Traded Fund and Market        Part A.               Definitions.\510\
 Price.
Information Concerning Fees   Item 3. Risk/Return   Item I.13(h).
 and Costs.                    Summary: Fee Table.
Information Concerning        Item 6(c). Purchase   Item I.13(i).
 Purchase and Sale of Fund     and Sale of Fund
 Shares.                       Shares.
Table Showing Premium and     Item 11(g)(2).......  Item I.13(j).
 Discount Information.
------------------------------------------------------------------------

J. Amendments to Form N-CEN

    Form N-CEN is a structured form that requires registered funds to
provide census-type information to the Commission on an annual
basis.\511\ As proposed, we are adopting a new requirement that will
collect specific information on which ETFs are relying on rule 6c-
11.\512\ We believe that this requirement will allow us to better
monitor reliance on rule 6c-11 and assist us with our accounting,
auditing, and oversight functions, including compliance with the
Paperwork Reduction Act.\513\
---------------------------------------------------------------------------

    \511\ See Reporting Modernization Adopting Release, supra
footnote 263.
    \512\ Item C.7.k of Form N-CEN. Item C.7 of Form N-CEN requires
management companies to report whether they relied on certain rules
under the Investment Company Act during the reporting period. In
addition, Item C.3.a.i of Form N-CEN already requires funds to
report if they are an ETF.
    \513\ See Reporting Modernization Adopting Release, supra
footnote 263.
---------------------------------------------------------------------------

    We also are changing the definition of ``authorized participant''
in Form N-CEN to conform the definition with rule 6c-11 by deleting a
specific reference to an authorized participant's participation in
DTC.\514\ In addition to reducing regulatory confusion by harmonizing
the definition of ``authorized participant'' with rule 6c-11, this
change also will obviate the need for future amendments if additional
clearing agencies become registered with the Commission.\515\
Commenters that addressed the proposed amendments to Form N-CEN
expressed support, and we have determined to adopt the amendments as
proposed.
---------------------------------------------------------------------------

    \514\ Item E.2 of Form N-CEN.
    \515\ As proposed, the amendments to Form N-CEN will define the
term ``authorized participant'' as ``a member or participant of a
clearing agency registered with the Commission, which has a written
agreement with the Exchange-Traded Fund or Exchange-Traded Managed
Fund or one of its service providers that allows the authorized
participant to place orders for the purchase and redemption of
creation units.'' See Instruction to Item E.2 of Form N-CEN.
---------------------------------------------------------------------------

K. Technical and Conforming Amendments to Form N-1A, Form N-8B-2, Form
N-CSR, Form N-PORT, and Regulation S-X

    In October 2016, the Commission adopted new rules and forms and
amended other rules and forms under the Investment Company Act to
modernize the reporting and disclosure of information by registered
investment companies.\516\ In February 2019, the Commission adopted an
interim final rule that amended the timing requirements for filing
reports on Form N-PORT.\517\ We are making the following technical
corrections as a result of these rulemakings, as well as correcting
certain other outdated citations and instructions:
---------------------------------------------------------------------------

    \516\ See Reporting Modernization Adopting Release, supra
footnote 263.
    \517\ See Amendments to the Timing Requirements for Filing
Reports on Form N-PORT, Investment Company Act Release No. 33384
(Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)] (``Interim Final Rule
Release'').
---------------------------------------------------------------------------

     Correcting footnote 1 of 17 CFR 210.12-14 (rule 12-14 of
Regulation S-X) by replacing a reference to Column E with a reference
to Column F.\518\
---------------------------------------------------------------------------

    \518\ See rule 12-14, note 1.
---------------------------------------------------------------------------

     Amending General Instruction B.4.(a) of Form N-1A to
update outdated citation references to 17 CFR 230.400 through 230.498
(Regulation C) by replacing references to 17 CFR 230.497 (rule 497)
with references to rule 498.\519\
---------------------------------------------------------------------------

    \519\ See General Instruction B.4.(a) of Form N-1A.
---------------------------------------------------------------------------

     Amending General Instruction B.4.(d) of Form N-1A to
update outdated citation references to 17 CFR 232.10 through 232.903
(Regulation S-T) by replacing references to rule 903 with references to
rule 501.\520\
---------------------------------------------------------------------------

    \520\ See General Instruction B.4.(d) of Form N-1A.
---------------------------------------------------------------------------

     Amending Instruction 4(b) to Item 13 of Form N-1A by
deleting outdated instructions regarding changes in methodology for
determining the ratio of expenses to average net assets.\521\
---------------------------------------------------------------------------

    \521\ See Instruction 4(b) to Item 13.
---------------------------------------------------------------------------

     Amending Form N-1A to require money market funds to state
in their annual and semi-annual reports that: (i) Their monthly
portfolio holdings are available on Form N-MFP; (ii) the money market
fund's reports on Form N-MFP are available on the Commission's website;
and (iii) the money market fund makes portfolio holdings information
available to shareholders on its website.\522\ This amendment will
reflect the fact that money market funds report monthly portfolio
holdings on Form N-MFP rather than reporting portfolio holdings for the
first and third fiscal quarters on Form N-PORT.
---------------------------------------------------------------------------

    \522\ See Instruction to Item 27(d)(3) of Form N-1A.

---------------------------------------------------------------------------

     Amending Form N-CSR to correct references to item numbers
in General Instruction D and in the instruction to Item 13.\523\
---------------------------------------------------------------------------

    \523\ See General Instruction D to Form N-CSR and Item 13 of
Instruction 13 of Form N-CSR.
---------------------------------------------------------------------------

     Amending General Instruction F (Public Availability) of
Form N-PORT to read ``With the exception of the non-public information
discussed below, the information reported on Form N-PORT for the third
month of each Fund's fiscal quarter will be made publicly available
upon filing.'' \524\ This amendment will reflect the Commission's
action making quarter-end reports on Form N-PORT public immediately
upon filing, with the exception of the non-public fields identified in
General Instruction F.\525\
---------------------------------------------------------------------------

    \524\ See Instruction F to Form N-PORT.
    \525\ See Interim Final Rule Release, supra footnote 518, at
n.35 and accompanying text.
---------------------------------------------------------------------------

     Withdrawing Instruction 23 of Reporting Modernization
Adopting Release, which would have amended 17 CFR 232.401 (rule 401 of
Regulation S-T) to remove references to Form N-Q.\526\ The amendment is
no longer necessary because rule 401 was rescinded by a subsequent
rulemaking.\527\
---------------------------------------------------------------------------

    \526\ See Reporting Modernization Adopting Release, supra
footnote 263; see also 17 CFR 232.401.
    \527\ See Inline XBRL Filing of Tagged Data, Investment Company
Act Release No. 33139 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
---------------------------------------------------------------------------

     Amending Item IX of Form N-8B-2 to clarify the required
designation of exhibits and the use of incorporation by reference in
order to conform to similar instructions in other Investment Company
forms.\528\
---------------------------------------------------------------------------

    \528\ See, e.g., Item 28 of Form N-1A.; Item 26 of Form N-6.
---------------------------------------------------------------------------

L. Compliance Dates

    The Commission is providing for a transition period for the
amendments to Forms N-1A, N-8B-2, and N-CEN. Specifically, we are
adopting compliance dates for our amendments to Form N-1A, Form N-8B-2,
and Form N-CEN of December 22, 2020, one year following the amendments'
effective date. All registration statements, post-effective amendments,
and reports on these forms filed on or after the compliance date must
comply with the amendments. Based on the staff's experience, we believe
that this will provide adequate time for ETFs and other funds to
compile and review the information that must be disclosed.

III. Other Matters

    Pursuant to the Congressional Review Act,\529\ the Office of
Information and Regulatory Affairs has designated this rule a ``major
rule,'' as defined by 5 U.S.C. 804(2). If any of the provisions of
these rules, or the application thereof to any person or circumstance,
is held to be invalid, such invalidity shall not affect other
provisions or application of such provisions to other persons or
circumstances that can be given effect without the invalid provision or
application.
---------------------------------------------------------------------------

    \529\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

    We are mindful of the costs imposed by, and the benefits obtained
from, our rules. Section 2(c) of the Investment Company Act, section
2(b) of the Securities Act, and section 3(f) of the Exchange Act state
that when the Commission is engaging in rulmaking under such titles and
is required to consider or determine whether the action is necessary or
appropriate in (or, with respect to the Investment Company Act,
consistent with) the public interest, the Commission shall consider
whether the action will promote efficiency, competition, and capital
formation, in addition to the protection of investors. Further, section
23(a)(2) of the Exchange Act requires the Commission to consider, among
other matters, the impact such rules would have on competition and
states that the Commission shall not adopt any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act. The following analysis considers, in
detail, the potential economic effects that may result from the rule,
including the benefits and costs to investors and other market
participants as well as the broader implications of the rule for
efficiency, competition, and capital formation.

A. Introduction

    ETFs currently need to obtain an order from the Commission that
exempts them from certain provisions of the Act that otherwise would
prohibit several features essential to the structure and operation of
ETFs. Obtaining such exemptive relief typically has resulted in
expenses and delays in forming new ETFs. In addition, the conditions in
the exemptive orders issued by the Commission have evolved over time.
As a result, some ETF sponsors may have a competitive advantage over
other sponsors because some exemptive orders allow the sponsors to
launch new funds under the terms and conditions of those orders, and
because the terms in some of these orders may be more flexible than
others.
    Rule 6c-11 will allow ETFs that satisfy certain conditions to
operate without obtaining an exemptive order from the Commission. The
Commission also is rescinding the exemptive relief we have issued to
ETFs that will be permitted to operate in reliance on the rule.
However, we anticipate that ETFs whose exemptive relief will be
rescinded under the rule generally will be able to rely on the rule
without substantially changing their current operations, as the rule's
conditions are similar to those contained in existing exemptive relief,
consistent with existing market practice, or generally more flexible
than those contained within existing exemptive relief.\530\ ETFs that
wish to operate in a manner not covered by the final exemptive rule can
seek individual exemptive relief from the Commission.\531\
---------------------------------------------------------------------------

    \530\ As discussed in more detail below, some conditions in the
rule and the scope of the relief provided are less flexible than
those included in certain exemptive orders (e.g. the absence of
master-feeder relief) and others represent requirements that were
not included in exemptive orders (e.g. basket policies and
procedures and the recordkeeping requirements).
    \531\ We are not rescinding the exemptive orders for certain
categories of ETFs (i.e., UIT ETFs, share class ETFs, leveraged/
inverse ETFs and non-transparent ETFs), with the exception of
master-feeder relief that funds did not rely on as of the date of
the 2018 ETF Proposing Release (June 28, 2018).
---------------------------------------------------------------------------

    We believe that rule 6c-11 will establish a regulatory framework
that: (1) Reduces the expense and delay currently associated with
forming and operating certain ETFs unable to rely on existing orders;
and (2) creates a level playing field for ETFs that can rely on the
rule. As such, the rule will enable increased product competition among
certain ETF providers, which can lead to lower fees for investors,
encourage financial innovation, and increase investor choice in the ETF
market.
    The increased basket flexibility the rule affords in particular may
benefit ETFs and their shareholders. To the extent that ETFs are able
to implement basket policies and procedures that better facilitate the
arbitrage mechanism, these ETFs may reduce their bid-ask spreads and
thereby lower transaction costs for their investors. In addition,
certain ETFs may be able to use the increased basket flexibility to
reduce trading costs the ETF incurs.\532\
---------------------------------------------------------------------------

    \532\ Several of the anticipated benefits of rule 6c-11 may be
associated with metrics that will be measurable only after funds
operate in reliance on the rule; such metrics include changes in
bid-ask spreads, premiums/discounts to NAV per share, fund fees, and
the number of ETFs. These metrics may help facilitate evaluation of
the extent to which the rule has generated the anticipated benefits,
although these metrics may also be affected by developments
independent of rule 6c-11.
---------------------------------------------------------------------------

    The amendments to Forms N-1A and N-8B-2 as well as the additional
website disclosures required by the rule are intended to improve the
information

about ETFs available to the market and to allow investors to more
readily obtain information about fund products, resulting in reduced
investor search costs. To the extent that the disclosure requirements
will improve investors' ability to evaluate the performance and other
characteristics of fund products, the amendments may result in better
informed investor decisions and more efficient allocation of investor
capital among fund products, and may further promote competition among
ETFs and between ETFs and mutual funds.
    The rule and amendments to Forms N-1A and N-8B-2 also may impact
non-ETF products and market participants. To the extent that the rule
will lead to lower investor search costs, lower fees, and increased
product innovation and investor choice in the ETF market, investors may
shift their investments towards ETFs and away from funds similar to
ETFs, such as mutual funds. Such a shift in investor demand also may
affect broker-dealers and investment advisers, whose customers and
clients may show increased interest in and demand for ETFs. Moreover,
because ETF shares are traded on the secondary market, the rule also
can affect exchanges, alternative trading systems, facilities for OTC
trading, broker-dealers, and clearing agencies to the extent that the
rule causes changes in the ETF trading activity they support.

B. Economic Baseline

1. ETF Industry Growth and Trends
    The ETF industry has experienced extensive growth since the first
U.S. ETF began trading in 1993.\533\ From 1993 to 2002, an average of
10 new ETFs registered each year and ETF net assets increased by an
average of $10.7 billion annually. Industry growth accelerated from
2003 to 2006, when, on average, 62 new ETFs and $77 billion in net
assets were added to the industry annually. Since 2007, the industry
has seen an average of 137 new ETF entrants and an average growth of
$241.2 billion annually. Since 2007, ETF net assets have grown at an
average rate of 17.2% per year, which compares to 3.2% for closed-end
funds and 6.3% for open-end funds over the same period.\534\
---------------------------------------------------------------------------

    \533\ For the purpose of this release, we focus exclusively on
ETFs that trade on U.S. exchanges.
    \534\ Unless otherwise noted, the number and net assets of ETFs
in this section of the Release are based on a staff analysis of
Bloomberg data. Growth rates for open- and closed-end funds are
based on a staff analysis of Morningstar data.
---------------------------------------------------------------------------

    At the end of December 2018, there were 1,978 registered ETFs,
totaling $3.3 trillion in net assets and spanning six broad investment
style categories. ETFs are predominantly structured as open-end funds;
however, eight UIT ETFs together represented 10.3% of ETF total net
assets ($340.6 billion), and 68 share class ETFs together represented
25.6% of total net assets ($854.6 billion). The chart illustrates
growth in ETF net assets by investment strategy beginning in 2000. It
also tracks the percentage of net assets invested in actively managed
ETFs.

[GRAPHIC] [TIFF OMITTED] TR24OC19.019

    Although indexing is still the most common ETF strategy, over time
ETFs have evolved to offer, among other things, active management,
leveraged and inverse investment strategies, and exposure to various
types of foreign securities (in both index-based and actively managed
ETFs). At the end of December 2018, there were 167 leveraged/inverse
ETFs that were structured as open-end funds.\535\ In total, leveraged/
inverse ETFs had total net assets of $29.64 billion or approximately 1%
of all ETF net assets. None of the eight registered UIT ETFs employed
leveraged or inverse investment strategies. Of the remaining
unleveraged ETFs, both index-based and actively managed, 1,705 ETFs had
combined net assets of $3 trillion operated as open-end funds, while
eight UIT ETFs had $340.6 billion in net assets.\536\
---------------------------------------------------------------------------

    \535\ See supra footnote 92 (noting that the exemptive orders
that we have issued to sponsors of leveraged/inverse ETFs do not
provide relief to ETFs described as seeking investment returns that
correspond to the performance of a leveraged or inverse leveraged
market index over a predetermined period of time).
    \536\ Bloomberg defines actively managed or index-based managed
funds according to disclosure in the fund prospectus.
---------------------------------------------------------------------------

    There were 257 actively managed ETFs with total net assets of $69.5
billion. The remaining 1,721 ETFs, with a combined $3.23 trillion in
net assets, were index-based ETFs. Of these, 1,713 ETFs with total net
assets of $2.892 trillion were structured as open-end funds and eight
UIT ETFs had total net assets of $340.6 billion.
    The majority of ETFs (1,615) held some foreign exposure in their
portfolio according to Morningstar data. These ETFs had total net
assets of $2.921 trillion. Of these funds, seven were UIT ETFs and had
$320.6 billion in net assets. The remaining 1,608 ETFs accounting for
$2.6 trillion in net assets were organized as open-end funds. On
average, these ETFs reported foreign exposure of 40.15% (56.87% for UIT
ETFs and 40.07% for ETFs structured as open-end funds).\537\
---------------------------------------------------------------------------

    \537\ We estimate funds' foreign holdings on February 27, 2019
from Morningstar data. For each ETF, foreign holdings of equity and
debt securities are combined to obtain the approximate percentage of
assets invested in foreign securities. Morningstar provided foreign
holding data for 1,970 ETFs. In this data, 363 funds, one of which
is a UIT ETF, reported holding no foreign securities and 8 funds
from the original 1,978 are missing foreign holdings data.
---------------------------------------------------------------------------

2. Exemptive Order Process and Certain Conditions Under Existing Orders
    ETFs seeking to operate as investment companies required exemptive
relief from the Commission. Since the first exemptive order was granted
in 1992, the Commission has issued approximately 300 exemptive orders
to ETFs. The average number of approved exemptive orders between 1992
and 2006 was approximately 2.5 per year, which has increased to
approximately 29 per year since 2007.

    Based on our review of exemptive orders that granted relief for
unleveraged ETFs between January 2007 and early April 2019, the median
processing time from the filing of an initial application to the
issuance of an order was 213 days, although there was considerable
variation.\538\ Depending on the complexity of a fund's application,
some ETF sponsors received exemptive relief in a relatively short
period of time (the 10th percentile of the processing time was 87 days)
while others waited over one year for approval (the 90th percentile of
the processing time was 669 days).
---------------------------------------------------------------------------

    \538\ The earliest order in our sample was approved on January
17, 2007 and the latest order was approved on April 2, 2019. This
data does not include orders for non-transparent ETFs.
---------------------------------------------------------------------------

    In addition to the processing time associated with applying for an
exemptive order, Commission staff estimates that the direct cost of a
typical fund's application for ETF relief (associated with, for
example, legal fees) is approximately $100,000, which may vary
considerably depending on the complexity of the prospective fund.
    These exemptive orders permit ETFs to operate as investment
companies under the Investment Company Act, subject to representations
and conditions, some of which have changed over time.\539\ For example,
as discussed above, our orders have required ETFs that will rely on
rule 6c-11 to provide some degree of transparency regarding their
portfolio holdings.\540\ Actively managed ETFs and some self-indexed
ETFs have been required to disclose their full portfolio holdings each
day, while other index-based ETFs are permitted to specify the index
they seek to track (as long as the index provider lists the constituent
securities on its website) or disclose the components of their baskets.
Based on a staff review of 150 randomly selected ETFs, which included
100 index-based ETFs and 50 actively managed ETFs, however, all 150
ETFs maintain a website and provide the ETF's complete daily portfolio
holdings. Therefore, we believe it is likely that all ETFs that can
rely on the rule, including those that are not subject to a full
transparency condition in their exemptive order, currently provide full
portfolio transparency.\541\
---------------------------------------------------------------------------

    \539\ ETFs generally have obtained similar exemptive relief
under these orders. However, over time, our exemptive orders
generally have increased the maximum number of days that an ETF
holding foreign investments can delay the satisfaction of
redemptions as part of the relief from section 22(e) of the Act
(from 12 days to 15 days).
    \540\ See supra footnote 225.
    \541\ The samples were randomly drawn from all index-based ETFs
and all actively managed ETFs currently trading according to
Bloomberg. We recognize that the selection of ETFs examined
overweights the sample of actively managed ETFs relative to the
entire population of actively managed ETFs. Our sampling procedure
was done to avoid small sample bias as equally proportioned sampling
would call for a survey of approximately 2 actively managed funds.
Commenters did not disagree with statements in the proposing release
that ETFs that can rely on the rule maintain a website and provide
the ETF's complete daily portfolio holdings.
---------------------------------------------------------------------------

    ETFs' flexibility to use custom baskets also has evolved over time
under our exemptive orders. From 1996 to 2006, exemptive orders for
open-end ETFs did not expressly limit baskets to a pro rata
representation of the ETF's portfolio holdings. Since approximately
2006, however, our exemptive orders placed increasingly tighter
restrictions on ETFs' composition of baskets.\542\ Because our
exemptive orders have generally included future funds relief to allow
sponsors to form and operate new ETFs, we are unable to quantify the
number of funds operating under each of the different basket
flexibility conditions included in our orders.\543\
---------------------------------------------------------------------------

    \542\ See 2018 ETF Proposing Release, supra footnote 7, at
nn.236-241 and accompanying text.
    \543\ See supra footnote 5.
---------------------------------------------------------------------------

    Many exemptive orders also have required ETFs to provide certain
website disclosures on their website, free of charge.\544\ Based on a
staff review of the websites of 150 randomly selected ETFs, all 150
ETFs provided the previous day's NAV, price of the ETF shares,\545\ and
the premium or discount associated with the ETF share price at the
market close. Accordingly, we believe that all ETFs that can rely on
rule 6c-11 currently disclose this information on their website.\546\
Our exemptive orders also have included other requirements, including
the publication of the ETF's IIV every 15 seconds.
---------------------------------------------------------------------------

    \544\ See 2018 ETF Proposing Release, supra footnote 7, at
section II.C.6.c. Substantially all exemptive orders starting in
2008 include a requirement for daily website disclosures of NAV,
closing price, and premiums and discounts--each as of the end of the
prior business day.
    \545\ One actively managed ETF provided a price based on the
midpoint between the bid and ask prices, while the remainder of the
actively managed ETFs and all index-based ETFs provided closing
prices.
    \546\ Commenters did not disagree with a statement in the
proposing release that all ETFs that can rely on the rule currently
provide this information on their website.
---------------------------------------------------------------------------

3. Market Participants
    Several non-ETF market participants may be affected by the rule,
including fund sponsors, authorized participants, liquidity providers,
trading venues, and institutional and retail investors.
    Using data from Bloomberg, we estimate that there are 81 unique ETF
sponsors with approximately 1,978 ETFs as of December 31, 2018. The
median number of ETFs per sponsor is six and the mean is 24, suggesting
that a small number of sponsors have a large share of the ETF market
(in terms of number of ETFs). Indeed, the top five sponsors operate a
combined 965 ETFs, whereas the bottom half of sponsors operate only a
combined 118 ETFs.
    An ETF (either directly or through a service provider) has
contractual arrangements with authorized participants to purchase or
redeem ETF shares in creation unit size aggregations in exchange for a
basket of securities and other assets. Based on data from Form N-CEN as
of July 26, 2019, the median ETF has 23 authorized participant
agreements and 4 active authorized participants.\547\ \548\ Larger ETFs
tend to have more authorized participant agreements, with the median
number of authorized participant agreements ranging from 13 for the
smallest quarter of ETFs to 33 for the largest quarter of ETFs. Larger
ETFs also tend to have more active authorized participants, ranging
from a median of 2 to 7 for the smallest and largest quarters of ETFs,
respectively. A 2015 survey-based study of fifteen fund sponsors
reports, however, that creation and redemption transactions occurred
only on between 10% to 20% of trading days and that only 10% of the
daily activity in all ETF shares (by volume) are creations or
redemptions.\549\
---------------------------------------------------------------------------

    \547\ Beginning July 30, 2018, ETFs started reporting
information on authorized participants in response to Item E.2 of
Form N-CEN. As of July 26, 2019, 1,739 ETFs had filed the form.
    \548\ An active AP is an authorized participant that engaged in
creation or redemption activity during the reporting period. Some
market makers and other market participants engage in creation and
redemptions indirectly through authorized participants. See supra
section I.B. Data on the number of such market participants is not
reported on Form N-CEN.
    \549\ See Rochelle Antoniewicz & Jane Heinrichs, The Role and
Activities of Authorized Participants of Exchange-Traded Funds, ICI
Report (Mar. 2015) (``Antoniewicz II''). The study also points out
that NSCC is the sole provider of clearing services for ETF primary
market transactions and that whether a creation or redemption order
is eligible to be processed through NSCC depends on the eligibility
for NSCC processing of the securities in the ETF's basket. See also
2019 ICI Factbook, supra footnote 3 (``On average, 90 percent of the
total daily activity in ETFs occurs on the secondary market.'').
---------------------------------------------------------------------------

    Some authorized participants also act as registered market makers
in ETF shares. Other liquidity providers for ETF shares include market
makers that are not authorized participants, hedge funds, and
proprietary trading firms. According to a 2014 survey, the median
number of liquidity providers for an ETF was 17, while the median
number of authorized participants that are

registered market makers for an ETF was 4.\550\
---------------------------------------------------------------------------

    \550\ See Antoniewicz II, supra footnote 550; see also 2019 ICI
Factbook, supra footnote 3.
---------------------------------------------------------------------------

    ETF shares are mainly traded on national securities exchanges.\551\
Table 4 lists the 9 exchanges with the largest average daily ETF
trading volume, measured over the 30 business days ending on March 7,
2019. The data shows that NYSE Arca handles the largest portion of ETF
trades ($15.3 billion), followed by Cboe BZX Exchange ($6.6 billion),
and Cboe EDGX Exchange ($4.5 billion).
---------------------------------------------------------------------------

    \551\ In the first quarter of 2019, 64% of ETF trading by dollar
volume was executed on exchanges, 26% over the counter without using
alternative trading systems (ATSs), and 10% over the counter using
ATSs, based on Trade and Quote (TAQ) data provided by the New York
Stock Exchange, Trade Reporting Facility (TRF) data provided by
FINRA, and ATS information made publicly available on the FINRA
website.

   Table 4--ETFS Traded on National Exchanges and Their Trading Volume
------------------------------------------------------------------------
                                                          Trading volume
                Exchange                  Number of ETFs     (billion)
------------------------------------------------------------------------
NYSE Arca, Inc..........................           1,939           $15.3
Cboe BZX Exchange, Inc..................           1,813             6.6
Cboe EDGX Exchange, Inc.................           1,815             4.5
Cboe BYX Exchange, Inc..................           1,721             3.6
The Nasdaq Stock Market LLC.............             348             2.6
Cboe EDGA Exchange, Inc.................           1,668             2.1
Nasdaq PHLX LLC.........................           1,070             1.9
Nasdaq BX, Inc..........................           1,671             1.5
NYSE Chicago, Inc.......................             184            1.2
------------------------------------------------------------------------
The table reports the number of ETFs traded at each exchange and the
  average daily ETF trading volume, measured over the 30 business days
  ending on March 7, 2019. Trading volume is calculated as trade price
  multiplied by the number of shares relating to each price by exchange.
  The figures reflect an analysis by Commission staff using data
  obtained through a subscription to Bloomberg.

    Both institutional and retail investors participate in the ETF
secondary market. As shown in Table 5 below, from the first quarter of
2015 to the fourth quarter of 2017, we estimate that institutions own,
on average, 43% of ETF shares, when calculating the average using equal
weights for all ETFs, and 57% when calculating the average using total
net assets (``TNA'')--based weights. The difference between the equal-
weighted and TNA-weighted average institutional ownership numbers--43%
vs. 57%--suggests that institutional investors tend to hold larger
ETFs. In addition, there is considerable variation in the degree to
which ETF shares are held by institutions, ranging from an average for
the 5th percentile of 6% to an average for the 95th percentile of
90%.\552\ However, we observe that the average institutional holding
did not change considerably over time during the sample period.
---------------------------------------------------------------------------

    \552\ The data we use is from Form 13F filings, which does not
capture all institutional positions because Form 13F does not
require reporting of short positions (which would lead to an
overstatement of institutional ownership) and not all institutional
investors are required to file the form (which would lead to an
understatement of institutional ownership).

                                                        Table 5--Institutional Ownership of ETFs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                                                    weighted     weighted
                     Quarter                        average      average      SD  (%)      P5  (%)      P25  (%)     P50  (%)     P75  (%)     P95  (%)
                                                      (%)          (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015Q1..........................................           41           54           24            5           22           38           58           85
2015Q2..........................................           42           55           25            6           23           40           60           91
2015Q3..........................................           44           56           26            7           25           41           62           94
2015Q4..........................................           44           57           26            5           24           43           62           92
2016Q1..........................................           44           57           26            5           24           42           62           92
2016Q2..........................................           43           56           26            6           23           41           61           92
2016Q3..........................................           43           56           26            5           24           41           62           91
2016Q4..........................................           44           57           25            6           24           42           61           91
2017Q1..........................................           43           58           25            6           24           42           61           91
2017Q2..........................................           44           55           25            6           25           42           61           90
2017Q3..........................................           43           61           25            6           24           42           61           88
2017Q4..........................................           44           58           24            7           25           43           61           87
Average.........................................           43           57           25            6           24           41           61           90
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports the quarterly institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided
  by the total shares outstanding adjusted for share splits. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles.
  All descriptive stats are equal-weighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using data from 2015Q1
  to 2017Q4 obtained through a subscription to WRDS SEC Analytics Suite and the Center for Research in Security Prices (CRSP).

    Further analysis shows that institutional ownership varies
considerably by the type of ETF. Using Morningstar Categories, for the
fourth quarter of 2017, Table 6 below shows that ETFs' equal-weighted
average institutional ownership ranges from 20% for alternative ETFs to
56% for taxable bond ETFs. We also find that

TNA-weighted average institutional ownership is higher than equal-
weighted average institutional ownership for international equity,
municipal bond, sector equity, taxable bond, and U.S. ETFs, suggesting
that institutional investors tend to hold larger ETFs within these
categories. The converse is true for allocation, alternative, and
commodity ETFs. The table also shows that there is large variation
within categories.\553\
---------------------------------------------------------------------------

    \553\ Morningstar Category is assigned based on the underlying
securities in each portfolio. Per Morningstar, funds in allocation
categories seek to provide both income and capital appreciation by
investing in multiple asset classes, including stocks, bonds, and
cash. Funds in alternative strategies employ investment approaches
(similar to those used by hedge funds) designed to offer returns
different than those of the long-only investments in the stock,
bond, or commodity markets. International equity portfolios expand
their focus to include stocks domiciled in diverse countries outside
the United States though most invest primarily in developed markets.
Municipal bond strategies are generally defined by state or national
focus and duration exposure. A fund is considered state-specific if
at least 70% of its assets are invested in municipal securities
issued by the various government entities of a single state. Sector-
specific equity funds are usually equity funds, in that they
maintain at least 85% exposure to equity. Fixed-Income/Taxable bond
portfolios invest at least 80% of assets in securities that provide
bond or cash exposure. U.S. equity portfolios are defined as
maintaining at least 85% exposure to equity and investing at least
70% of assets in U.S.-domiciled securities.

                                      Table 6--Institutional Ownership of ETFs by Morningstar Category for 2017:Q4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                                                    weighted     weighted
                    Category                        average      average      SD  (%)      P5  (%)      P25  (%)     P50  (%)     P75  (%)     P95  (%)
                                                      (%)          (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation......................................           46           40           27           10           22           41           67           94
Alternative.....................................           20           11           20            2            6           13           26           64
Commodities.....................................           43           40           16           16           39           39           57           61
International Equity............................           48           62           22           10           33           49           66           85
Municipal Bond..................................           52           63           16           22           40           51           64           74
Sector Equity...................................           43           59           21           12           27           42           57           82
Taxable Bond....................................           56           63           20           24           43           56           69           89
U.S. Equity.....................................           46           59           21           10           31           44           61           87
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports the institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided by the
  total shares outstanding adjusted for share splits, by Morningstar Category. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to
  95th percentiles. All descriptive stats are equal-weighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using
  data for 2017Q4 obtained a through subscription to WRDS SEC Analytics Suite and the CRSP.

4. Secondary Market Trading, Arbitrage, and ETF Liquidity
    Unlike shares of open-end funds, ETF shares are traded in the
secondary market at prices that may deviate from the ETF's NAV. As a
result, ETF investors may trade shares at prices that do not
necessarily reflect the NAV of the underlying ETF assets.\554\ As
discussed above, however, authorized participants engage in primary
market arbitrage activity that brings the market price of ETF shares
and the NAV of the ETF's portfolio closer together.\555\ Market
participants also can engage in arbitrage activity in the secondary
market by taking offsetting positions in the ETF shares and the
underlying basket assets.
---------------------------------------------------------------------------

    \554\ It is possible for both the ETF's NAV per share and its
share price to deviate from the intrinsic value of the ETF's
underlying portfolio. In addition, there may be cases in which the
ETF's share price is closer to the intrinsic value of the ETF's
portfolio than its NAV per share. See, e.g., Ananth Madhavan &
Aleksander Sobczyk, Price Dynamics and Liquidity of Exchange-Traded
Funds, Journal of Investment Management, Second Quarter 2016, at 1.
    \555\ See supra section I.B.
---------------------------------------------------------------------------

    Using data from Bloomberg, we find that ETFs, on average, have
closing prices slightly higher than the NAV per share (i.e., trade at a
premium at market close), as shown in Table 7 below. The equal-weighted
and TNA-weighted average premium/discount over the last 15 years for
all ETFs in the dataset are 0.07% and 0.06%, respectively, and the
median is 0.02%, indicating that the closing prices of ETF shares are,
on average, higher than the NAV per share. One study finds similar
results and concludes that, on average, ETF market prices tend to
reflect NAV per share closely.\556\ However, consistent with the study,
we find that ETF premiums/discounts vary significantly.\557\ For
example, we find that the (weighted) average premium/discount ranges
from 0.02% in 2018 to 0.14% in 2009, and the standard deviation of
premiums/discounts ranges from 0.16% in 2017 to 0.59% in 2008.
Moreover, not all ETF shares trade at a premium. For example, the table
shows, in a given year, at least 25% of ETF shares trade at a discount,
on average.
---------------------------------------------------------------------------

    \556\ See Antti Petajisto, Inefficiencies in the Pricing of
Exchange-Traded Funds, Financial Analysts Journal, First Quarter
2017, at 24.
    \557\ Commenters to our 2015 ETP Request for Comment, supra
footnote 19, reported qualitatively similar results. See, e.g.,
Comment Letter of Eaton Vance Corp. to Request for Comment on
Exchange-Traded Products (File No. S7-11-15) (Aug. 17, 2015).

                    Table 7--Time-Series Averages of Cross-Sectional Descriptive Statistics of Premium/Discount (%) Using Daily Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                      Year                          weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
2004............................................         0.10         0.04         0.26        -0.26        -0.06         0.02         0.09         0.55
2005............................................         0.06         0.08         0.28        -0.22        -0.04         0.04         0.11         0.62
2006............................................         0.07         0.08         0.34        -0.34        -0.04         0.03         0.14         0.67
2007............................................         0.14         0.08         0.38        -0.39        -0.06         0.03         0.20         0.64
2008............................................         0.09         0.10         0.59        -0.77        -0.14         0.05         0.34         1.03
2009............................................         0.12         0.14         0.53        -0.55        -0.08         0.02         0.34         1.02
2010............................................         0.07         0.07         0.35        -0.43        -0.05         0.02         0.16         0.63
2011............................................         0.04         0.07         0.41        -0.54        -0.04         0.02         0.17         0.76

2012............................................         0.06         0.07         0.28        -0.31        -0.02         0.02         0.14         0.58
2013............................................         0.06         0.03         0.28        -0.35        -0.03         0.02         0.09         0.43
2014............................................         0.05         0.04         0.22        -0.25        -0.01         0.02         0.08         0.35
2015............................................         0.04         0.04         0.23        -0.25        -0.01         0.02         0.08         0.40
2016............................................         0.03         0.04         0.23        -0.22        -0.01         0.01         0.09         0.39
2017............................................         0.07         0.06         0.16        -0.10        -0.01         0.02         0.09         0.33
2018............................................         0.03         0.02         0.22        -0.32        -0.03         0.01         0.07         0.36
Average.........................................         0.07         0.06         0.31        -0.35        -0.04         0.02         0.14         0.57
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The TNA-Weighted Average is weighted based
  on an ETF's previous month's total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Premiums or
  discounts are from daily Bloomberg data covering 2,235 ETFs for a total of 3,319,782 daily observations. Per Bloomberg, premium/discount (%) is the
  difference between the ETF's closing price on the day of the most recent NAV and the NAV of the fund on that day. The data covers the period from 01/
  02/2004 to 12/31/2018.

    Premiums and discounts to NAV per share also vary considerably by
the types of assets held by the ETF.\558\ We use Morningstar Investment
Categories to divide ETFs into groups of similar assets and, in Table 8
below, report the time-series averages of cross-sectional descriptive
statistics for premiums/discounts in the different Morningstar
Investment Categories. We find that the TNA-weighted average premium/
discount ranges from as low as 0.002% for alternative ETFs to 0.183%
for taxable bond ETFs. The results are qualitatively similar for the
equal-weighted average premium/discount.
---------------------------------------------------------------------------

    \558\ See, e.g., Robert Engle & Debojyoti Sarkar, Premiums-
Discounts and Exchange Traded Funds, Journal of Derivatives, Summer
2006, at 27 (observing that premiums and discounts for domestic ETFs
are generally small and highly transient, and that while premiums
and discounts are larger and more persistent in international ETFs,
they are smaller and less persistent than the premiums and discounts
of international closed-end funds).

           Table 8--Time-Series Averages of Cross-Sectional Descriptive Statistics of Premium/Discount (%) by Morningstar Investment Category
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                    Category                        weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation......................................        0.068        0.077        0.222       -0.124       -0.039        0.046        0.222        0.287
Alternative.....................................        0.006        0.002        0.317       -0.388       -0.119       -0.004        0.110        0.444
Commodities.....................................        0.199        0.105        0.446       -0.501        0.009        0.079        0.150        0.924
International Equity............................        0.176        0.181        0.422       -0.467       -0.071        0.192        0.438        0.799
Municipal Bond..................................        0.071        0.059        0.290       -0.351       -0.097        0.050        0.241        0.477
Sector Equity...................................        0.030        0.012        0.183       -0.234       -0.070        0.005        0.081        0.294
Taxable Bond....................................        0.192        0.183        0.196       -0.075        0.080        0.175        0.257        0.506
U.S. Equity.....................................        0.003        0.006        0.076       -0.098       -0.033        0.008        0.046        0.109
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The ETFs are first divided into groups based
  on Morningstar Categories. The TNA-Weighted Average is weighted based on an ETF's previous month's total net assets. SD refers to standard deviation.
  Columns P5 to P95 refer to the 5th to 95th percentiles. Premiums or discounts are from daily Bloomberg data covering 2,235 ETFs for a total of
  3,319,782 daily observations. Per Bloomberg, premium/discount (%) is the difference between the fund's closing price on the day of the most recent NAV
  and the NAV of the fund on that day. The data covers the period from 01/02/2004 to 12/31/2018.

    When the ETF arbitrage mechanism functions effectively, ETFs also
should trade at smaller bid-ask spreads.\559\ As shown in Table 9
below, the TNA-weighted average bid-ask spread, as a percentage of the
mid-price, has been relatively constant over the years, ranging from
highs of 0.37% in 2012 and 2016 to a low of 0.31% in 2018.\560\ Equal-
weighted average bid-ask spreads averaged 0.33% and were considerably
higher than TNA-weighted bid-ask spreads, which averaged 0.04%,
reflecting that larger ETFs tend to have smaller bid-ask spreads. The
table also shows that the bid-ask spread varies considerably between
ETFs, with an average of the 5th percentile of bid-ask spreads of 0.01%
and an average of the 95th percentile of bid-ask spreads at 0.16%.
---------------------------------------------------------------------------

    \559\ See, e.g., Joanne M. Hill, Dave Nadig, & Matt Hougan,
Comprehensive Guide to Exchange-Traded Funds (ETFS), CFA Institute
Research Foundation (2015), available at https://www.cfapubs.org/doi/pdf/10.2470/rf.v2015.n3.1 (``CFA Guide'').
    \560\ This analysis starts in 2012 because the available data
begins in that year.

                         Table 9--Time-Series Averages of Cross-Sectional Descriptive Statistics of Relative Bid-Ask Spread (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                      Year                          weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012............................................         0.37         0.06         0.12         0.01         0.02         0.02         0.05         0.27
2013............................................         0.33         0.05         0.10         0.01         0.01         0.02         0.05         0.21

2014............................................         0.27         0.04         0.06         0.01         0.01         0.02         0.04         0.11
2015............................................         0.32         0.04         0.07         0.00         0.01         0.02         0.05         0.12
2016............................................         0.37         0.04         0.07         0.01         0.01         0.02         0.04         0.11
2017............................................         0.34         0.03         0.07         0.00         0.01         0.02         0.03         0.11
2018............................................         0.31         0.05         0.09         0.01         0.01         0.02         0.04         0.16
Average.........................................         0.33         0.04         0.08         0.01         0.01         0.02         0.04         0.16
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The TNA-Weighted Average is weighted
  based on an ETF's previous month's total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask
  spreads are from daily Bloomberg data covering 2,235 ETFs for a total of 2,477,272 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is the
  average of all bid/ask spreads taken as a percentage of the mid-price. The data covers the period from 01/02/2004 to 12/31/2018.

    Table 10 below reports bid-ask spreads for ETF shares by
Morningstar Category. U.S. Equity ETFs have the smallest average bid-
ask spread of 0.03%, whereas allocation ETFs--ETFs that seek to provide
both income and capital appreciation by investing in multiple asset
classes, including stocks, bonds, and cash strategy--have the largest
average bid-ask spread of 0.21%.

       Table 10--Time-Series Averages of Cross-Sectional Descriptive Statistics of Relative Bid-Ask Spread (%) by Morningstar Investment Category
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                    Category                        weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation......................................         0.57         0.21         0.30         0.06         0.07         0.14         0.22         0.64
Alternative.....................................         0.38         0.10         0.16         0.02         0.03         0.05         0.09         0.33
Commodities.....................................         0.30         0.06         0.07         0.02         0.02         0.02         0.08         0.14
International Equity............................         0.43         0.07         0.11         0.02         0.02         0.03         0.08         0.21
Municipal Bond..................................         0.29         0.10         0.11         0.03         0.04         0.06         0.10         0.30
Sector Equity...................................         0.28         0.06         0.09         0.01         0.02         0.04         0.06         0.20
Taxable Bond....................................         0.29         0.04         0.08         0.01         0.01         0.02         0.04         0.15
U.S. Equity.....................................         0.21         0.03         0.04         0.01         0.01         0.01         0.03         0.09
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The ETFs are first divided into groups
  based on Morningstar Categories. The mean is weighted based on an ETF's previous month TNA and the data covers the period from 01/03/2012 to 12/31/
  2018. SD, Min and Max refer to standard deviation, minimum and maximum. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask spreads are
  from daily Bloomberg data covering 2,235 ETFs for a total of 2,477,272 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is the average of
  all bid/ask spreads taken as a percentage of the mid-price.

    The summary statistics presented thus far in this section suggest
that the arbitrage mechanism generally functions effectively during
normal market conditions. However, the Commission has observed periods
of market stress during which the arbitrage mechanism has functioned
less effectively and during which there were significant deviations for
some ETFs between market price and NAV per share and when bid-ask
spreads widened considerably. These conditions only persisted for very
short periods of time for the periods of market stress we have
observed, suggesting that the arbitrage mechanism recovered
quickly.\561\
---------------------------------------------------------------------------

    \561\ See, e.g., Ananth Madhavan, Exchange-Traded Funds, Market
Structure, and the Flash Crash, Financial Analysts Journal, July/
Aug. 2012, at 20.
---------------------------------------------------------------------------

C. Benefits and Costs of Rule 6c-11 and Form Amendments

    The Commission is sensitive to the economic effects that can result
from rule 6c-11 and amendments to Forms N-1A and N-8B-2, including
benefits and costs. Where possible, the Commission quantifies the
likely economic effects; however, the Commission is unable to quantify
certain economic effects because it lacks the information necessary to
provide estimates or ranges. In some cases, quantification is
particularly challenging due to the difficulty of predicting how market
participants will act under the conditions of the rule. Nevertheless,
as described more fully below, the Commission is providing both a
qualitative assessment and quantified estimate of the economic effects,
including the initial and ongoing costs of the additional disclosure
requirements, where feasible.
1. Rule 6c-11
    Rule 6c-11 will allow ETFs to operate in reliance on a rule rather
than individual exemptive orders if they meet the requirements and
conditions of the rule. In addition, we are rescinding all existing ETF
exemptive orders, with the exception of: (i) The section 12(d)(1)
relief included in those orders that permit certain fund of funds
arrangements; \562\ and (ii) orders relating to UIT ETFs, leveraged/
inverse ETFs, share class ETFs, and non-transparent ETFs. This section
first evaluates the general considerations associated with the
rulemaking and then discusses the

effects of the specific requirements and conditions of the rule.
---------------------------------------------------------------------------

    \562\ We will, however, rescind relief from sections 12(d)(1)
and 17(a)(1) and (2) that have been provided to allow master-feeder
arrangements for those ETFs that do not currently rely on the
relief. See supra section II.F. In addition, we will grandfather
existing master-feeder arrangements involving ETF feeder funds, but
prevent the formation of new ones under existing orders, by amending
relevant exemptive orders. See id.
---------------------------------------------------------------------------

a. General Considerations
    Rule 6c-11 will grant exemptive relief from the provisions of the
Act that otherwise prohibit several features essential to the ETF
structure. This section evaluates the overall effect of reducing the
expense and delay of operating certain new ETFs by granting this
exemptive relief as part of a rule rather than through the individual
exemptive order process.
    As the requirements and conditions of the rule are either similar
to those contained in existing exemptive orders, consistent with market
practice, or generally provide more flexibility, we anticipate that the
rule and the related rescission of ETF exemptive relief will not
require any existing ETFs whose exemptive relief will be rescinded to
significantly change the way they operate. Conversely, some ETFs whose
exemptive orders contain conditions that are more restrictive than
those contained in the rule may decide to change the way they operate
in order to make use of such increased flexibility.
    Relative to the baseline, rule 6c-11 will eliminate the costs
associated with applying to the Commission for an exemptive order to
form and operate as an ETF for funds relying on the rule. Specifically,
the process of forming new ETFs in reliance on the rule will be
quicker, more predictable, less complex, and therefore less costly than
obtaining an exemptive order as new ETFs that cannot rely on existing
orders are currently required to do. ETFs that cannot rely on the rule
will continue to be required to apply for an exemptive order to form
and operate, unless they have an existing exemptive order that includes
future fund relief.\563\
---------------------------------------------------------------------------

    \563\ See supra footnote 42 (noting that UIT ETFs' orders do not
include relief for future ETFs formed pursuant to the same order).
As discussed below, some ETFs will incur additional costs as a
result of the rule's requirement to adopt and implement written
policies and procedures that govern the construction of basket
assets and the process that will be used for the acceptance of
basket assets, the rule's additional website disclosure
requirements, and the amendments to Forms N-1A and N-8B-2. The
operation of such ETFs may therefore become more costly, on balance,
to the extent that these costs are not offset by the benefits from
the other parts of the rule, such as the increased basket
flexibility and, for certain new ETFs, the reduced costs of forming
the fund.
---------------------------------------------------------------------------

    As described above in section IV.B.2, we estimate that the cost for
a typical unleveraged ETF of filing for exemptive relief is $100,000.
In addition, based on our review of exemptive orders that granted
relief for unleveraged ETFs between January 2007 and early April 2019,
the median processing time from the filing of an initial application to
the issuance of an order was 213 days, although there was considerable
variation. Thus, any new ETF planning to operate within the parameters
set forth by the rule will save this expected cost and avoid this
delay. In addition, such ETFs would avoid the uncertainty about the
length of the delay associated with the exemptive order process,
allowing each sponsor to better control the timetable for launching a
new ETF product in a way that maximizes benefits to its business.
Conversely, funds that are not able to comply with the conditions of
the rule will continue to need to apply for an exemptive order.
Assuming that the number of new ETFs seeking to form and operate under
the rule that would otherwise need to apply for exemptive relief is
equal to the annual average number of ETFs that have applied for
exemptive relief since 2007, these cost and time savings would accrue
to approximately 29 ETFs per year.\564\ Using this assumption, the
annual costs savings to this group of ETF sponsors are approximately
$2.9 million.\565\ We are unable to quantify the benefit a new ETF will
derive from avoiding the delay and the uncertainty about the length of
the delay associated with the exemptive order process as the cost of a
delayed registration for a new ETF is inherently difficult to
measure.\566\
---------------------------------------------------------------------------

    \564\ Compared to the baseline, these cost and time savings will
only accrue to new ETFs whose sponsors have not received exemptive
relief that would allow such ETFs to operate.
    \565\ This estimate is based on the following calculation: 29 x
$100,000 = $2,900,000.
    \566\ Costs arising from the delay and the uncertainty
associated with the exemptive order process include primarily
forgone profits and costs associated with missed business
opportunities. We do not have access to data on ETFs' profits, and
commenters did not provide such data. Additionally, forgone profits
associated with missed business opportunities, such as forgoing a
``first-mover advantage,'' can be highly variable and dependent on
specific circumstances.
---------------------------------------------------------------------------

    By eliminating the need for ETFs that can rely on the rule to seek
an exemptive order from the Commission, the rule will also eliminate
certain indirect costs associated with the exemptive application
process. Specifically, ETFs that apply for an order forgo potential
market opportunities until they receive the order, while others forgo
the market opportunity entirely rather than seek an exemptive order
because they have concluded that the cost of seeking an exemptive order
would exceed the anticipated benefit of the market opportunity.
    In addition, we believe that the rule will make it easier for some
fund complexes to ensure that each ETF in the complex is in compliance
with regulations. Specifically, we anticipate that it will be easier,
and thus less costly, for ETF complexes that today operate funds under
multiple exemptive orders to ensure compliance with a single set of
requirements and conditions contained in the rule rather than with
multiple exemptive orders to the extent that the orders vary in the
requirements and conditions they contain.
    We acknowledge that fund complexes may initially incur costs
associated with assessing the requirements of the rule. However, we
believe that these costs will be relatively small.\567\ In addition, we
anticipate that it will be more efficient for third-party providers,
such as lawyers and compliance consultants, to offer services that help
ETFs ensure compliance with the rule, which will have broad
applicability, than is currently the case with ETFs relying on
exemptive orders with varying conditions. As a result, third party
service providers may be able to reduce the price of their services,
compared to the baseline, for ETFs that can rely on the rule, which may
partially or fully offset the initial costs of studying the
requirements of the rulemaking that ETFs may incur.
---------------------------------------------------------------------------

    \567\ We estimate that assessing the requirements of the final
rule will require 5 hours of a compliance manager ($309 per hour)
and 5 hours of a compliance attorney ($365 per hour), resulting in a
cost of $3,370 (5 x $309 + 5 x $365) per fund. The total cost for
all 1,735 ETFs that can rely on the rule will thus be $5,846,950
(1,735 x $3,370). The Commission's estimates of the relevant wage
rates are based on salary information for the securities industry
compiled by the Securities Industry and Financial Markets
Association's Office Salaries in the Securities Industry 2013. The
estimated wage figures are modified by Commission staff to account
for an 1800-hour work-year and multiplied by 2.93 to account for
bonuses, firm size, employee benefits, overhead, and adjusted to
account for the effects of inflation. See Securities Industry and
Financial Markets Association, Report on Management & Professional
Earnings in the Securities Industry 2013 (``SIFMA Report'').
---------------------------------------------------------------------------

    We expect that the rule also will benefit ETF investors to the
extent that it will remove a possible disincentive for sponsors to form
and operate new ETFs that provide investors with additional investment
choices if they currently do not have relief. As noted above, the
direct and indirect costs of the exemptive application process may
discourage potential sponsors, particularly sponsors interested in
offering smaller, more narrowly focused ETFs that may serve the
particular investment needs of certain investors.
    As we discuss below in section IV.D.2, we believe that the rule
could increase competition in the ETF market as a whole, which could
also lead to lower fees. Any effect of increased

competition on fees will likely be larger for segments of the ETF
market that currently may be less competitive (e.g., actively managed
ETFs) and smaller for segments of the market that currently may be more
competitive (e.g., index-based ETFs tracking major stock indices).
    By eliminating the need for individual exemptive relief, we
anticipate that the rule will, over time, increase the number of ETFs
and thus reinforce the current growth trend in the ETF industry. In
addition, the rule will increase demand for such ETFs, to the extent
that such ETFs lower their fees to investors and investors are
sensitive to fees.\568\ To the extent that some ETFs will experience
larger reductions in trading costs (e.g., fixed-income, international,
and actively managed ETFs, as discussed below in section IV.C.1.b.i.)
or larger increases in competition (e.g., actively managed ETFs, as
discussed above in this section), demand for these types of ETFs will
likely increase more than for other types of ETFs. The increased demand
will likely be due in part to investors substituting away from
comparable types of funds, such as mutual funds, and possibly due to
investors increasing the rate at which they save.\569\ Consequently,
the rule could increase total assets of ETFs and could decrease total
assets of other funds. The size of these effects will depend on the
degree to which ETFs will lower their fees or experience reduced
trading costs, as well as on the sensitivity of investor demand for
ETFs and other funds to changes in ETF fees and trading costs. We are
unable to quantify these effects on investor demand, in part, because
we cannot estimate the extent to which funds will lower their fees or
experience reduced trading costs and how lower fees and trading costs
will change investor demand.
---------------------------------------------------------------------------

    \568\ There is research to support that fund investors are
sensitive to fees. For instance, one paper (Erik R. Sirri & Peter
Tufano, Costly Search and Mutual Fund Flows, 53 Journal of Finance
1589 (1998)) finds that ``lower-fee funds and funds that reduce
their fees grow faster.'' However, we acknowledge that there are
studies that suggest that investors' sensitivity to fees may be
limited. One experimental study (James J. Choi, David Laibson, &
Brigitte C. Madrian, Why Does the Law of One Price Fail? An
Experiment on Index Mutual Funds, 23 Review of Financial Studies
1405 (2010)) finds that investors may not always pick the lowest-fee
fund when presented with a menu of otherwise identical funds to
choose from. In addition, other studies (e.g., Michael J. Cooper,
Michael Halling, & Wenhao Yang, The Mutual Fund Fee Puzzle (Working
Paper, 2016)) find evidence of significant fee dispersion among
mutual funds, even after controlling for other observable
differences between funds. While these studies investigate the
sensitivity of investors to fees of mutual funds rather than ETFs,
we believe that these results are likely to hold for ETFs as well.
We are not aware of any studies that specifically study the
sensitivity of ETF investors to fees.
    \569\ Investments in ETFs are one of many ways for investors to
allocate savings. If investors choose to increase their investment
in ETFs, there can be two sources for this additional investment:
(1) An increase in overall savings; and (2) a decrease in savings
allocated to other investments, such as mutual funds. These two
sources are not mutually exclusive, so that an increase in ETF
investments can be accompanied by both an increase in overall
savings and a decrease in savings invested elsewhere.
---------------------------------------------------------------------------

    Since ETFs are traded in the secondary market, an increase in total
assets of ETFs will likely coincide with larger trade volumes for the
exchanges where ETFs are traded, as well as for the clearing agencies
and broker-dealers involved in these trades. To the extent that these
market participants are compensated by volume, the rule will thus
benefit them by leading to an increase in revenues.\570\
---------------------------------------------------------------------------

    \570\ To the extent that investors substitute away from products
that are comparable to ETFs, such as mutual funds, an increase in
revenue for entities facilitating ETF transactions may be offset by
a decrease in revenue for entities facilitating fewer transactions
in those other products.
---------------------------------------------------------------------------

    In addition, we expect the rule to reduce the number of
applications for ETF exemptive relief. This will allow Commission staff
more time to review applications for exemptive relief from registered
investment companies, including those for more complex or novel ETFs
that will continue to require exemptive relief. To the extent that this
speeds up the processing time for these remaining applications, the
rule may reduce the indirect costs of forming and operating for ETFs
that seek to operate outside its parameters and for other registered
investment companies that require exemptive relief to operate and, as a
result, may promote innovation among these types of funds.
b. Conditions for Reliance on Rule 6c-11
    Rule 6c-11 contains several conditions that are designed to
facilitate an effective arbitrage mechanism, reduce costs, and inform
and protect investors. Beyond the general impact of reducing the
expense and delay of new ETFs, many of the conditions in rule 6c-11 do
not offer additional benefits or costs when measured against the
baseline, as they are generally codifications of the current regulatory
practice. However, some conditions are departures from current
exemptive orders or current market practice and we discuss the effects
of these departures in more detail below.
i. Conditions That May Facilitate an Effective Arbitrage Mechanism
    Arbitrage is the practice of buying and selling equivalent or
similar assets (or portfolios of assets) in different markets to take
advantage of a price difference.\571\ As a consequence, arbitrageurs
generate price pressure that works to equalize the prices of these
assets across different markets. This is important for investors as it
helps ensure that asset prices reflect market fundamentals (i.e., are
efficient) irrespective of the market in which they are traded.
---------------------------------------------------------------------------

    \571\ See, e.g., Jonathan B. Berk & Peter DeMarzo, Corporate
Finance (3rd ed. 2013).
---------------------------------------------------------------------------

    There are several factors that are important for arbitrageurs to
consider in order to determine the existence of arbitrage opportunities
and execute an arbitrage strategy effectively. First, when the assets
involved in the arbitrage are similar but not the same, as is the case
for ETFs, arbitrage will be more effective the more closely the prices
of the two assets track each other and the more transparency
arbitrageurs have into any factors that may cause price differences
between the two assets. In addition, arbitrage requires that
arbitrageurs have the ability to enter into the trades necessary to
execute the arbitrage strategy, and arbitrage is more effective the
smaller and more predictable the associated trading costs are.\572\ The
rule contains conditions that take these considerations into account
and are designed to promote the effective functioning of the arbitrage
mechanism for ETFs.
---------------------------------------------------------------------------

    \572\ Authorized participants, other market participants, and
arbitrageurs acting in secondary markets may incur costs and be
exposed to risk when engaging in arbitrage. The costs include bid-
ask spreads and transaction fees associated with the arbitrage
trades. In addition, during the time it takes arbitrageurs to
execute these trades, they are exposed to the risk that the prices
of the basket assets and the ETF shares change. As a consequence,
arbitrageurs are likely to decide to wait for any deviation between
the market price of ETF shares and NAV per share to widen until the
expected profit from arbitrage is large enough to compensate for any
additional costs and risks associated with engaging in the
transaction.
---------------------------------------------------------------------------

    The rule will require ETFs relying on the rule to adopt and
implement written policies and procedures that govern the construction
of basket assets and the process that will be used for the acceptance
of basket assets, including policies and procedures specific to the
creation of custom baskets if the ETF uses custom baskets.
    Although current exemptive orders contain varying provisions for
basket flexibility, we do not believe that the rule will require
existing ETFs to change how they construct baskets. Instead, the

rule will give some ETFs more flexibility for constructing baskets than
what is allowed by their existing exemptive orders, provided they adopt
and implement custom basket policies and procedures.
    We believe that fixed-income, international, and actively managed
ETFs will particularly benefit from the increased basket flexibility
under the rule if they currently operate under exemptive orders that do
not allow custom baskets. For example, the increased basket flexibility
should allow fixed-income ETFs to avoid losing hard-to-find bonds when
meeting redemptions or to use sampling techniques to construct baskets
that are composed of fewer individual bonds, thus reducing trading
costs for authorized participants. Similarly, international ETFs will
be able to tailor their creation and redemption baskets to accommodate
difficulties in transacting in certain international securities. In
addition, actively managed ETFs will, in certain instances, be able to
use the increased basket flexibility to acquire or dispose of
securities by adjusting the composition of the creation or redemption
basket rather than by directly purchasing or selling the securities. In
these instances, actively managed funds will be able to reduce certain
transaction costs, such as those associated with bid-ask spreads.
    For these reasons, we believe that, to the extent that ETFs are
able to implement procedures that facilitate the arbitrage mechanism or
reduce costs for those ETFs, the rule will benefit ETFs that use the
increased basket flexibility the rule affords and will ultimately
benefit their investors. One commenter submitted results from an
empirical analysis that supported this assessment.\573\ For example,
the commenter observes that fixed-income ETFs that currently have
increased basket flexibility exhibit smaller bid-ask spreads and
reduced premiums and discounts to NAV, particularly during times of
market stress.\574\ Due to a lack of data, we are unable to quantify
the number of ETFs that would choose to implement custom basket
policies and procedures, and thus the potential benefits accruing to
ETFs and their investors.
---------------------------------------------------------------------------

    \573\ See ICI Comment Letter (providing the results of an
empirical analysis indicating that fixed-income ETFs with basket
flexibility had narrower bid-ask spreads, lower tracking
differentials, and traded at smaller discounts than fixed-income
ETFs without basket flexibility). The commenter conducted a survey
to identify fixed-income ETFs that currently have increased basket
flexibility. While the commenter provided the results of an
empirical analysis based on this data, the commenter did not provide
the Commission with the survey responses themselves.
    \574\ Conversely, another commenter stated that increased basket
flexibility may reduce arbitrage efficiency for fixed-income ETFs,
particularly during market stress. See Bluefin Comment Letter. This
commenter observes that such ETFs may choose to include less liquid
portfolio holdings in redemption baskets in greater than pro-rata
proportions, thereby increasing trading costs for arbitrageurs and
leading to larger premiums and discounts. While we acknowledge this
concern, ETFs generally are incentivized to choose custom baskets
that reduce premiums and discounts for the benefit of transacting
shareholders. In addition, as discussed above in section II.C.5.a,
we believe that requiring fixed-income ETFs to establish detailed
parameters for the construction and acceptance of custom baskets
that are in the best interests of the ETF and its shareholders
addresses the risks associated with custom baskets.
---------------------------------------------------------------------------

    To the extent that existing ETFs do not already have policies and
procedures governing basket assets in place or that existing policies
and procedures are not consistent with the requirements of the rule,
ETFs will incur costs associated with developing and implementing such
policies and procedures. However, such costs may be partially or
totally offset by the basket flexibility discussed above. We estimate
that an average ETF will incur an initial cost of $10,718 \575\
associated with establishing and implementing standard and custom
basket policies and procedures. In addition, we estimate that an
average ETF will incur an ongoing cost of $4,135 \576\ each year to
review and update its basket policies and procedures. We thus estimate
that the total industry cost associated with the policies and
procedures requirement in the rule for ETFs that can rely on the rule
in the first year will equal $25,769,955.\577\
---------------------------------------------------------------------------

    \575\ This estimate is based on the following calculations: 12
hours x $329 per hour (senior manager) + 7 hours x $530 (chief
compliance officer) + 2 hours x $365 (compliance attorney) + 5 hours
x $466 (assistant general counsel) = $10,718. See infra section
V.B.3, Table 13.
    \576\ This estimate is based on the following calculations: 5
hours x $329 per hour (senior manager) + 2.5 hours x $530 (chief
compliance officer) + 2.5 hours x $466 (assistant general counsel) =
$4,135. See infra section V.B.3, Table 13.
    \577\ This estimate is based on the following calculation:
($10,718 + $4,135) x 1,735 ETFs = $25,769,955. This estimate may be
an over-estimate in that it assumes that all ETFs, regardless of
their actual use of custom baskets, would implement policies and
procedures for custom basket assets. It also may overestimate costs
because some fund complexes may use the same basket policies and
procedures for all ETFs within the complex.
---------------------------------------------------------------------------

    Finally, although the rule's custom basket policies and procedures
requirements are designed to reduce the potential for cherry-picking,
dumping, and other potential abuses, we acknowledge that this
principles-based approach may not be effective at preventing all such
abuses. However, ETFs will be required to maintain records related to
the custom baskets used, which will allow the Commission to examine for
potential abuses.
    As proposed, the rule also will require an ETF to disclose
prominently on its website the portfolio holdings that will form the
basis for the next calculation of NAV per share. This information
allows authorized participants and other arbitrageurs to identify
arbitrage opportunities and execute arbitrage trades that reduce
premiums and discounts to NAV per share, ultimately benefiting all
investors. In addition, we agree with a commenter who stated that
portfolio transparency helps investors to better discern differences
between ETFs that track similar indexes or have similar investment
objectives.\578\
---------------------------------------------------------------------------

    \578\ See CSIM Comment Letter.
---------------------------------------------------------------------------

    The requirements for portfolio transparency in existing exemptive
orders have varied. However, based on a staff review of ETFs' websites,
we understand that all ETFs that can rely on the rule currently provide
daily full portfolio transparency. Thus, ETFs that can rely on the rule
already bear the ongoing costs associated with maintaining such
disclosures.\579\ We believe that the ETFs that can rely on the rule
will incur a one-time cost associated with reviewing whether their
current portfolio disclosure is compliant with the requirements of
proposed rule 6c-11 and, if necessary, make changes to the information
that is presented on their website.\580\ We estimate this one-time cost
to be $1,997 for the average ETF, resulting in an aggregate one-time
cost of $3,463,928 for all ETFs that can rely on the rule.\581\
---------------------------------------------------------------------------

    \579\ In the 2018 ETF Proposing Release, we estimated that an
ETF that does not currently maintain daily portfolio holdings on its
website would spend approximately 5 hours of professional time to
update the relevant web page daily at a cost of $1,405.50 each year.
Because we believe all ETFs that can rely on the rule already
provide this information on their websites, we believe that very
few, if any, ETFs would have to bear these additional costs.
    \580\ The rule will require ETFs to provide certain information
for each portfolio holding. These item requirements are a more
limited set of the information currently required by the listing
exchanges' generic listing standards for actively managed ETFs.
    \581\ This estimate is based on the following calculations: 1.5
hours x $284 (senior systems analyst) + 1.5 hours x $331 (senior
programmer) + 1 hour x $309 (compliance manager) + 1 hour x $365
(compliance attorney) + $400 for external website development =
$1,997. The industry cost is 1,735 x $1,997 = 3,463,928. This
estimate is conservative as it does not assume a cost reduction for
actively managed ETFs that already comply with the listing standards
on which the item requirements for the portfolio holding disclosure
under the rule are based.
---------------------------------------------------------------------------

    Some commenters raised concerns that providing daily portfolio
information on an ETF's website could expose the fund and its investors
to

costs associated with ``front-running'' and, in the case of actively
managed ETFs, ``piggybacking.'' \582\ However, based on our
understanding that all ETFs that can rely on the rule currently provide
daily full portfolio transparency, the rule will not change the degree
to which ETFs and their investors are exposed to such costs compared to
the baseline.
---------------------------------------------------------------------------

    \582\ See supra section II.C.4.
---------------------------------------------------------------------------

    As proposed, rule 6c-11 would have required that an ETF's portfolio
holdings disclosure be made on each business day: (1) Before the
opening of regular trading on the primary listing exchange of the ETF's
shares; and (2) before the ETF starts accepting orders for the purchase
or redemption of creation units. The rule will omit the second
requirement in order to accommodate the current industry practice of T-
1 creation and redemption orders.\583\ We agree with commenters that T-
1 orders facilitate ETF arbitrage for certain ETFs holding foreign
securities by allowing arbitrageurs to align the execution time of
underlying securities with the NAV calculation of the order.\584\
Compared to the proposal, we therefore believe that this aspect of the
rule will lead to narrower bid-ask spreads and smaller premiums and
discounts, benefiting investors in these ETFs.
---------------------------------------------------------------------------

    \583\ See supra section II.C.4.a. This timing requirement is
consistent with the transparency requirements of our existing
exemptive orders.
    \584\ See id.
---------------------------------------------------------------------------

    Compared to the proposal, the rule will require ETFs to present
enumerated information regarding each portfolio holding (which are a
more limited set of the disclosures currently required by the listing
exchanges' generic listing standards for actively managed ETFs), rather
than the description, amount, value, and unrealized gain/loss of each
position in the manner prescribed by Article 12 of Regulation S-X. As
discussed above in section II.C.4.b, we believe that this information
will focus the disclosure on the pieces of information that are most
relevant to investors while reducing the burden for ETFs of complying
with the disclosure requirement. As a result, we believe that the
disclosure format under the rule will provide similar benefits to
investors at lower costs to ETFs.\585\
---------------------------------------------------------------------------

    \585\ The cost estimates in this section of the economic
analysis reflect the cost reduction, compared to the proposal,
associated with the change in the format of the disclosure. See also
infra footnote 684 and accompanying text.
---------------------------------------------------------------------------

ii. Other Cost Savings From the Rule
    Under the terms of the exemptive orders, ETFs are required to
disclose in their registration statement that redemptions may be
postponed for foreign holidays. Rule 6c-11 does not contain such a
requirement and will thus eliminate the cost of preparing and updating
this disclosure for existing ETFs. This information is already covered
by the agreement between the ETF and the authorized participant.\586\
---------------------------------------------------------------------------

    \586\ We believe that authorized participants would share this
information with other market participants as necessary. For
example, an authorized participant acting as agent typically would
share this information with its customer if it is a necessary part
of the creation or redemption process.
---------------------------------------------------------------------------

    The terms of the exemptive orders also require an ETF to identify
itself in any sales literature as an ETF that does not sell or redeem
individual shares and explain that investors may purchase or sell
individual ETF shares through a broker via a national securities
exchange. The rule will not include such a requirement, as we no longer
believe that it is necessary given that markets have become familiar
with ETFs in the multiple decades they have been available. The
omission of such a requirement will lead to cost savings for existing
and future ETFs associated with preparing and reviewing this disclosure
for sales literature.\587\
---------------------------------------------------------------------------

    \587\ We estimate that the omission of this requirement will
save 0.25 hours of a compliance attorney ($365 per hour), resulting
in a cost savings of $91 (0.25 x $365) per fund each year. The total
cost savings for all 1,735 ETFs that can rely on the rule will thus
be $158,319 (1,735 x $91).
---------------------------------------------------------------------------

iii. Intraday Indicative Value
    The rule will not require an ETF to disseminate its IIV, as is
currently required under all exemptive orders and current exchange
listing standards. To the extent that current exchange listing
standards require IIV to be disseminated, the rule's omission of such a
requirement will not represent a change from the baseline and will not
result in any costs or benefits to market participants.
    We believe, and commenters agreed, that many sophisticated
institutional market participants do not rely on the IIV to value an
ETF's assets, as discussed above in section II.C.3. In addition, the
IIV may not reflect the intrinsic value of certain ETFs' assets (e.g.,
for funds that invest in foreign securities whose markets are closed
during the ETF's trading day or funds whose assets trade infrequently,
as is the case for certain bond funds).\588\ An investor who relies on
stale or inaccurate IIV information to purchase or sell ETF shares
could be exposed to price risk until the position is closed and could
incur the trading costs associated with these trades. Furthermore, as
discussed above in section II.C.3, based on a staff review of the
websites of the ten largest ETFs by assets under management and of
several publicly available free websites, we do not believe that
investors have easy access to IIV through free, publicly available
websites.
---------------------------------------------------------------------------

    \588\ Commenters agreed that traditional IIV can have
significant limitations, for example for ETFs holding fixed-income
securities. See, e.g., ICI Comment Letter. See also supra footnote
203.
---------------------------------------------------------------------------

    Some commenters stated that retail investors relying on IIV could
see their ability to evaluate ETFs reduced without this metric.\589\ As
we stated in the proposing release, we agree that the IIV may provide a
reasonably accurate estimate of the value of certain ETFs' portfolios,
including those ETFs whose underlying assets are very liquid and
frequently traded during the ETF's trading day. However, as discussed
above in section II.C.3, we have concerns regarding the accuracy of IIV
estimates and the lack of uniform methodology requirements. Moreover,
retail investors do not have easy access to IIV through free, publicly
available websites today even for those assets classes where IIV may be
more reliable. Therefore, we do not believe that IIV provides
information that retail investors can reliably use when making
investment decisions and thus do not believe that it is a necessary
condition for ETFs that are operating in reliance on rule 6c-11.
---------------------------------------------------------------------------

    \589\ See, e.g., Angel Comment Letter; Nasdaq Comment Letter;
IDS Comment Letter.
---------------------------------------------------------------------------

iv. Website Disclosure Provisions
    Rule 6c-11 will require an ETF to disclose certain information
prominently on its website.\590\ The goal of these disclosure
requirements is to provide investors with key metrics to evaluate their
trading and investment decisions in a location that is easily
accessible and frequently updated.\591\

Based on a staff review of ETFs' websites, we believe that all ETFs
that can rely on the rule currently have a website and currently
provide daily website disclosures of NAV, closing price, and premiums
or discounts.\592\ As a consequence, existing ETFs generally will not
incur any additional cost associated with the creation and technical
maintenance of a website or these specific website disclosure
requirements.
---------------------------------------------------------------------------

    \590\ See supra footnote 226.
    \591\ According to the most recent U.S. census data,
approximately 77.2% of U.S. households had some form of internet
access in their home in 2015 and 86.8% have a computer (e.g.,
desktop, laptop, tablet or smartphone). See Camille Ryan & Jamie M.
Lewis, Computer and Internet Usage in the United States: 2015, U.S.
Census Bureau ACS-37 (Sept. 2017), available at https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf; see also Sarah Holden, Daniel Schrass, & Michael Bogdan,
Ownership of Mutual Funds, Shareholder Sentiment, and Use of the
Internet, 2017, ICI Research Perspective (Oct. 2017), available at
https://www.ici.org/pdf/per23-07.pdf (stating that ``[i]n mid-2017,
95 percent of households owning mutual funds had internet access, up
from about two-thirds in 2000'' and ``86 percent of mutual fund-
owning households with a household head aged 65 or older had
internet access in mid-2017''); Andrew Perrin & Maeve Duggan,
Americans' Internet Access: 2000-2015, Pew Research Center (June
2015), available at http://assets.pewresearch.org/wp-content/uploads/sites/14/2015/06/2015-06-26_internet-usage-across-demographics-discover_FINAL.pdf (finding in 2015, 84% of all U.S.
adults use the internet). We acknowledge that the benefits of the
website disclosure requirement would be attenuated for those
investors who lack internet access or otherwise are not able to
access ETFs' websites.
    \592\ See supra section IV.B.4.
---------------------------------------------------------------------------

    Our exemptive orders have not included requirements for line graph
and tabular historical information regarding premiums and discounts.
While Form N-1A contains tabular website disclosures related to
historical premiums/discounts in Items 11(g)(2) and 27(b)(7)(iv), which
we are eliminating for ETFs that will rely on rule 6c-11, we anticipate
that all existing ETFs that fall within the scope of the rule will
still incur some additional costs associated with these
disclosures.\593\ We believe that substantially all ETFs already have
the required data available to them as part of their regular operations
(as it is required by Form N-1A and allows ETFs to monitor the trading
behavior of their shares), and have systems (such as computer
equipment, an internet connection, and a website) in place that can be
used for processing this data and uploading it to their websites.
However, these ETFs will incur the costs associated with establishing
and following (potentially automated) processes for processing and
uploading this data to their websites. We estimate that an average ETF
will incur a one-time cost of $1,997 \594\ for implementing this
website disclosure and an ongoing cost of $491\595\ per year for
updating the relevant web page with this information. We thus estimate
the total cost, in the first year, to ETFs that can rely on the rule
for providing this website disclosure, of $4,315,379.\596\
---------------------------------------------------------------------------

    \593\ See supra section II.H.2.b.
    \594\ This estimate is based on the following calculations: 1.5
hours x $284 (senior systems analyst) + 1.5 hours x $331 (senior
programmer) + 1 hour x $309 (compliance manager) + 1 hour x $365
(compliance attorney) + $400 for external website development =
$1,997.
    \595\ This estimate is based on the following calculations: 0.25
hours x $284 (senior systems analyst) + 0.25 hours x $331 (senior
programmer) + 0.5 hour x $309 (compliance manager) + 0.5 hour x $365
(compliance attorney) = $491.
    \596\ This estimate is based on the following calculation:
($1,997 + $491) x 1,735 ETFs = $4,315,379.
---------------------------------------------------------------------------

    Our exemptive orders have not included a requirement for ETFs to
provide disclosure if an ETF's premium or discount is greater than 2%
for more than seven consecutive trading days and the factors that
materially contributed to a premium or discount, if known. As a result,
under the rule those ETFs that experience such a premium or discount
will incur additional costs associated with determining what factors
contributed to the premiums or discounts and drafting and uploading a
discussion to their website.
    Based on a staff analysis of historical data on ETF premiums and
discounts from 2008 to 2018 using Bloomberg data, we believe that, on
average, 4.5% of ETFs that can rely on the rule will trigger this
disclosure requirement each year.\597\ As suggested by commenters, this
disclosure requirement is likely to affect certain categories of ETFs
more than others.\598\ For example, in 2018, we estimate that the
reporting requirement would not have been triggered for any allocation
ETFs, commodity ETFs, or municipal bond ETFs, while it would have been
triggered for 0.3% of taxable bond ETFs, 0.6% of sector equity ETFs,
3.1% of U.S. equity ETFs, 4.2% of international equity ETFs, and 4.8%
of alternative ETFs. We estimate that an ETF required to make such a
disclosure in a given year will incur an average cost of $1,504,
yielding a total annual industry cost of $117,405.\599\
---------------------------------------------------------------------------

    \597\ This estimate represents the average of the percentage of
ETFs for which the reporting requirement was triggered at least once
in a given year, for those ETFs that could rely on the rule. During
the sample period from 2008 to 2018, the percentage of ETFs for
which the reporting requirement was triggered at least once varied
from 1.5% (2010) to 10% (2008).
    \598\ See supra footnote 359 and accompanying text.
    \599\ We believe that such disclosure will require 1.25 hours
for a compliance attorney and the compliance manager to determine if
this requirement has been triggered and produce a draft of the
required disclosures + 0.75 hours for a senior programmer and a
senior systems analyst to include the information on the website, at
a time cost of (1.25 hours x $365 compliance attorney hourly rate) +
(1.25 hours x $309 compliance manager hourly rate) + (0.75 hours x
$331 senior programmer hourly rate) + (0.75 hours x $284 senior
systems analyst hourly rate) in addition to $200 for external
website development = $1,504. The annual cost of this requirement
for those ETFs that can rely on the rule is calculated as 4.5% x
1,735 ETFs x $1,504 = $117,405. This estimate includes costs for
website development, which would only be incurred by an ETF making
this disclosure for the first time.
---------------------------------------------------------------------------

    The rule also will require additional disclosure by the ETF of the
median bid-ask spread for the most recent 30-day period on its website.
This requirement is modified from the proposal, which would have
required an ETF to disclose the median bid-ask spread for the ETF's
most recent fiscal year on its website and in its prospectus.
    We believe that the rule's disclosure requirement will further
inform investors about the expected cost of trading an ETF and
facilitate comparison of transaction costs across ETFs. As such, the
disclosure of median bid-ask spreads could reduce investors'
uncertainty about the trading environment. We agree with commenters
that actual bid-ask spreads paid by ETF investors can be influenced by
a variety of factors, including order size, market conditions, as well
as the broker-dealer used.\600\ Nevertheless, we believe that requiring
the disclosure of bid-ask spread information is still valuable to
investors as it is indicative of the general magnitude of an ETF's
trading costs attributable to bid-ask spreads. In addition, we believe
bid-ask spreads can help investors rank ETFs in terms of expected
execution costs, as an ETF with historically larger bid-ask spreads can
be expected to be more costly to trade than an ETF with historically
lower bid-ask spreads, when holding other factors that impact execution
costs, such as order size, market conditions, and the broker-dealer,
constant.
---------------------------------------------------------------------------

    \600\ See, e.g., Vanguard Comment Letter (also pointing out
that, in certain circumstances, broker-dealers can obtain price
improvements leading to market orders being executed either within
the NBBO or at midpoint or better).
---------------------------------------------------------------------------

    Existing exemptive orders do not require ETFs to disclose median
bid-ask spreads. As a result, we assume that all ETFs operating under
the final rule will have to implement processes and systems to compute
the median bid-ask spreads and will have to accommodate a new data
point on their web page to report this information.\601\ We estimate
that an ETF will incur a one-time estimated cost of $8,294 to comply
with this requirement.\602\ In addition, we estimate that an ETF that
purchases

NBBO information to compute bid-ask spread will incur an additional
ongoing annual cost of $4,042.\603\ Assuming that all ETFs will have to
purchase data to satisfy this requirement, we estimate an upper bound
for the total industry cost in the first year of $21,401,659.\604\
---------------------------------------------------------------------------

    \601\ Based on a review of 150 randomly selected ETFs, which
included 100 index-based ETFs and 50 actively managed ETFs, 10
percent of index-based ETFs and 1.5 percent of actively managed ETFs
provided some information on bid-ask spreads. However, all ETFs that
provided such information displayed bid-ask spreads only for a
particular point in time (for example as of the time the prior day's
NAV was struck) rather than median bid-ask spreads computed for the
most recent 30-day period, as required by the rule.
    \602\ This estimate is based on the following calculations: 6.5
hours x $284 (senior systems analyst) + 6.5 hours x $331 (senior
programmer) + 4 hour x $309 (compliance manager) + 4 hour x $365
(compliance attorney) + $1,600 for external website development =
$8,294.
    \603\ In the 2018 ETF Proposing Release, we stated that we
believed ETFs currently maintain a record of historical price data
as a matter of current business practices which could be used to
satisfy the requirement to compute bid-ask spreads at a nominal
cost. See 2018 ETF Proposing Release, supra footnote 7, at section
III.C.1. Some commenters, however, suggested that some ETFs would
incur costs to purchase data collected by third parties, although
these commenters did not provide specific estimates of such costs.
See, e.g., BNY Mellon Comment Letter; John Hancock Comment Letter.
Assuming a data cost of $2,500 per year, we estimate that an ETF
that would need to purchase the data will incur the following
ongoing cost: 1 hours x $284 (senior systems analyst) + 1 hours x
$331 (senior programmer) + 1.375 hours x $309 (compliance manager) +
1.375 hours x $365 (compliance attorney) + $2,500 (data) = $4,042.
    \604\ This estimate is based on the following calculation:
($8,294 + $4,042) x 1,735 ETFs = $21,401,659.
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    The requirement of disclosures on ETFs' websites we are adopting
will enable investors to more readily obtain certain key information
for individual ETFs, potentially resulting in better informed trading
decisions.\605\ The conditions standardize certain content requirements
to facilitate investor analysis of information while allowing ETFs to
select a layout for displaying the required information that the
individual ETF finds most efficient and appropriate for its website.
Because the information will be made available on individual websites,
in the layout chosen by the ETF, we acknowledge that an investor's
ability to efficiently extract information from website disclosures for
purposes of aggregation, comparison, and analysis across multiple ETFs
and time periods may be limited. Investors seeking to compare multiple
ETFs will have to visit the website of every ETF, navigate to the
relevant section of the website, and extract the information provided
in the layout chosen by the fund. Depending on the manner in which a
typical fund investor will use the website disclosures, these
considerations may decrease the information benefits of the new
disclosures. However, we recognize that investors may rely on third-
party providers that aggregate such information for all ETFs into a
structured format that investors can more easily access and process for
the purpose of statistical and comparative analyses. While investors
may incur costs of obtaining information from third-party service
providers, it will likely be lower than the cost they would incur if
they performed the collection themselves, and the cost of such services
may otherwise be reduced as a result of competition among service
providers. Overall, we believe that requiring ETFs to provide this
information on their websites will ultimately provide an efficient
means for facilitating investor access to information.
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    \605\ See supra footnote 226.
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c. Recordkeeping
    The rule will require ETFs to preserve and maintain copies of all
written authorized participant agreements for at least five years, the
first two years in an easily accessible place. This requirement will
provide Commission examination staff with a basis to evaluate whether
the authorized participant agreement is in compliance with the rule and
other provisions of the Investment Company Act and the rules
thereunder, and also will promote internal supervision and
compliance.\606\ As the agreement forms the contractual foundation on
which authorized participants engage in arbitrage activity, compliance
of the agreement with applicable rules is important for the arbitrage
mechanism to function properly.
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    \606\ ETFs already are required to provide some information
about authorized participants on Form N-CEN, including the name of
each authorized participant, additional identifying information, and
the dollar values of the fund shares the authorized participant
purchased and redeemed during the reporting period. However, this
information alone would not be sufficient for Commission staff to
evaluate whether a fund's authorized participant agreements are in
compliance with the rule.
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    We also are requiring ETFs to maintain information regarding the
baskets exchanged with authorized participants on each business day,
including a record identifying any custom basket and stating that the
custom basket complies with the ETF's custom basket policies and
procedures. We believe that these records will help our examination
staff understand how baskets are being used by ETFs, evaluate
compliance with the rule and other provisions of the Act and rules
thereunder and other applicable law, and examine for potential
overreach by ETFs in connection with the use of custom baskets or
transactions with affiliates.
    Existing exemptive orders have not required ETFs to preserve and
maintain copies of authorized participant agreements or information
about basket composition, or to prepare and maintain a record
identifying each custom basket and stating that custom baskets comply
with the custom basket policies and procedures. However, we believe
that most ETFs, as a matter of established business practice, already
preserve and maintain copies of authorized participant agreements as
well as data on baskets used.\607\
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    \607\ One commenter stated that ETFs generally already implement
robust recordkeeping programs. See Invesco Comment Letter.
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    As discussed below in section V.B.2, we estimate the average annual
cost for an ETF to comply with these recordkeeping requirements is $393
per year.\608\ Assuming that (1) 80% of ETFs already preserve and
maintain copies of authorized participant agreements as well as
information on basket composition; (2) no ETF currently maintains
records identifying any custom basket and stating that the custom
basket complies with the ETF's custom basket policies and procedures;
and (3) 25% of the total annual recordkeeping costs can be attributed
to the new recordkeeping requirements for custom baskets, the total
industry cost for ETFs that can rely on the rule will be $544,790 per
year.\609\
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    \608\ See infra section V.B.3, Table 12. An average ETF would
have to maintain and store 24 authorized participant agreements. See
also supra footnotes 548-550 and accompanying text.
    \609\ This estimate is based on the following calculation: 1,735
ETFs x (20% + 80% * 75%) x $393 = $544,790. The final rule will
require ETFs to maintain additional information on basket
composition (ticker symbol, CUSIP or other identifier, description
of holding, quantity of each holding, and percentage weight of each
holding composing the basket). We believe that this additional
requirement does not present a significant additional recordkeeping
cost.
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d. Master-Feeder Relief
    We will rescind the master-feeder relief granted to ETFs, with the
exception of master-feeder relief that funds relied on as of the date
of the 2018 ETF Proposing Release (June 28, 2018). We are rescinding
such relief because there generally is a lack of industry interest in
ETF master-feeder arrangements, and certain master-feeder arrangements
raise policy concerns, as discussed above in section II.F. While there
are currently many exemptive orders that contain the master-feeder
relief, it is our understanding that only one fund complex currently
relies on this relief to structure master-feeder arrangements with one
master and one feeder fund each.\610\ We will grandfather existing
master-feeder arrangements involving ETF feeder funds, but prevent the
formation of new ones under existing orders, by amending relevant
exemptive orders.\611\ As a result, we do

not expect that the rescission of the existing master-feeder relief
will impose costs on ETFs that currently rely on the relief to
structure master-feeder arrangements. However, to the extent that an
ETF without a grandfathered master-feeder arrangement would apply for
an exemptive order that grants master-feeder relief, such an ETF would
incur costs associated with the exemptive order application.\612\ At
the same time, the rescission of the relief may benefit investors in
prospective feeder ETFs to the extent that it protects them from any
concerns associated with feeder ETFs discussed above.\613\
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    \610\ See 2018 ETF Proposing Release, supra footnote 7, at n.339
and accompanying text. See also supra footnote 449 and accompanying
text.
    \611\ Without this relief, the affected funds could continue
operating by effecting creation and redemption transactions between
authorized participants and the feeder fund (as well as the
transactions between the master and feeder fund) in cash rather than
in kind. As cash creations and redemptions can be less efficient
than in-kind transactions for certain ETFs, this could impose a cost
on the ETFs that are part of the fund family. Cash redemptions and
creations could also affect the current relationships that funds
have with authorized participants if the authorized participants
would be unwilling to perform the arbitrage function when receiving
cash instead of baskets of securities, which could have unintended
spillover effects on the secondary market trading of these funds'
shares. Alternatively, these feeder funds may opt to pursue their
investment objectives through direct investments in securities and/
or other financial instruments, rather than through investments in
master funds. Such a restructuring of the funds involved would also
lead to costs (primarily associated with legal and accounting work)
on the ETFs that are part of the fund family. As a result, if this
change would require portfolio transactions to occur at the fund,
there could be additional costs, such as lower overall total returns
to the fund or investors finding the fund to be a less attractive
investment.
    \612\ One commenter indicated that it has invested resources
exploring various approaches to an ETF master-feeder structure. See
Fidelity Comment Letter.
    \613\ See supra section II.F.
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2. Amendments to Forms N-1A, N-8B-2, and N-CEN
    The amendments to Forms N-1A and N-8B-2 are designed to provide
investors with tailored information regarding the costs associated with
investing in ETFs.\614\ As discussed in section II.H above, we believe
that the new disclosures will benefit investors by helping them better
understand and compare specific funds, potentially resulting in more
informed investment decisions, more efficient allocation of investor
capital, and greater competition for investor capital among funds.
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    \614\ As proposed, we also are amending Forms N-1A and N-8B-2 to
include narrative disclosures for both mutual funds and ETFs that
will clarify that the fees and expenses reflected in the expense
table may be higher for investors if they sell shares of the fund.
See supra section II.H.2.a.
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    We are amending Forms N-1A and N-8B-2 to include information on ETF
trading and associated costs that we anticipate will help investors
better understand costs specific to ETFs, such as bid-ask spreads.\615\
In a departure from the proposal, we are eliminating the Q&A format for
these disclosures, which will allow ETFs to determine the format for
conveying the required disclosures to investors. In addition, the
narrative disclosures will be streamlined and included in Item 6 of
Form N-1A, whereas the proposed disclosure in Q&A format would have
been included in Item 3. As discussed above in section II.H, we believe
that the updated format and location will improve the usefulness of the
disclosure to ETF investors.
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    \615\ Rule 6c-11 will require ETFs that rely on the rule to
provide the median bid-ask spread for the last thirty calendar days
and certain disclosures regarding premiums and discounts on their
websites. Our amendments to Forms N-1A and N-8B-2 will require ETFs
that do not rely on rule 6c-11 to disclose median bid-ask spread
information on their websites or in their prospectus and exclude
only those ETFs that provide premium/discount disclosures in
accordance with rule 6c-11 from the premium and discount disclosure
requirements in Form N-1A.
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    ETFs will incur costs associated with these new disclosures on
Forms N-1A and N-8B-2.\616\ ETFs structured as open-end funds are
currently required to disclose information about premiums and discounts
to NAV per share in reports on Form N-1A. However, UIT ETFs, which file
reports with the Commission on Form N-8B-2, are not required to make
such disclosures. We estimate that this reporting requirement will
increase the incremental cost for UIT ETFs compared to ETFs structured
as open-end funds. In addition, ETFs that rely on rule 6c-11 will be
exempt from the Form N-1A disclosure requirements related to bid-ask
spreads and premiums and discounts to NAV per share (as such
disclosures will be required under rule 6c-11 to be provided on their
websites), which reduces the incremental cost we estimate for open-end
funds that can rely on the rule compared to those that cannot. Taking
these considerations into account, we estimate that each ETF that is
structured as an open-end fund will incur a one-time cost of $3,799
\617\ and an ongoing cost of $1,899 \618\ per year if it can rely on
rule 6c-11, and a one-time cost of $6,960 \619\ and an ongoing cost of
$3,480 \620\ per year if it cannot rely on rule 6c-11. We estimate that
a UIT ETF will incur a one-time cost of $8,352 \621\ and an ongoing
cost of $3,480 \622\ per year. We thus estimate that the total industry
cost for this requirement for ETFs in the first year would equal
$12,434,736.\623\
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    \616\ As discussed in more detail below in section V.E, the
ongoing costs of complying with the proposed amendments to Form N-
8B-2 for all UIT ETFs, as well as the one-time initial costs for
existing UIT ETFs, would accrue to Form S-6.
    \617\ This estimate is based on the following calculations: 5.46
hours x $365 (compliance attorney) + 5.46 hours x $331 (senior
programmer) = $3,799.
    \618\ This estimate is based on the following calculations: 2.73
hours x $365 (compliance attorney) + 2.73 hours x $331 (senior
programmer) = $1,899.
    \619\ This estimate is based on the following calculations: 10
hours x $365 (compliance attorney) + 10 hours x $331 (senior
programmer) = $6,960.
    \620\ This estimate is based on the following calculations: 5
hours x $365 (compliance attorney) + 5 hours x $331 (senior
programmer) = $3,480.
    \621\ This estimate is based on the following calculations: 12
hours x $365 (compliance attorney) + 12 hours x $331 (senior
programmer) = $8,352.
    \622\ This estimate is based on the following calculations: 5
hours x $365 (compliance attorney) + 5 hours x $331 (senior
programmer) = $3,480.
    \623\ This estimate is based on the following calculation: 1,735
ETFs structured as an open-end fund that can rely on the rule x
($3,799 + $1,899) + 235 ETFs structured as an open-end fund that
cannot rely on the rule ($6,960 + $3,480) + 8 UIT ETFs ($8,352 +
$3,480) = $12,434,736.