[Federal Register Volume 83, Number 85 (Wednesday, May 2, 2018)]
[Notices]
[Pages 19371-19376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09265]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83120; File No. SR-NYSEArca-2018-04]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Adopt New NYSE Arca Rule 8.900-E and To List and Trade 
Shares of the Royce Pennsylvania ETF; Royce Premier ETF; and Royce 
Total Return ETF Under Proposed NYSE Arca Rule 8.900-E

April 26, 2018.

    On January 8, 2018, 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 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to: (1) Adopt NYSE Arca Rule 8.900-E (Managed Portfolio Shares); 
and (2) list and trade shares (``Shares'') of the Royce Pennsylvania 
ETF, Royce Premier ETF, and Royce Total Return ETF under proposed NYSE 
Arca Rule 8.900-E. The proposed rule change was published for comment 
in the Federal Register on January 26, 2018.\3\ On March 7, 2018, 
pursuant to Section 19(b)(2) of the Exchange Act,\4\ the Commission 
designated a longer period within which to approve the proposed rule 
change, disapprove the proposed rule change, or institute proceedings 
to determine whether to disapprove the proposed rule change.\5\ The 
Commission has received five comments on the proposed rule change.\6\ 
This order institutes proceedings under Section 19(b)(2)(B) of the 
Exchange Act \7\ to determine whether to approve or disapprove the 
proposed rule change.
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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. 82549 (January 19, 
2018), 83 FR 3846 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82824, 83 FR 10934 
(March 13, 2018). The Commission designated April 26, 2018, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ See letters from: (1) Terence W. Norman, Founder, Blue 
Tractor Group, LLC, dated February 6, 2018 (``Blue Tractor Letter 
I''); (2) Simon P. Goulet, Co-Founder, Blue Tractor Group, LLC, 
dated February 13, 2018 (``Blue Tractor Letter II''); (3) Todd J. 
Broms, Chief Executive Officer, Broms & Company LLC, dated February 
16, 2018 (``Broms Letter''); (4) Kevin S. Haeberle, Associate 
Professor of Law, William & Mary Law School, dated February 16, 2018 
(``Haeberle Letter''); and (5) Gary L. Gastineau, President, ETF 
Consultants.com, Inc., dated March 6, 2018 (``Gastineau Letter''). 
The comment letters are available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Exchange's Description of the Proposed Rule Change 
\8\
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    \8\ For a complete description of the Exchange's proposal, 
including a description of the Precidian ETF Trust II (``Trust''), 
see the Notice, supra note 3.
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    The Exchange proposes to adopt new NYSE Arca Rule 8.900-E, which 
would govern the listing and trading of Managed Portfolio Shares.\9\ 
The Exchange also proposes to list and trade the Shares of the Royce 
Pennsylvania ETF, Royce Premier ETF, and Royce Total Return ETF under 
proposed NYSE Arca Rule 8.900-E (each the ``Fund,'' and collectively 
the ``Funds'').
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    \9\ Proposed NYSE Arca Rule 8.900-E(c)(1) defines the term 
``Managed Portfolio Share'' as a security that (a) represents an 
interest in a registered investment company (``Investment Company'') 
organized as an open-end management investment company or similar 
entity, that invests in a portfolio of securities selected by the 
Investment Company's investment adviser consistent with the 
Investment Company's investment objectives and policies; (b) is 
issued in a specified aggregate minimum number of shares equal to a 
Creation Unit (as defined in proposed Rule 8.900-E(c)(3)), or 
multiples thereof, in return for a designated portfolio of 
securities (and/or an amount of cash) with a value equal to the next 
determined net asset value (``NAV''); and (c) when aggregated in the 
same specified aggregate number of shares equal to a Redemption Unit 
(as defined in proposed Rule 8.900-E(c)(4)), or multiples thereof, 
may be redeemed at the request of an authorized participant, which 
authorized participant will be paid through a confidential account 
established for its benefit (``Confidential Account'') a portfolio 
of securities and/or cash with a value equal to the next determined 
NAV.
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A. Description of the Funds

    The portfolio for each Fund will consist of long and/or short 
positions in U.S.-listed securities and shares issued

[[Page 19372]]

by other U.S.-listed exchange-traded funds (``ETFs'').\10\ All 
exchange-listed equity securities in which the Funds will invest will 
be listed and traded on U.S. national securities exchanges.
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    \10\ The Exchange represents that, for purposes of the filing, 
ETFs include Investment Company Units (as described in NYSE Arca 
Rule 5.2-E(j)(3)); Portfolio Depository Receipts (as described in 
NYSE Arca Rule 8.100-E); and Managed Fund Shares (as described in 
NYSE Arca Rule 8.600-E). The ETFs in which the Funds will invest all 
will be listed and traded on U.S. national securities exchanges. 
While the Funds may invest in inverse ETFs, the Funds will not 
invest in leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs.
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1. Royce Pennsylvania ETF
    Under normal market conditions,\11\ the Royce Pennsylvania ETF will 
invest at least 65% of its assets in U.S. exchange-listed equity 
securities of small-cap companies with market capitalizations up to $3 
billion that Royce & Associates, LP (``Royce''), the Fund's investment 
sub-adviser, believes are trading below the sub-adviser's estimate of 
their current worth. The Fund may invest in U.S. exchange-listed ETFs. 
The Fund may sell securities to, among other things, secure gains, 
limit losses, re-deploy assets into what Royce deems to be more 
promising opportunities, and/or manage cash levels in the Fund's 
portfolio.
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    \11\ Proposed Rule 8.900-E(c)(6) defines the term ``normal 
market conditions'' as including, but not limited to, the absence of 
trading halts in the applicable financial markets generally; 
operational issues (e.g., systems failure) causing dissemination of 
inaccurate market information; or force majeure type events such as 
natural or manmade disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption or any similar intervening 
circumstance.
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2. Royce Premier ETF
    Under normal market conditions, the Royce Premier ETF will invest 
at least 80% of its net assets in a limited number of U.S. exchange-
listed equity securities of primarily small-cap companies with market 
capitalizations from $1 billion to $3 billion at the time of 
investment. The Fund may invest in U.S. exchange-listed ETFs. The Fund 
may sell securities to, among other things, secure gains, limit losses, 
re-deploy assets into what Royce deems to be more promising 
opportunities, and/or manage cash levels in the Fund's portfolio.
3. Royce Total Return ETF
    Under normal market conditions, the Royce Total Return ETF will 
invest at least 65% of its assets in dividend-paying U.S.-listed 
securities of small-cap companies with market capitalizations up to $3 
billion that Royce believes are trading below its estimate of their 
current worth. The Fund may invest in U.S. exchange-listed ETFs. The 
Fund may sell securities to, among other things, secure gains, limit 
losses, re-deploy assets into what Royce deems to be more promising 
opportunities, and/or manage cash levels in the Fund's portfolio.
4. Other Investments
    While each Fund, under normal market conditions, will invest 
primarily in U.S.-listed equity securities, as described above, each 
Fund may invest its remaining assets in other securities and financial 
instruments as follows: (i) U.S. exchange-listed warrants, rights, and 
options (limited to 5% of total assets); (ii) cash or cash equivalents; 
\12\ and (iii) the securities of other investment companies.
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    \12\ The Exchange states that, for purposes of the filing, cash 
equivalents include short-term instruments (instruments with 
maturities of less than 3 months) of the following types: (i) U.S. 
Government securities, including bills, notes, and bonds differing 
as to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. Government agencies or 
instrumentalities; (ii) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (iii) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (iv) repurchase agreements and reverse 
repurchase agreements; (v) bank time deposits, which are monies kept 
on deposit with banks or savings and loan associations for a stated 
period of time at a fixed rate of interest; (vi) commercial paper, 
which are short-term unsecured promissory notes; and (vii) money 
market funds.
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5. Investment Restrictions
    The Funds will not invest in futures, forwards, or swaps. Further, 
each Fund's investments will be consistent with its investment 
objective and will not be used to enhance leverage. While the Funds may 
invest in inverse ETFs, they will not invest in leveraged (e.g., 2X, -
2X, 3X or -3X) ETFs. Finally, the equity securities (other than non-
exchange-listed investment company securities) and options in which the 
Funds invest will be listed on a U.S. national securities exchange.

B. Key Features of Managed Portfolio Shares

    According to the Exchange, while Investment Companies issuing 
Managed Portfolio Shares would be actively-managed, and in that respect 
would be similar to those issuing Managed Fund Shares,\13\ Managed 
Portfolio Shares would differ from Managed Fund Shares in the following 
respects:
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    \13\ Managed Fund Shares are shares of actively-managed 
Investment Companies listed and traded under NYSE Arca Rule 8.600-E.
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     First, issues of Managed Fund Shares are required to 
disseminate their ``Disclosed Portfolio'' at least once daily.\14\ By 
contrast, the portfolio for an issue of Managed Portfolio Shares would 
be disclosed only quarterly.
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    \14\ NYSE Arca Rule 8.600-E(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 NAV at the end of the 
business day. NYSE Arca Rule 8.600-E(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 creation of shares in 
``Creation Unit'' size or the redemption of shares in ``Redemption 
Unit'' size, the delivery or receipt of any portfolio securities in 
kind would be effected through an agent (``AP Representative'') in a 
Confidential Account established for the benefit of the creating or 
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 
the Reporting Authority (as defined in proposed NYSE Arca Rule 8.900-
E(c)(5)) and/or 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.'')).\15\ The Exchange states that the 
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.\16\
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    \15\ Proposed NYSE Arca Rule 8.900-E(c)(2) defines the VIIV as 
the estimated indicative value of a Managed Portfolio Share based on 
all of the holdings of a series of Managed Portfolio Shares as of 
the close of business on the prior business day, and, for corporate 
actions, based on the applicable holdings as of the opening of 
business on the current business day, priced and disseminated in one 
second intervals during the Core Trading Session.
    \16\ 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.
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C. Arbitrage of Managed Portfolio Shares

    The Exchange asserts that market makers will be able to make 
efficient and liquid markets in the Shares priced near the VIIV as long 
as the VIIV is disseminated every second and market makers employ 
market making techniques such as ``statistical arbitrage,'' including 
correlation hedging, beta hedging, and dispersion trading, which the 
Exchange represents is currently used throughout the

[[Page 19373]]

financial services industry, to make efficient markets in exchange-
traded products.\17\ According to the Exchange, if an authorized 
participant believes that the Shares 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 the Shares short and purchase 
securities that the authorized participant believes will track the 
movements of the Shares. When the spread narrows, the authorized 
participant would execute offsetting orders or enter an order with its 
AP Representative to create Shares. According to the Exchange, the 
authorized participant's purchase of the portfolio securities into its 
Confidential Account, combined with the sale of the Shares, may create 
downward pressure on the price of the Shares and/or upward pressure on 
the price of the portfolio securities, bringing the market price of the 
Shares and the value of a Fund's portfolio securities closer together.
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    \17\ According to the Exchange, statistical arbitrage enables a 
trader to construct an accurate proxy for another instrument, 
allowing it to hedge the other instrument or buy or sell the 
instrument when it is cheap or expensive in relation to the proxy. 
The Exchange states that statistical analysis permits traders to 
discover correlations, based purely on trading data without regard 
to other fundamental drivers. The Exchange also states that 
correlations are a function of differentials, over time, between one 
instrument or group of instruments and one or more other 
instruments, and that once the nature of these price deviations have 
been quantified, a universe of securities is searched in an effort 
to, in the case of a hedging strategy, minimize the differential. In 
addition, the Exchange also states that, once a suitable hedging 
proxy has been identified, a trader can minimize portfolio risk by 
executing the hedging basket. According to the Exchange, the trader 
then can monitor the performance of this hedge throughout the trade 
period, making correction where warranted. The Exchange states that, 
in the case of correlation hedging, the analysis seeks to find a 
proxy that matches the pricing behavior of the Fund, and that in the 
case of beta hedging, the analysis seeks to determine the 
relationship between the price movement over time of the Fund and 
that of another stock.
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    Similarly, according to the Exchange, an authorized participant 
could buy the Shares and instruct the AP Representative to redeem them 
and then sell the underlying portfolio securities from its Confidential 
Account in an attempt to profit when the Shares trade at a discount to 
the portfolio securities. According to the Exchange, the authorized 
participant's purchase of the Shares in the secondary market, combined 
with the sale of the portfolio securities from its Confidential 
Account, may create upward pressure on the price of the Shares and/or 
downward pressure on the price of portfolio securities, driving the 
market price of the Shares and the value of the Fund's portfolio 
securities closer together. The Exchange states that, according to 
Precidian Funds LLC, the investment adviser to the Trust (``Adviser''), 
this process is identical to how many authorized participants currently 
arbitrage existing, traditional ETFs, except for the use of the 
Confidential Account.

D. The Creation and Redemption Procedures

    The Exchange states that, generally, the Shares will be purchased 
and redeemed on an in-kind basis, so that, except where the purchase or 
redemption would include cash under the circumstances described in the 
applicable Fund's registration statement, purchasers will be required 
to purchase ``Creation Units'' by making an in-kind deposit of 
specified instruments (``Deposit Instruments''), and authorized 
participants redeeming their Shares will receive an in-kind transfer of 
specified instruments (``Redemption Instruments'') in their 
Confidential Account through an AP Representative. 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 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 order cut-off time established by the 
Fund. 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 AP Representative will 
in turn liquidate, hedge, or otherwise manage the securities based on 
instructions from the authorized participant.\18\ The AP Representative 
will pay the liquidation proceeds net of expenses, plus or minus any 
cash balancing amount, to the authorized participant through DTC.\19\ 
The redemption securities that the Confidential Account receives are 
expected to mirror the portfolio holdings of a Fund pro rata.
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    \18\ The Exchange represents that an authorized participant will 
issue execution instructions to the AP Representative 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.
    \19\ 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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    In the case of a creation, the authorized participant will enter 
into an irrevocable creation order with the Fund and then direct the AP 
Representative to purchase the necessary basket of portfolio 
securities. The AP Representative will then purchase the necessary 
securities in the Confidential Account. Once the necessary basket of 
securities has been acquired, the purchased securities held in the 
Confidential Account will be contributed in-kind to the Fund.
    The Exchange states that, in purchasing the necessary securities 
for creation purposes, and, conversely, in selling the portfolio 
securities for redemption purposes, the AP Representative will be 
required, by the terms of the Confidential Account agreement, to 
obfuscate the trades by use of tactics such as breaking the trades into 
multiple purchases or sales and transacting in multiple marketplaces.

E. 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-CSR under the 1940 Act, and to file its complete portfolio schedules 
for the first and third fiscal quarters on Form N-Q under the 1940 Act, 
within 60 days of the end of the quarter. Form N-Q requires funds to 
file the same schedules of investments that are required in annual and 
semi-annual reports to shareholders. 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 website at www.sec.gov.
    In addition, the VIIV will be widely disseminated by the Reporting 
Authority and/or one or more major market-data vendors at least every 
second during the Exchange's Core Trading Session. According to the

[[Page 19374]]

Exchange, the VIIV will include all accrued income and expenses of a 
Fund, and any extraordinary expenses booked during the day that would 
be taken into account in calculating the Fund's NAV will also be 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 a 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. The Exchange also believes that the use of quotations will dampen 
the impact of any momentary spikes in the price of a portfolio 
security.
    According to the Exchange, each Fund will utilize two separate 
pricing feeds to provide two separate, 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 
on a real time basis.\20\ 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. Upon notification to the Exchange by the issuer of a series of 
Managed Portfolio Shares, or its agent, that the public VIIV and non-
public, alternative intra-day indicative value differ by more than 25 
basis points for 60 seconds, the Exchange will halt trading as soon as 
practicable in the Shares until the discrepancy is resolved.\21\ Each 
Fund's board of directors 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 website.
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    \20\ The Exchange states that a Fund's Custodian will provide, 
on a daily basis, the identities and quantities of portfolio 
securities that will form the basis for the Fund's calculation of 
NAV at the end of the business day, plus any cash in the portfolio, 
to the Pricing Verification Agent for purposes of pricing.
    \21\ According to the Exchange, for the period January 1, 2017, 
to October 31, 2017, the average bid/ask spread on actively managed 
equity ETFs (Managed Fund Shares) traded on NYSE Arca, as a 
percentage, was 38 basis points. For the same period, the spread on 
all exchange-traded products traded on NYSE Arca, as a percentage, 
was 54 basis points. A continuous deviation for sixty seconds could 
indicate an error in the feed or in a calculation engine used to 
calculate the two intraday indicative values. The Exchange states 
that the Trust reserves the right to change these thresholds to the 
extent deemed appropriate and approved by the Fund's board of 
directors.
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F. Surveillance

    The Exchange represents that trading in the Shares will be subject 
to the existing trading surveillances, administered by the Exchange, as 
well as cross-market surveillances administered by the Financial 
Industry Regulatory Authority (``FINRA'') on behalf of the Exchange, 
which are designed to detect violations of Exchange rules and 
applicable federal securities laws. The Exchange represents that these 
procedures are adequate to properly monitor Exchange trading of the 
Shares in all trading sessions and to deter and detect violations of 
Exchange rules and federal securities laws applicable to trading on the 
Exchange.\22\
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    \22\ The Exchange states that these surveillances generally 
focus on detecting securities trading outside their normal patterns, 
which could be indicative of manipulative or other violative 
activity. The Exchange represents that the Exchange or FINRA, on 
behalf of the Exchange, or both, will communicate as needed 
regarding trading in the Shares, underlying common stocks, rights, 
warrants, ETFs, and exchange-listed options with other markets and 
other entities that are members of the Intermarket Surveillance 
Group (``ISG''), and the Exchange or FINRA, on behalf of the 
Exchange, or both, may obtain trading information regarding such 
securities from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares, 
underlying common stocks, rights, warrants, ETFs and exchange-listed 
options from markets and other entities that are members of ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
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    The Exchange represents that the Adviser will make available daily 
to FINRA and the Exchange the portfolio holdings of each Fund in order 
to facilitate the performance of the surveillances referred to above. 
In addition, the Exchange states that it has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.

II. Summary of Comment Letters

    The Commission has received five comment letters on the proposed 
rule change, each of which expresses opposition to the proposed rule 
change.\23\ As of the date of this order instituting proceedings, the 
Exchange has not submitted a response to the comments.
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    \23\ See supra note 6.
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    A. Blue Tractor Letter I.\24\ The commenter opposes the proposed 
rule change and raises the following concerns: \25\
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    \24\ The Blue Tractor Letter I is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3004003-161880.pdf.
    \25\ Although the commenter purports to comment on the Notice, 
the comments are more directly related to the Trust's December 4, 
2017, exemptive application. See Fifth Amended and Restated 
Application for an Order under Section 6(c) of the 1940 Act for 
exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-14405), dated December 4, 2017 (``Exemptive 
Application''). The commenter also references concerns that it 
raised in its comment letters to a similar, previous proposal filed 
by the Exchange to list and trade Managed Portfolio Shares, which 
the Exchange withdrew. See Securities Exchange Act Release No. 80553 
(April 28, 2017), 82 FR 20932 (May 4, 2017) (``Prior Proposal'').
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     Under the proposal, market participants will not be able 
to engage in bona fide arbitrage or efficient statistical arbitrage to 
keep the price of Shares close to a Fund's NAV; \26\
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    \26\ The commenter also notes that market makers will not be 
able to construct optimized tracking portfolios using the proposed 
fund structure and cites to a comment letter that it filed in 
response to the Prior Proposal. See Letter from Simon P. Goulet, Co-
Founder, Blue Tractor Group, LLC, to Brent J. Fields, Secretary, 
Commission, dated November 22, 2017. This letter is available at 
https://www.sec.gov/comments/sr-nysearca-201736/nysearca201736-2735961-161533.pdf.
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     Funds can be reverse engineered to determine the 
composition of the portfolio securities, which will make the Funds 
susceptible to front-running;
     The proposed fund structure will result in asymmetric 
disclosure of confidential portfolio information to selected parties;
     Details regarding the VIIV generation process, as well as 
calculation engine verification procedures, are inadequate for market 
participants and market makers;
     One second dissemination of VIIVs in a high frequency 
trading environment is inadequate for authorized participants and 
market makers and not of value to retail investors; and
     Requiring AP Representatives to obfuscate trades for 
creation and redemption purposes in an effort to keep portfolio 
composition confidential will delay execution and increase costs for 
authorized participants.
    B. Blue Tractor Letter II.\27\ The commenter reiterates its concern 
that the Funds can be reverse engineered to determine their trading 
strategies and that ``predatory traders'' can use such information in 
order to front run the Funds.
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    \27\ The Blue Tractor Letter II is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3053961-161905.pdf.

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[[Page 19375]]

    C. Broms Letter.\28\ The commenter opposes the proposed rule change 
and raises the following concerns: \29\
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    \28\ The Broms Letter is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3110868-161910.pdf.
    \29\ The commenter also generally references concerns that it 
raised in its comment letters related to the Prior Proposal. See 
Letter from Todd J. Broms, Chief Executive Officer, Broms & Company 
LLC, to Brent J. Fields, Secretary, Commission, dated May 25, 2017, 
available at https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736.htm. See also Letter from Todd J. Broms, Chief 
Executive Officer, Broms & Company LLC, to Brent J. Fields, 
Secretary, Commission, dated June 27, 2016, available at https://www.sec.gov/comments/sr-nysearca-2016-08/nysearca201608-10.pdf.
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     Selective disclosure of confidential portfolio information 
to AP Representatives to trade on behalf of authorized participants 
violates federal securities policy and facilitates illegal insider 
trading;
     The portfolio holdings can be reverse engineered and 
result in harm to the Funds' shareholders; and
     Because authorized participants cannot engage in bona fide 
arbitrage, the Shares will not trade efficiently.
    D. Haeberle Letter.\30\ The commenter opposes the proposed rule 
change and raises the following concerns: \31\
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    \30\ The Haeberle Letter is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3110867-161909.pdf.
    \31\ The commenter also summarizes the main points of its letter 
regarding the Prior Proposal. See Letter from Kevin S. Haeberle, 
Associate Professor of Law, William & Mary Law School, to Brent J. 
Fields, Secretary, Commission, dated December 15, 2017, available at 
https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736.htm.
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     Selective disclosure of portfolio information to AP 
Representatives, and the use of such information by AP Representatives 
to engage in creations and redemptions, may violate Section 10(b) of 
the Exchange Act and Rule 10b-5 thereunder; \32\
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    \32\ 15 U.S.C. 78j; 17 CFR 240.10b-5.
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     The proposal does not address how the Funds will ensure 
that AP Representatives comply with representations and contractual 
agreements to keep the Funds' portfolio securities confidential;
     Because AP Representatives will be required to obfuscate 
the sale and purchase of portfolio securities for creations and 
redemptions, they will be less likely to uphold their best execution 
obligations to authorized participants;
     Any failure of best execution will frustrate efficient 
market-making and arbitrage, leading to reduced liquidity in the 
Shares; and
     AP Representative services will likely be costly and, due 
to compliance constraints, few may offer such services, which will lead 
to higher expenses for the Funds and reduced liquidity for the Shares.
    E. Gastineau Letter.\33\ The commenter opposes the proposed rule 
change and raises the following concerns:
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    \33\ The Gastineau Letter is available at https://www.sec.gov/comments/sr-nysearca-2018-04/nysearca201804-3201927-162011.pdf.
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     The filing and other related documents are ``riddled with 
demonstrably false statements of fact, unsubstantiated and misleading 
expressions of opinion, and omissions of critical analysis and 
disclosure. . . .''; \34\
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    \34\ See Gastineau Letter, supra note 6, at 7.
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     The portfolio holdings information can be uncovered by (1) 
time-series analysis of the VIIV or other publicly disseminated Fund 
information (reverse engineering), (2) observations of Confidential 
Account trading, (3) misuse or misappropriation of Fund holdings 
information communicated to AP Representatives, or (4) loss or theft of 
confidential Fund holdings information communicated to AP 
Representatives;
     By not assuring the protection of the Funds' proprietary 
investment strategies, the proposal \35\ fails to demonstrate a public 
purpose or to offer investors advantages over currently approved 
structures;
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    \35\ In his comment letter, the commenter defines the 
``proposal'' as the Notice, the Exemptive Application, the 
registration statement that the Trust filed on Form N-1A with 
respect to the Funds (Registration Statement on Form N-1A for the 
Trust, File Nos. 333-217142 and 811-23246, as filed on April 5, 
2017), and certain comments on the Prior Proposal (see Letter from 
Mark Criscitello, Chairman, Precidian Funds LLC, to Brent J. Fields, 
Secretary, Commission, dated October 11, 2017; Letter from Daniel J. 
McCabe, Chief Executive, Precidian Investments, to Brent J. Fields, 
Secretary, Commission, dated October 12, 2017; and Letter from 
Joseph A. Sullivan, Chairman and Chief Executive Officer, Legg 
Mason, Inc., to Brent J. Fields, Secretary, Commission, dated 
October 12, 2017, which are available at https://www.sec.gov/comments/sr-nysearca-2017-36/nysearca201736.htm). Accordingly, the 
term ``proposal'' as used to describe the commenter's comment letter 
refers to the same.
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     The proposal violates the requirements for selective 
disclosure in the 2004 adopting release to the N1-A Amendments and as 
well as the principles of Regulation FD; \36\
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    \36\ 17 CFR 243.100 et seq.
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     The proposed disclosure of the Funds' portfolio holdings 
on a daily basis to AP Representatives, Fund service providers, and 
oversight authorities, and the lack of a surveillance or monitoring 
program to ensure that the Funds' confidential information is protected 
and not misused, facilitate illegal insider trading in the Funds' 
portfolio securities to the detriment of the Funds' shareholders;
     The proposed Fund structure raises impediments to the 
successful arbitrage of, and market making in, the Shares, especially 
during volatile or stressed markets, because of: (1) The deficiencies 
of VIIVs as intraday price signals, (2) market makers' forced reliance 
on statistical arbitrage and related correlation-based hedging 
techniques to manage their intraday exposures, and (3) the higher costs 
and loss of execution control over transactions in Creation Basket 
securities effected through the Confidential Accounts;
     The Shares will be more susceptible to trading halts 
because even a minimal level of quote disruption in the portfolio 
holdings will halt the Shares, which in turn will harm the Shares' 
liquidity and trading efficiency;
     Fund shareholders will incur significant new costs, 
liabilities, and risks in connection with the calculation and public 
dissemination of the VIIVs and the selective private disclosure of the 
Funds' confidential portfolio holdings information;
     The Shares will not trade efficiently because the Funds 
will invest in small-cap stocks, illiquid assets, and ETFs potentially 
holding foreign equities and/or less-liquid fixed income instruments;
     Information to investors is inadequate, and the Funds 
should provide publicly available, enhanced real-time VIIVs, daily 
closing market price and premium/discount based on the NAV, daily 
intraday estimated premiums/discounts, and daily purchase and 
redemption transaction fees; and
     (1) Widespread dissemination of the Funds' confidential 
portfolio holdings on a daily basis and ``the absence of a discernible 
program'' to protect the Funds' confidential information, and (2) the 
``high likelihood'' that the Shares will trade at wider bid-ask spreads 
and more variable premiums/discounts than existing active ETFs, render 
the proposal inconsistent with the Section 6(b)(5) requirements that 
Exchange rules must be designed to prevent fraudulent and manipulative 
acts and practices, protect investors and the public interest, and not 
to permit unfair discrimination among customers, issuers, brokers and 
dealers.\37\
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    \37\ In addition, the commenter believes that the proposal fails 
to meet the statutory standards for exemptive relief pursuant to 
Section 6(c) of the 1940 Act and asserts that the normal tax 
benefits of ETF investing will likely not apply to the Funds.

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[[Page 19376]]

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-04 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \38\ to determine whether the proposed 
rule change 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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    \38\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\39\ 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 Exchange 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, . . . to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.'' \40\
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    \39\ Id.
    \40\ 15 U.S.C. 78f(b)(5).
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IV. 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 Exchange 
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.\41\
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    \41\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 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 May 23, 2018. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 6, 
2018.
    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,\42\ the issues raised by the commenters, and any other 
issues raised by the proposed rule change under the Exchange Act. In 
particular, the Commission seeks commenters' views regarding the 
concerns raised with respect to selective disclosure of confidential 
portfolio information, namely, whether such disclosure is consistent 
with the requirement of Section 6(b)(5) that the rules of the exchange 
be designed to prevent fraudulent and manipulative acts and practices. 
The Commission also seeks commenters' views regarding the various 
concerns raised about how the Shares may trade in the secondary market, 
including the potential for frequent trading halts and poor trading 
performance during times of market volatility and stress. In this 
regard, the Commission specifically seeks commenters' views on whether 
the proposal is consistent with the maintenance of a fair and orderly 
market.
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    \42\ See supra note 3.
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    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 [email protected]. Please include 
File Number SR-NYSEArca-2018-04 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.

All submissions should refer to File Numbers SR-NYSEArca-2018-04. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2018-04 and should be submitted 
on or before May 23, 2018. Rebuttal comments should be submitted by 
June 6, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09265 Filed 5-1-18; 8:45 am]
 BILLING CODE 8011-01-P


