to verify that corporate actions are 
appropriately reflected in a Fund's VIIVs because of the non-
transparent portfolio.
     The process for adjusting VIIVs in the event of trading 
halts in portfolio securities is cumbersome and likely to result in 
errors in disseminated VIIVs. Throughout a halt, which may be 
protracted, the Fund would continue to disseminate VIIVs that do not 
reflect fair values of the halted security, and therefore may vary 
significantly from the Fund's true underlying value at that time. The 
commenter asserts that MM IIVs would almost certainly arrive at a fair 
estimate of a Fund's current underlying value far faster than the VIIV 
specified process.
    The commenter asserts that reliance on faulty VIIVs may expose 
market makers to unrecoverable losses, noting that: (1) Neither the 
Exchange nor its agents nor the Reporting Authority would be liable for 
disseminating erroneous VIIVs; and (2) the circumstances under which 
the Independent Pricing Agents and the Pricing Verification Agent are 
legally liable for such errors are limited.
    According to the commenter, market makers' forced reliance on VIIVs 
to determine intraday Fund valuations is a source of significant 
incremental risk for them versus making markets in existing ETFs, and 
he predicts that this will result in the Shares trading at wider bid-
ask spreads and more variable premiums and discounts to NAV than 
similar existing ETFs.
    The commenter also criticizes the Confidential Accounts structure. 
He asserts that, compared to the usual manner in which market makers in 
existing ETFs engage in arbitrage and buy and sell Creation Basket 
instruments, the Confidential Accounts arrangement exposes market 
makers to significant additional costs, risks and lost opportunities, 
including:
     Less control over trade execution and trade order 
management when implementing portfolio hedging and Creation Unit 
transactions, which will result in more cost and risk, and less profit 
opportunity.
     No ability for market makers to use their market knowledge 
and market positions to enhance arbitrage profits and minimize costs.
     Reduced incentive for third-party service providers to 
trade expeditiously and with low market impact.
     Little or no ability for market makers to monitor trading 
in Confidential Accounts to ensure best execution or to evaluate 
trading performance.
     Forced pro rata hedging, which, the commenter states, is 
very often not the best hedge. Sub-optimal hedging results in less 
efficient arbitrage.
     Given the more-involved routing of trade instructions and 
trade orders that the Confidential Account structure would necessitate, 
the commenter states that hedging and Creation Unit instrument 
transactions through Confident Accounts will almost certainly take 
longer, on average, for a market maker to execute than similar 
transactions that the market maker executes internally. According to 
the commenter, slower executions may translate into less efficient 
arbitrage.
     Potentially significant explicit costs to establish and 
maintain Confidential Accounts.
    Additionally, the commenter discusses the efficiency of statistical 
arbitrage. While market makers may be able to gain some useful 
information about a Fund's current composition by knowing the Fund's 
investment objective and tracking performance correlations over time 
versus a known index, the commenter states that the amount of portfolio 
information that can be gleaned using this approach is limited. As a 
result, any portfolio hedge constructed using this information would be 
subject to meaningful basis risk.
    The commenter also expresses concern regarding portfolio 
information security in light of the dissemination of this data across 
a network of Trusted Agents, affiliated broker-dealers and other 
Confidential Account service providers, and their use of the provided 
information to implement trades on behalf of Confidential Account 
holders.
    The commenter also raises concerns with the possibility that market 
participants could use the VIIV to reverse-engineer the Funds' 
portfolio holdings, subjecting the Funds to the dilutive effects of 
front-running. The commenter asserts that ``it is far from a settled 
question that the Funds would not ever be susceptible to reverse 
engineering.''
    B. Nadig Letter.\20\ This commenter states his support of the 
proposal, noting that, after having been through multiple variations, 
the proposal now has the correct VIIV structure.
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    \20\ The Nadig Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-3.htm.
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    C. Gross Letter.\21\ This commenter first notes the advantages that 
ETFs offer to retail investors, and supports the idea of investing in 
actively managed funds, stating that live, intra-day pricing of the 
underlying portfolio enables the commenter to see how the portfolio 
value is performing at all times (as opposed to mutual funds), enables 
market participants to provide liquidity for the product (with the 
ability to arbitrage price discrepancies by creating and redeeming 
shares in the portfolio, as with existing ETFs), and allows for 
purchases and sales of shares at any time. With wider intra-day trading 
ranges recently, the ability to put in limit buy orders below the 
market (or limit sell orders above the market) is critical to the 
commenter.
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    \21\ The Gross Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-4.htm.
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    In addition, the commenter notes that actively managed ETFs provide 
benefits to the fund manager and to fund performance. The commenter 
states that actively managed ETFs allow fund managers to make 
investment decisions they believe in, without being distorted by tax 
consequences. In addition, the commenter believes that the proposed 
Funds have come up with a way to provide retail and professional 
investors with a level playing field in terms of intra-day price feeds 
on the value of the underlying portfolio, and through a trusted agent 
to allow market makers to create and redeem (and hold) the portfolio of 
the actively managed fund without being able to see the individual 
share holdings. The commenter finds this proposal to be an ``elegant 
solution'' and to be an effective way to both use the well-understood 
arbitrage mechanism that has made ETFs liquid and reliable products and 
allow market makers to control execution of their fund portfolios while 
protecting the confidentiality of the fund manager.
    D. Sullivan Letter.\22\ The commenter expresses support for the 
proposed rule change. He states that the Precidian structure would 
permit his firm's portfolio managers to manage active ETFs using their 
proprietary strategies without being susceptible to front running by 
other managers or investors and while still offering the following 
benefits of active ETFs to clients, which would positively impact 
yields and net investor returns: (1) The ability to trade shares 
throughout the day at known prices; (2) lower fund operating expenses, 
primarily in the form of lower transfer agency costs and overall 
portfolio transaction costs; and (3) improved tax efficiency. According 
to the commenter, his firm's clients realize only a modest benefit from 
daily transparency. The commenter also

[[Page 32380]]

mentioned that his firm is a shareholder in Precidian.
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    \22\ The Sullivan Letter is available at: http://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-5.pdf.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2016-08 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \23\ to determine whether the proposed rule 
change, as modified by Amendment No. 1 thereto, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposed rule 
change. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, as described below, the Commission seeks and 
encourages interested persons to provide comments on the proposed rule 
change.
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    \23\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\24\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \25\
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    \24\ Id.
    \25\ 15 U.S.C. 78f(b)(5).
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V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\26\
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    \26\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 13, 2016. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 27, 
2016. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, which are set 
forth in the Notice \27\ and in Amendment No. 1 to the proposed rule 
change,\28\ in addition to any other comments they may wish to submit 
about the proposed rule change. Specifically, the Commission seeks 
comment on the statements of the Exchange contained in the Notice, as 
modified by Amendment No. 1 thereto, and any other issues raised by the 
proposed rule change. In particular, the Commission seeks comment on 
the following:
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    \27\ See supra note 3.
    \28\ See supra note 4.
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    1. Do commenters believe that market makers will be able to engage 
in effective and efficient arbitrage in the Shares without knowledge of 
the contents of the Funds' portfolios? Do commenters believe that 
market makers will be able to engage in effective and efficient 
arbitrage in the Shares while delegating trading in the portfolio 
securities to an intermediary, rather than trading in those securities 
directly? Do commenters believe that the Shares of a Fund will trade at 
secondary market prices that are closely aligned with the value of the 
Fund's portfolio?
    2. Do commenters believe that the trading characteristics--such as 
bid/ask spread and premium or discount to NAV--of a Fund will be 
comparable to the trading characteristics of a fully transparent ETF 
with similar assets and a similar strategy?
    3. What are commenters' views concerning the proposed use of a VIIV 
as opposed to the IIV commonly used by other ETFs? Do commenters 
believe that the VIIV will provide sufficient information to market 
participants to ensure that the Funds are appropriately priced in 
secondary trading? Do commenters believe that the VIIV will provide 
sufficient information to market participants in periods of market 
volatility, including periods in which securities underlying a Fund's 
portfolio encounter trading halts or pauses? Do commenters believe that 
the proposed parameters that apply to the accuracy of the VIIV--i.e., 
the requirement that the two independent calculations not disagree by 
more than 25 basis points for 60 seconds or more--are appropriate?
    4. What are commenters views regarding whether market participants 
will be able to use the VIIV--by itself or in conjunction with other 
public data--to reverse engineer a Fund's portfolio holdings? What 
factors might affect the susceptibility of a Fund to such reverse 
engineering? If such reverse engineering were possible, what effect 
would it have on the Fund? What effect would reverse engineering have 
on shareholders in the Fund?
    5. What are commenters views about the selective disclosure of 
portfolio holdings to the Trusted Agents, as described above?
    6. In light of the non-transparency of the basket of securities 
underlying the proposed Funds, the Commission seeks comment on how a 
broker-dealer authorized participant engaging in creation and 
redemption activity might fulfill its obligation to maintain a minimum 
level of net capital in compliance with Rule 15c3-1 under the Act and 
how such an authorized participant would comply with the books and 
records requirements of Rules 17a-3 and 17a-4 under the Act. For 
example, how would an authorized participant that is a broker-dealer 
apply an appropriate haircut to positions included in the Creation 
Basket when the authorized participant is unaware of the securities 
included in the basket? In addition, how would the authorized 
participant determine an appropriate price for such securities? 
Moreover, how would such an authorized participant make and keep 
current the records required under Rule 17a-3, including the daily 
blotter and daily stock record required under paragraphs (a)(1) and 
(a)(5), respectively, of that rule?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2016-08 on the subject line.

Paper Comments

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


[[Page 32381]]


All submissions should refer to File Numbers SR-NYSEArca-2016-08. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of these filings also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2016-08 and should 
be submitted on or before June 13, 2016. Rebuttal comments should be 
submitted by June 27, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-12028 Filed 5-20-16; 8:45 am]
BILLING CODE 8011-01-P


