[Federal Register Volume 79, Number 209 (Wednesday, October 29, 2014)]
[Notices]
[Pages 64436-64444]
[FR Doc No: 2014-25714]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73424; File No. SR-NYSEArca-2014-10]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change To Adopt NYSE Arca Equities Rule
8.900, Which Permits the Listing and Trading of Managed Portfolio
Shares, and To List and Trade Shares of the ActiveShares Large-Cap
Fund, ActiveShares Mid-Cap Fund, and ActiveShares Multi-Cap Fund
Pursuant to That Rule

October 24, 2014.
    On February 7, 2014, NYSE Arca, Inc. (``Exchange'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Exchange
Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
adopt new NYSE Arca Equities Rule 8.900, which would govern the listing
and trading of Managed Portfolio Shares, and to list and trade shares
of the ActiveShares Large-Cap Fund, ActiveShares Mid-Cap Fund, and
ActiveShares Multi-Cap Fund (each a ``Fund'' and, collectively,
``Funds'') under proposed NYSE Arca Equities Rule 8.900.\3\ The
proposed rule change was published for comment in the Federal Register
on February 26, 2014.\4\ The Commission received one comment letter on
the proposed rule change during the initial comment period.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Commission notes that Precidian ETFs Trust, which would
be the issuer of the Funds, filed an Application for an Order under
Section 6(c) of the 1940 Act for exemptions from various provisions
of the 1940 Act and rules thereunder (File No. 812-14116), dated
July 18, 2013 (``Exemptive Application''). The Commission published
notice of this application (``Notice of Application for Exemptive
Relief'') on October 21, 2014. See Investment Company Act Release
No. 31300 (Oct. 21, 2014) (Precidian ETFs Trust, et al.; Notice of
Application).
    \4\ See Securities Exchange Act Release No. 71588 (Feb. 20,
2014), 79 FR 10848 (``Notice''), available at http://www.sec.gov/rules/sro/nysearca/2014/34-71588.pdf.
    \5\ See Letter from Gary L. Gastineau, President, ETF
Consultants.com, Inc., to Elizabeth M. Murphy, Secretary, Commission
(Mar. 18, 2014) (``Gastineau Letter''). All comments on this
proposal (see also notes 8 and 11, infra) are available at http://www.sec.gov/comments/sr-nysearca-2014-10/nysearca201410.shtml.
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    On April 7, 2014, pursuant to Section 19(b)(2) of the Exchange
Act,\6\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to approve or disapprove
the proposed rule change.\7\ The Commission received two additional
comment letters on the proposed rule change, including a letter from
the Exchange in support of its proposal.\8\ On May 27, 2014, the
Commission instituted proceedings under Section 19(b)(2)(B) of the
Exchange Act \9\ to determine whether to approve or disapprove the
proposed rule change.\10\ The Commission

received a second letter from one of the commenters.\11\ On August 22,
2014, the Commission designated a longer period for Commission action
on the proposed rule change.\12\ The Commission subsequently received
an additional comment letter regarding the proposed rule change.\13\
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    \6\ 15 U.S.C. 78s(b)(2).
    \7\ See Securities Exchange Act Release No. 71895, 79 FR 20285
(Apr. 11, 2014). The Commission designated a longer period within
which to take action on the proposed rule change and designated May
27, 2014, as the date by which it should approve, disapprove, or
institute proceedings to determine whether to disapprove the
proposed rule change.
    \8\ See Letter from Dennis J. DeCore, Former Co-Head U.S. Index
Arbitrage (1997-2007), Nomura Securities, to Elizabeth M. Murphy,
Secretary, Commission (Apr. 8, 2014) (``DeCore Letter''); Letter
from Martha Redding, Chief Counsel and Assistant Corporate
Secretary, NYSE Euronext, to Secretary, Commission (May 14, 2014)
(``Response Letter'').
    \9\ 15 U.S.C. 78s(b)(2)(B).
    \10\ See Securities Exchange Act Release No. 72255, 79 FR 31362
(June 2, 2014). Specifically, the Commission instituted proceedings
to allow for additional analysis of the proposed rule change's
consistency with Section 6(b)(5) of the Exchange Act, which
requires, among other things, that the rules of a national
securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' See id., 79 FR at 31368 (text accompanying n.86).
    \11\ See Letter from Gary L. Gastineau, President, ETF
Consultants.com, Inc., to Elizabeth M. Murphy, Secretary, Commission
(June 23, 2014) (``Second Gastineau Letter'').
    \12\ See Securities Exchange Act Release No. 72901, 79 FR 51380
(Aug. 28, 2014) (designating October 24, 2014 as the date by which
the Commission must either approve or disapprove the proposed rule
change).
    \13\ See Letter from Reginald M. Browne, Senior Managing
Director--ETF Group, Cantor Fitzgerald & Co, to Mary Jo White,
Chair, Commission (Oct. 20, 2014) (``Browne Letter'').
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    This Order disapproves the proposed rule change.

I. Description of the Proposal

    The Exchange proposes: (1) To adopt new NYSE Arca Equities Rule
8.900 to permit the listing and trading, or trading pursuant to
unlisted trading privileges (``UTP''), of Managed Portfolio Shares,
which are securities issued by an actively managed open-end investment
management company; and (2) to list and trade shares (``Shares'') of
the Funds under proposed NYSE Arca Equities Rule 8.900.\14\ The
discussion below summarizes the Exchange's proposal, details of which
are described in the Notice.\15\
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    \14\ The Exchange also proposes to amend NYSE Arca Equities Rule
7.34(a)(4)(A) (Trading Sessions) to include Managed Portfolio Shares
in the trading halt provision for shares traded pursuant to UTP
during the Exchange's Opening Session.
    \15\ See Notice, supra note 4. Additional information regarding
the Precidian ETFs Trust and the Shares, including investment
strategies, risks, creation and redemption procedures, fees,
portfolio holdings disclosure policies, distributions, and taxes is
available in the registration statement filed by the Precidian ETFs
Trust on January 22, 2014, on Form N-1A under the Securities Act of
1933 and under the Investment Company Act of 1940 (``1940 Act'')
relating to the Funds (File Nos. 333-171987 and 811-22524)
(``Registration Statement'').
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A. Proposed Listing Rules

    The Exchange's proposal defines the term ``Managed Portfolio
Share'' as a security that (a) is issued by a registered investment
company (``Investment Company'') organized as an open-end management
investment company or similar entity that invests in a portfolio of
securities selected by the Investment Company's investment adviser
consistent with the Investment Company's investment objectives and
policies; (b) is issued in any number of shares for a cash amount equal
to the next determined net asset value (``NAV''); (c) may be redeemed
for cash by any Retail Investor (as defined below) in any size less
than a Redemption Unit (as defined below) for a cash amount equal to
the next determined NAV; and (d) when aggregated in a number of shares
equal to a Redemption Unit or multiples thereof, may be redeemed by or
through an Authorized Participant,\16\ with payment to be made, through
a blind trust established for the Authorized Participant's benefit, in
the form of securities, cash, or both with a value equal to the next
determined NAV.
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    \16\ Certain large market participants, typically broker-
dealers, can become ``Authorized Participants'' with respect to the
Funds. Each Authorized Participant would enter into a contractual
relationship with a Fund or Funds, allowing it to engage in
redemptions of Shares directly with the issuer.
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    While funds issuing Managed Portfolio Shares would be actively
managed and, to that extent, would be similar to Managed Fund Shares
(which are actively managed funds listed and traded under NYSE Arca
Equities Rule 8.600), Managed Portfolio Shares differ from Managed Fund
Shares in the following significant respects.
     In contrast to Managed Fund Shares, for which a
``Disclosed Portfolio'' is required to be disseminated at least once
daily,\17\ the portfolio for an issue of Managed Portfolio Shares would
be disclosed once quarterly in accordance with disclosure requirements
otherwise applicable to open-end investment companies registered under
the 1940 Act.\18\
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    \17\ NYSE Arca Equities Rule 8.600(c)(2) defines the term
``Disclosed Portfolio'' as the ``identities and quantities of the
securities and other assets held by the Investment Company that will
form the basis for the Investment Company's calculation of net asset
value at the end of the business day.'' NYSE Arca Equities Rule
8.600(d)(2)(B)(i) requires that the Disclosed Portfolio be
disseminated at least once daily and that it be made available to
all market participants at the same time.
    \18\ A mutual fund is required to file with the Commission its
complete portfolio schedules for the second and fourth fiscal
quarters on Form N-SAR under the 1940 Act, and to file its complete
portfolio schedules for the first and third fiscal quarters on Form
N-Q under the 1940 Act, within 60 days of the end of the quarter.
Form N-Q requires funds to file the same schedules of investments
that are required in annual and semi-annual reports to shareholders.
These forms are available to the public on the Commission's Web site
at http://www.sec.gov/.
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     In connection with the redemption of shares in Redemption
Unit \19\ size, the in-kind delivery of any portfolio securities would
generally be effected through a blind trust for the benefit of the
redeeming Authorized Participant, and the blind trust would liquidate
the portfolio securities pursuant to standing instructions from the
Authorized Participant without disclosing the identity of those
securities to the Authorized Participant.
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    \19\ A ``Redemption Unit'' is a specified number of Managed
Portfolio Shares used for determining whether a retail investor may
redeem for cash. According to the Notice, a Redemption Unit is
currently 50,000 Shares.
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     Investors, including ``Retail Investors,'' \20\ would be
able to purchase shares either (a) in the secondary markets (e.g., the
Exchange) at market prices or (b) for cash directly from a Fund in any
amount on any day a fund determines its NAV, as described in more
detail below.
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    \20\ Under the proposal, a ``Retail Investor'' is defined as (i)
a natural person; (ii) a trust established exclusively for the
benefit of a natural person or a group of related family members; or
(iii) a tax deferred retirement plan where investments are selected
by a natural person purchasing for its own account.
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     As with traditional open-end investment companies, Retail
Investors would be able to redeem shares for cash directly from a fund
on any day and in any size less than a Redemption Unit at the fund's
NAV.\21\
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    \21\ With respect to the three Funds that are the subject of the
proposal, the Exchange has represented that fees for creations and
redemptions by Retail Investors would not exceed two percent, in
accordance with the requirements of Rule 22c-2 under the 1940 Act.
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    For each series of Managed Portfolio Shares, an estimated value,
defined in the proposed rules as the ``Portfolio Indicative Value''
(``PIV''), that reflects an estimated intraday value of a fund's
portfolio, based on the last market price or last sale price, would be
disseminated. The PIV would be based upon all of a Fund's holdings as
of the close of the prior business day and would be widely disseminated
by one or more major market data vendors at least every 15 seconds
during the Exchange's Core Trading Session (normally, 9:30 a.m. to 4:00
p.m., Eastern Time).
    The Exchange's proposal provides that the Exchange would file
separate proposals under Section 19(b) of the Exchange Act before
listing and trading any additional series of Managed Portfolio Shares.

B. Description of the Funds

    The portfolio for each Fund would consist primarily of stocks in
the Russell 3000 Index (which consists of stocks included in the
Russell 1000 Index and the Russell 2000 Index) and shares issued by
other exchange-traded funds (``ETFs) that invest primarily in shares of
issuers in the Russell 3000 Index. The

ActiveShares Large Cap Fund would invest primarily in securities
included in the Russell 1000 Index and in ETFs that primarily invest in
stocks in the Russell 1000 Index. The ActiveShares Mid-Cap Fund would
invest primarily in securities that are included in the Russell 2000
Index and in ETFs that primarily invest in stocks in the Russell 2000
Index. And the ActiveShares Multi-Cap Fund would invest primarily in
securities included in the Russell 3000 Index and in ETFs that
primarily invest in stocks in the Russell 3000 Index. All exchange-
listed equity securities in which the Funds would invest would be
listed and traded on a U.S. national securities exchange.
    Each Fund would target an overall net equity market exposure of
between 70% and 130% of the Fund's assets. Each Fund would purchase
securities that its portfolio managers believed to be undervalued and
would sell short securities that the portfolio managers believed to be
overvalued. Under normal market conditions,\22\ each Fund's net long
equity market exposure would not exceed 130%, and its net short equity
market exposure would not exceed 30%, but the portfolio managers might
at times exceed these percentages.
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    \22\ The terms ``normally'' and ``under normal market
conditions'' would include, but not be limited to, the absence of
extreme volatility or trading halts in the equity markets or the
financial markets generally; operational issues causing
dissemination of inaccurate market information; or force majeure
events such as systems failure, natural or man-made disaster, act of
God, armed conflict, act of terrorism, riot or labor disruption, or
any similar intervening circumstance.
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    Other Investments. While each Fund, under normal market conditions,
would invest primarily in stocks included in the Russell 3000 Index and
ETFs, as described above, each Fund would be able to invest its
remaining assets in repurchase agreements and reverse repurchase
agreements, high-quality money market instruments, and the securities
of other investment companies to the extent allowed by law.

II. Summary of the Comments Received

    As noted above, the Commission received two letters from the same
commenter opposing the proposed rule change,\23\ two letters from
commenters supporting the proposal, and a letter from the Exchange
responding to the opposing commenter's objections. Comments on the
proposal raised two broad issues--(1) the effectiveness of arbitrage in
the absence of daily portfolio disclosure, and (2) the benefits and
drawbacks of the Funds' unique creation and redemption processes--as
well as a number of other issues that are narrower in scope.
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    \23\ This commenter notes that he has a retained economic
interest in a product that may be competitive with Managed Portfolio
Shares and states that his views on the Exchange's filing ``may be
considered subject to a conflict of interest.'' Gastineau Letter,
supra note 5, at 1, n.1. The Exchange asserts that the concerns of
the opposing commenter are driven by competitive motives and that
these concerns should not affect the Commission's decision to
approve or disapprove the proposed rule change. See Response Letter,
supra note 8, at 5. Instead, according to the Exchange, different
proposals to list and trade actively managed EFTs without daily
portfolio disclosure should be assessed on their individual merits
and risks. See id. The opposing commenter asserts that the
Commission should not ignore his comments just because they are
raised by a competitor. See Second Gastineau Letter, supra note 11,
at 7. The opposing commenter argues that the Commission should
consider legitimate issues raised by any credible source, and he
asserts that his comments are made in the public interest and, to
the best of his ability, are not influenced by any conflict. See id.
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A. The Effectiveness of Arbitrage in the Absence of Daily Portfolio
Disclosure

    The opposing commenter predicts that, compared to most existing
ETFs, the Shares would probably trade with significantly wider bid-ask
spreads, with more variable premiums and discounts, or with both,
because of what the opposing commenter characterizes as the
unreliability of the Funds' proposed method for ensuring secondary
market trading efficiency.\24\ The opposing commenter states that the
Funds' market makers would have only indirect, and likely imperfect,
information about Fund holdings.\25\ As a result, according to the
opposing commenter, effectively arbitraging the Funds would be
significantly more difficult than the arbitrage for most existing
foreign ETFs.\26\
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    \24\ See Gastineau Letter, supra note 5, at 6.
    \25\ See id. at 8.
    \26\ See id.
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    The opposing commenter argues that there is no support for the
Exchange's contention that existing ETFs holding portfolios of foreign
securities, such as index-based ETFs holding Asian stocks, have
demonstrated efficient pricing characteristics even though they do not
provide opportunities for riskless arbitrage transactions during much
of the trading day.\27\ The opposing commenter also cites a draft
academic working paper for the propositions that market trading
efficiency varies significantly by type and size of ETF; that funds
with high share trading volumes, liquid underlying holdings, and
efficient arbitrage mechanisms trade with relatively tight bid-ask
spreads and more stable premiums and discounts; and that funds lacking
these characteristics generally trade with wider spreads and more
variable premiums and discounts.\28\
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    \27\ See id.
    \28\ See id. (citing Antti Petajisto, Inefficiencies in the
Pricing of Exchange-Traded Funds (Working Paper Sept. 20, 2013
(``Petajisto Study'')).
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    Another commenter predicts that trading spreads in Managed
Portfolio Shares would not be as ``tight'' as trading spreads in the
SPY or QQQ (where futures, options, and equity portfolios can be used
as a pure hedge), but that a frequent update of the intraday indicative
value would allow market maker spreads to be reasonable.\29\ A third
commenter, who is a market maker in ETFs, states that, in his
professional opinion and after significant analysis, ``given a clearly
defined investment objective within a known universe of securities,
efficient markets can and will be made in ETFs utilizing Precidian's
Blind Trust Structure.'' \30\
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    \29\ See DeCore Letter, supra note 8, at 1.
    \30\ See Browne Letter, supra note 13, at 2.
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    The Exchange responds to the opposing commenter that, as set forth
in the Notice, market makers have indicated that the available
information regarding the Shares would be sufficient for arbitrage and
hedging purposes.\31\ Additionally, the Exchange states that, based on
discussions with market makers, it expects that market makers would
agree to act as lead market makers (``LMMs'') in the Shares and
believes that no market maker would accept an LMM assignment if it were
not entirely comfortable in its ability to hedge its positions.\32\ The
Exchange argues that the opposing commenter offers no direct support
for his doubts regarding efficient secondary market trading, and the
Exchange asserts that these LMMs are uniquely suited to prospectively
assess the effectiveness of arbitrage in the shares.\33\
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    \31\ See Response Letter, supra note 8, at 2.
    \32\ See id.
    \33\ See id.
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    Regarding the Exchange's assertion that market makers will be able
to make efficient and liquid markets priced near the PIV as long as an
accurate PIV is disseminated every 15 seconds and market makers have
knowledge of a fund's means of achieving its investment objective, the
opposing commenter states that, for a number of reasons, the
dissemination of a PIV by the Funds is likely to prove ineffective in
ensuring alignment of secondary market prices for the Shares with the
values of the underlying portfolios.\34\ The opposing commenter asserts
that, during periods of rapid market movement, the use of last-sale
prices to calculate a PIV, coupled with the

dissemination of the PIV only every 15 seconds, would mean that the PIV
would be a lagging indicator of actual portfolio values.\35\
Additionally, the opposing commenter asserts that the PIV may reflect
clearly erroneous values for securities that have not yet opened for
trading on a particular business day or that are subject to an intraday
interruption in trading.\36\ The opposing commenter also criticizes the
Exchange's representation that the adviser and calculation agent would
use ``commercially reasonable efforts'' to calculate the PIV, arguing
that this is a substantially lower standard of care than that applying
to NAV calculations for ETFs and mutual funds.\37\ The opposing
commenter further asserts that the proposal does not provide that any
entity would stand behind a Fund's PIV to ensure timeliness and
accuracy.\38\
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    \34\ See Gastineau Letter, supra note 5, at 2-3.
    \35\ See id. at 10.
    \36\ See id.
    \37\ See id. at 10-11.
    \38\ See id. at 11.
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    The opposing commenter predicts that frequent PIV errors would
cause ``erroneous share trades'' to be executed.\39\ The opposing
commenter states that the proposal does not address whether PIV errors
and related erroneous trades would be detected by the Exchange, whether
such trades would be cancelled, or whether the Exchange would apply a
materiality standard for cancellations.\40\ The opposing commenter
argues that, as a condition of approval, the Exchange should be
required to monitor the timeliness and accuracy of PIV dissemination
and to implement procedures to address trades when an erroneous PIV has
been disseminated.\41\
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    \39\ See id. at 13.
    \40\ See id.
    \41\ See id.
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    The Exchange agrees with the opposing commenter that an accurate
PIV would be essential for trading in the Shares, but asserts that the
opposing commenter offers no support for the assertion that the PIV
would be unreliable.\42\ The Exchange reiterates that market makers
have indicated that, after the first few days of trading, there would
be sufficient data to run a statistical analysis that would lead to
differences between the Share price of the ETF and the PIV being
tightened substantially.\43\ The Exchange states that it has no reason
to believe that the PIV, which would be calculated using methodology
substantially similar to that used in the calculation of all other ETF
intraday indicative values, would be inherently unreliable.\44\ The
Exchange asserts that market participants would accept the PIV as a
reliable, indicative real-time value because (a) the PIV would be
calculated and disseminated based on a Fund's actual portfolio
holdings; (b) the securities in which the Funds plan to invest are
generally highly liquid and actively traded and therefore generally
have accurate real-time pricing available; and (c) market participants
would have a daily opportunity to evaluate whether the PIV at or near
the close of trading was indeed predictive of the actual NAV.\45\
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    \42\ See Response Letter, supra note 8, at 2.
    \43\ See id.
    \44\ See id.
    \45\ See id.
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    The Exchange states that, because it has no reason to believe that
the PIVs would be inherently unreliable, it does not propose to
institute any additional monitoring programs.\46\ Instead, the Exchange
states that it would rely on its existing surveillance systems to
monitor trading in the Shares and that these procedures are adequate to
properly deter and detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange.\47\ The Exchange
also states that its existing rule applicable to trade cancellations
(NYSE Area Equities Rule 7.10) neither addresses trade cancellations in
the event erroneous PIVs are disseminated nor provides the Exchange
with the discretion to cancel trades.\48\
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    \46\ See id.
    \47\ See id. at 3.
    \48\ See id.
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    In his second comment letter,\49\ which addresses the Exchange's
Response Letter,\50\ the opposing commenter states that he does not
question the veracity of LMMs who have discussed with the Exchange
their ability to make efficient and liquid markets in the Shares, but
that he questions whether the important caveat--that accurate PIVs are
available--would reliably be met.\51\ He offers the following reasons
why dissemination of PIVs at 15-second intervals throughout the
Exchange's Core Trading Session would not provide a reliable and
sufficient basis for ensuring that market trading prices of Shares
maintain a close correspondence to each Share's underlying value: (a)
PIVs may not be calculated in the same manner as NAV; (b) PIVs would be
based on consolidated last sale information and may reflect clearly
erroneous values for securities that have not opened for trading on a
particular business day or that are subject to an intraday interruption
in trading; (c) PIVs would be calculated based on a ``commercially
reasonable'' standard of care, not the higher standards that apply to a
Fund's daily NAV calculations; (d) there would be no time or scope for
checking calculated PIV values before they are released in real time
1,560 times each trading day; and (e) the calculation of PIVs would
require the coordinated actions of multiple parties, none of which
would guarantee the accuracy of disseminated PIVs or assume liability
for damages resulting from PIV errors.\52\
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    \49\ See Second Gastineau Letter, supra note 11.
    \50\ See Response Letter, supra note 8.
    \51\ See Second Gastineau Letter, supra note 11, at 3.
    \52\ See id.
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    The opposing commenter asserts that disseminated PIVs for ETFs with
transparent portfolios have essentially no relevance to secondary
market trading efficiency and limited overall utility for
investors.\53\ In contrast, according to the opposing commenter, the
officially disseminated PIVs would be the foundation supporting market
trading of the Shares, because Fund holdings would not be disclosed,
and market makers in the Shares would not be able to calculate their
own independent estimates of intraday Fund values or to verify the
accuracy of the Fund-disseminated PIVs.\54\ The opposing commenter
states that he is unaware of any studies that demonstrate the
reliability of the intraday values disseminated for existing ETFs based
on substantially the same calculation methodology and standards as
proposed for the Shares.\55\ He recommends that, if the Exchange is
unwilling to undertake a surveillance program to detect erroneous PIVs
and to establish procedures for cancelling trades based on erroneous
trades, the Commission should condition any approval of the proposed
rule change on a demonstration of the prospective reliability of Fund
PIVs through a comprehensive study of the historical accuracy of the
disseminated intraday values of existing ETFs with investment profiles
similar to the Funds.\56\
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    \53\ See id.
    \54\ See id. at 4-5.
    \55\ See id. at 5.
    \56\ See id.
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    The opposing commenter also questions whether the terms ``efficient
and liquid markets'' and ``priced near the PIV'' (used by the cited
LMMs) are properly defined or are suitable standards for open-end funds
issuing redeemable securities.\57\ The opposing commenter asserts that
the Petajisto Study \58\ demonstrates that the trading

efficiency of existing ETFs varies across a broad range and that many
existing ETFs trade with wide bid-ask spreads and highly variable
premiums/discounts,\59\ and he posits that some of the LMMs supporting
trading in those ETFs would nonetheless represent that they trade
``efficiently'' and ``near'' underlying value.\60\
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    \57\ See id. at 3.
    \58\ See supra note 28.
    \59\ See Second Gastineau Letter, supra note 11, at 3.
    \60\ See id.
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    The opposing commenter recommends that the Commission ask the
Exchange to quantify the range of expected bid-ask spreads and
premiums/discounts at which LMMs have indicated they expect the Shares
to trade and to compare these expectations to accurate measures of
benchmark index ETF trading performance.\61\ Additionally, the opposing
commenter argues that the Exchange's statement that it ``expects that a
market maker will act as [LMM] in the Shares and believes no market
maker would accept [an LMM] assignment if they were not entirely
comfortable in their ability to hedge their positions'' does not
support the Exchange's assertion that the Shares can be expected to
trade at consistently tight bid-ask spreads and stable premiums/
discounts.\62\ He asserts that: (1) Every closed-end fund listed on the
Exchange also has an LMM, including the many closed-end funds that
routinely trade at double-digit discounts or premiums to NAV; and
therefore (2) the mere presence of a market maker willing to serve as
LMM is not evidence that a particular fund would trade with bid-ask
spreads and premiums/discounts consistent with the marketplace's
expectations for how ETFs should trade or the legal standard applicable
to open-end investment companies issuing redeemable securities.\63\
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    \61\ See id.
    \62\ See id. at 4.
    \63\ See id.
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B. Creation and Redemption Process

1. Redemptions by Authorized Participants
    The opposing commenter raises a number of objections to the Funds'
proposed use of a blind trust to effect redemption transactions by
Authorized Participants. He predicts that the proposed redemption
arrangements would introduce additional costs and uncertainties for
Authorized Participants for the following reasons:
     The Funds' custodian would have a monopoly position as the
sole eligible provider of trustee services for the blind trust;
     the Funds' adviser, rather than the Authorized
Participant, would negotiate the fees paid to the trustee;
     in contrast to existing ETFs, no Authorized Participant
would have the potential ability to use its market knowledge and market
position to enhance arbitrage profits (or offset arbitrage costs) by
managing sales of the distributed securities to minimize market impact
or to realize prices above the market close; and
     the Funds' custodian, who acts for the Authorized
Participant in the sale of distributed securities, would have no
apparent incentive to sell distributed securities with low market
impact or at prices above the close and would experience little or no
downside from doing the opposite.\64\
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    \64\ See Gastineau Letter, supra note 5, at 12.
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    The opposing commenter also asserts that redeeming Authorized
Participants would be exposed to potential costs and risks associated
with not being able to control disposition of significantly more
concentrated redemption proceeds, and the opposing commenter argues
that these extra costs and risks associated with the blind trust
arrangement would be passed through to shareholders transacting in the
secondary market, reflected as wider bid-ask spreads, more volatile
premiums and discounts for the Shares, or both.\65\
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    \65\ See id.
---------------------------------------------------------------------------

    In addition, the opposing commenter argues that the Commission
should not grant the issuer's pending request for exemptive relief
under the 1940 Act to maintain early Order Cut-Off Times for Fund
redemptions, which are intended to facilitate the timely sale of
distributed securities by the blind trusts that receive the proceeds of
Authorized Participant redemptions and to facilitate the efficient
processing of redemptions by retail investors through the Retail
Redemption Facility.\66\
---------------------------------------------------------------------------

    \66\ See id. at 16.
---------------------------------------------------------------------------

    In response, the Exchange argues that the opposing commenter's
arguments regarding cost considerations are irrelevant under the
Exchange Act \67\ and that limiting broker-dealer processing fees on
direct purchases and redemptions of Shares would require Commission
rulemaking.\68\ The Exchange also argues that the opposing commenter's
arguments regarding early Order Cut-Off Times for redemption is not
relevant under the Exchange Act.\69\
---------------------------------------------------------------------------

    \67\ See Response Letter, supra note 8, at 4-5.
    \68\ See id. at 4.
    \69\ See id. at 4-5.
---------------------------------------------------------------------------

    The opposing commenter argues, in response, that mandatory early
Order Cut-Off Times for direct purchases and redemptions of Shares,
while raising issues under the 1940 Act, also raise Exchange Act issues
due to the potential impact on secondary market trading. Specifically,
the opposing commenter asks: (1) If Authorized Participants cannot
enter orders to purchase and redeem Shares after a designated cut-off
time, how would this affect market trading later in the session; and
(2) if market makers cannot transact with the Fund to offload long and
short positions in Shares accumulated after the cut off time, how could
the Funds' proposed arbitrage mechanism function effectively? \70\
---------------------------------------------------------------------------

    \70\ See Second Gastineau Letter, supra note 11, at 2.
---------------------------------------------------------------------------

    In connection with the unique redemption features of the Funds, the
opposing commenter further asserts that there is a ``significant risk''
that the Internal Revenue Service (``IRS'') would deny the purported
tax benefits of the Funds' distinctive in-kind redemption program.\71\
Therefore, the opposing commenter recommends that approval of the
proposal be conditioned on the issuer obtaining a favorable IRS
determination of the tax treatment through a Private Letter Ruling.\72\
---------------------------------------------------------------------------

    \71\ See Gastineau Letter, supra note 5, at 5.
    \72\ See id.; Second Gastineau Letter, supra note 11, at 2.
---------------------------------------------------------------------------

    In response, the Exchange argues that the opposing commenter's
arguments regarding the tax treatment of in-kind distributions through
the blind trust are not relevant under the Exchange Act.\73\
---------------------------------------------------------------------------

    \73\ See Response Letter, supra note 8, at 4-5.
---------------------------------------------------------------------------

    The opposing commenter's second letter restates his belief that the
tax treatment of the Funds' in-kind redemptions is relevant and again
urges the Commission to condition any approval of the proposed rule
change on the issuer receiving a Private Letter Ruling from the IRS
affirming the claimed tax treatment of the Funds' in-kind
redemptions.\74\
---------------------------------------------------------------------------

    \74\ See Gastineau Letter, supra note 5, at 5. More generally,
the opposing commenter asserts that none of the arguments he made
are irrelevant because Section 6(b)(5) of the Exchange Act states,
in relevant part, that the ``rules of the exchange must be designed
. . . to promote just and equitable principles of trade, . . . to
remove impediments to and perfect the mechanism of a free and open
market . . . and, in general, to protect investors and the public
interest; and are not designed to permit unfair discrimination''
among market participants. See Second Gastineau Letter, supra note
11, at 2 (omissions in original).
---------------------------------------------------------------------------

2. The Retail Redemption Facility
    The opposing commenter posits that a principal purpose of including
direct Share purchases and the Retail Redemption Facility in the
proposal is to provide comfort to the Commission and market
participants that investors

would be able to transact with the Fund at or near NAV whenever
secondary market trading prices of shares vary significantly from
NAV.\75\ The opposing commenter argues that these provisions, as
proposed, are inadequate for this purpose because: (a) The Retail
Redemption Facility would be available only to a limited set of
shareholders and would be restricted to redemptions of less than a
Redemption Unit of shares; (b) the expected early Order Cut-Off Time
for direct share purchases and the Retail Redemption Facility means
that an investor's ability to directly purchase or redeem shares for
cash would exist for only a portion of each business day; (c) investors
who directly purchase and redeem shares would be subject to transaction
fees imposed by the Fund of up to 2% and may also be subject to broker-
dealer processing fees; (d) self-directed investors may not have
adequate information about the available liquidity options to make
intelligent choices about how best to buy and sell shares; (e) broker-
dealers may not have adequate information to ensure that their
customers consistently receive best execution on transactions in
shares, given the two distinct liquidity pathways; and (f) broker-
dealers may not have or may not develop the systems capabilities
necessary to support customer transactions in Funds offering both
secondary market trading in shares and direct share purchases and
redemptions.\76\
---------------------------------------------------------------------------

    \75\ See Gastineau Letter, supra note 5, at 17.
    \76\ See id. at 17-18.
---------------------------------------------------------------------------

    The opposing commenter asserts that the Exchange's statements that
``investors may choose to purchase Shares directly from a Fund if they
want to assure that they would not purchase Shares at a premium'' and
that ``Retail Investors may decide to redeem their Shares for cash if
they want to make sure they receive the NAV and do not want to risk
selling their Shares in the secondary market at a discount'' are valid
only to the extent that a Fund's direct purchase and redemption options
apply to a particular investor, are available at the particular time of
day when the investor seeks to buy or sell Shares, are not negated by
disproportionate fees, and are backed by investor information and
broker-dealer systems adequate to support informed decision-making and
effective execution of direct transactions in Shares.\77\ The opposing
commenter expresses concern that, because of the challenges to broker-
dealer trade management and order processing systems introduced by the
Funds' unique dual-liquidity features, broker-dealers (if left
unregulated) would charge significantly higher fees on direct purchases
and redemptions than the commissions they charge on comparably sized
secondary market trades in Shares.\78\ He argues that, if broker-dealer
fees on direct transactions in Shares are too high, then shareholders
would, in a practical sense, lose access to the Funds' intended
mechanism for ensuring continued access to liquidity at or near NAV
during periods when market trading prices of Shares vary significantly
from NAV.\79\ To the extent that the Commission values the Funds'
direct purchase and redemption facilities, he recommends that the
Commission place appropriate limits on associated broker-dealer fees
and Fund Transactions Fees.\80\ The opposing commenter also repeats his
views that the Funds' proposed direct purchase and redemptions options
should apply equally to all investors and should be available
throughout each business day's Regular Trading Session, arguing that
disparate redemption rights for different groups of shareholders are
inherently discriminatory and inconsistent with the Requirements of
Section 6(b)(5) of the Exchange Act.\81\
---------------------------------------------------------------------------

    \77\ See Second Gastineau Letter, supra note 11, at 6.
    \78\ See id.
    \79\ See id.
    \80\ See id.
    \81\ See id.
---------------------------------------------------------------------------

    The opposing commenter recommends that the Funds should be required
to extend eligibility for the Retail Redemption Facility to all
shareholders and that the Order Cut-Off Times for direct purchases of
shares and redemptions under the Retail Redemption Facility be
established as of the close of the Exchange's regular trading
session.\82\ The opposing commenter recommends that the Exchange be
required to limit trading in shares to broker-dealers that have
represented to the Exchange that they have systems in place (a) to
accommodate direct purchases and redemptions of Shares on terms no less
favorable than secondary market transactions and (b) to ensure best
execution of transactions in shares, considering both secondary market
trading and direct purchase and redemption options.\83\ The opposing
commenter also recommends that the broker-dealers trading shares on the
Exchange should not be permitted to charge their customers processing
fees on direct purchases and redemptions of shares that exceed what
they charge the same customers for secondary market trades.\84\
Further, the opposing commenter recommends that the Funds should not be
permitted to charge transaction fees on direct purchases and
redemptions of shares that exceed the associated Fund expenses
incurred, taking into account the size of a specific transaction.\85\
---------------------------------------------------------------------------

    \82\ See Gastineau Letter, supra note 5, at 20.
    \83\ See id.
    \84\ See id.
    \85\ See id. at 20-21.
---------------------------------------------------------------------------

    In response, the Exchange does not address the individual
objections raised by the opposing commenter, but instead asserts that
the process proposed in the Notice is consistent with the applicable
provisions of the Exchange Act.\86\
---------------------------------------------------------------------------

    \86\ See Response Letter, supra note 8, at 4.
---------------------------------------------------------------------------

C. Other Issues

1. Disclosures
    The opposing commenter alleges that the prospectus contains a
number of material misstatements and omissions relating to in-kind
redemptions and direct purchases and redemptions.\87\ In response, the
Exchange argues that the opposing commenter's arguments regarding
prospectus disclosures are irrelevant under the Exchange Act.\88\ The
opposing commenter, in his second comment letter, argues that adequacy
of Fund disclosures is critically important to evaluation of the
proposal under both the 1940 Act and the Exchange Act because
efficient, informed, and non-discriminatory trading in the Shares
requires market participants to have access to timely and accurate
information regarding the Funds, including risks and special
considerations in buying and selling Shares.\89\
---------------------------------------------------------------------------

    \87\ See Gastineau Letter, supra note 5, at 27-28.
    \88\ See Response Letter, supra note 8, at 4-5.
    \89\ See Second Gastineau Letter, supra note 11, at 3.
---------------------------------------------------------------------------

    With respect to improved disclosures and availability of
information, the opposing commenter states that, given the importance
of the PIV to the decision-making process of current and prospective
Fund investors, all Fund investors should have ongoing access to
current PIV values.\90\ The opposing commenter suggests that each
Fund's current PIV be provided at no charge on a public Web site and
made available to the public no later than it is made available to any
other market participant.\91\ The opposing commenter also suggests that
the following be published on the Funds' Web site: Real-time PIVs and
historical PIV information; statistics regarding closing-price premiums
and discounts, statistics

regarding intraday estimated premiums and discounts; statistics
regarding bid-ask spreads; statistics regarding long or short equity
market exposure and the amount of investment leverage employed; and
statistics regarding transaction fees applicable to direct purchases of
shares, redemptions through the Retail Redemption Facility, and
Redemption Unit redemptions by Authorized Participants.\92\
---------------------------------------------------------------------------

    \90\ See Gastineau Letter, supra note 5, at 25.
    \91\ See id.
    \92\ See id. at 26-27.
---------------------------------------------------------------------------

    Further, the opposing commenter asserts that, given the fundamental
differences in how the Shares may be bought or sold, compared to other
ETFs, it is not appropriate for the Funds to be advertised or marketed
as ETFs.\93\ Therefore, the opposing commenter recommends that the
Commission take appropriate steps to ensure that the Exchange, broker-
dealers, and market data providers do not describe the Funds as
ETFs.\94\
---------------------------------------------------------------------------

    \93\ See id. at 28.
    \94\ See id.
---------------------------------------------------------------------------

    In response, the Exchange states that such real-time Web site
disclosure of an indicative value is not required of other ETFs.\95\
The Exchange states that the PIV is designed to provide guidance
regarding variances between the prior day's closing prices and intraday
changes in the value of the underlying portfolio.\96\ The pricing of
the Shares themselves would be disseminated in real time through the
Consolidated Quotation System, according to the Exchange.\97\
---------------------------------------------------------------------------

    \95\ See Response Letter, supra note 8, at 4.
    \96\ See id.
    \97\ See id.
---------------------------------------------------------------------------

    Responding to the Exchange's assertion that the Funds should not be
required to provide investors with free public access to real-time PIVs
and other Fund trading information because these requirements do not
apply to existing ETFs, the opposing commenter asserts that the Funds
would differ from all existing ETFs in three respects for which the
suggested requirements for additional PIV and other Fund trading
information disclosures are highly relevant: (a) The Funds would offer
shareholders two distinct pathways for buying and selling Shares (i.e.,
direct transactions and secondary market trades) and therefore should
be obligated to give investors sufficient information about Share
trading conditions to help them determine how best to buy and sell
Shares; (b) the arbitrage mechanism intended to support efficient
secondary market trading in Shares is untested and is likely to be less
reliable than the mechanism supporting efficient trading in existing
ETFs, meaning that investors in the Funds should appropriately pay more
attention to Share trading costs and must have access to enhanced
trading information to make that possible; and (c) the arbitrage
mechanism underlying trading in Shares is uniquely reliant upon PIVs,
with the result that a level playing field among market participants
can only be achieved if all Fund investors have equal access to this
critical Fund data.\98\
---------------------------------------------------------------------------

    \98\ See Second Gastineau Letter, supra note 11, at 7.
---------------------------------------------------------------------------

2. Proposed Limits on Fund Holdings
    The opposing commenter asserts that the Funds should: (a) Be
required to limit their equity investments to U.S.-exchange-listed
stocks with market caps of $5 billion or greater (consistent with the
general understanding of large- and medium-cap stocks, a universe of
about 700 stocks currently); (b) not be permitted to invest in illiquid
assets or debt instruments of non-U.S. issuers; and (c) not be
permitted to employ investment leverage or hold short positions.\99\
---------------------------------------------------------------------------

    \99\ See Gastineau Letter, supra note 5, at 24.
---------------------------------------------------------------------------

    In response, the Exchange argues that the opposing commenter's
recommendation to curtail the permitted investments of the Funds is not
relevant under the Exchange Act.\100\
---------------------------------------------------------------------------

    \100\ See Response Letter, supra note 8, at 4.
---------------------------------------------------------------------------

    In his second letter, the opposing commenter argues that the nature
of the Funds' holdings is highly relevant because the reliability of a
Fund's PIVs would depend on the availability, timeliness, and accuracy
of intraday valuations for the Fund's underlying holdings, which in
turn would vary significantly by holdings type.\101\ He asserts that,
if intraday valuation information for a Fund's holdings does not
support the dissemination of timely and accurate PIVs throughout the
Regular Trading Session, the Fund cannot be expected to trade
efficiently.\102\
---------------------------------------------------------------------------

    \101\ See Second Gastineau Letter, supra note 11, at 3.
    \102\ See Second Gastineau Letter, supra note 11, at 3.
---------------------------------------------------------------------------

3. Trading Hours
    The opposing commenter notes that the Exchange would permit trading
in the Shares between 4:00 a.m. and 8:00 p.m., but that the PIV would
only be disseminated during the Core Trading Session of 9:30 a.m. to
4:00 p.m.\103\ The opposing commenter asserts that the proposal does
not adequately address the significant risk that the prices of shares
bought or sold in the Opening Session (4:00 a.m. to 9:30 a.m.) and Late
Trading Session (4:00 p.m. to 8:00 p.m.) would vary widely from
underlying portfolio values because an updated PIVs would not be
available.\104\ Therefore, the opposing commenter suggests that trading
in shares should be limited to the Exchange's Core Trading
Session.\105\
---------------------------------------------------------------------------

    \103\ See Gastineau Letter, supra note 5, at 24.
    \104\ See id.
    \105\ See id.
---------------------------------------------------------------------------

    In response, the Exchange states that: (a) Its surveillance
procedures are operative during all trading sessions and are adequate
to monitor trading in the Shares; (b) that it has no reason to discount
the assertions of market makers regarding their ability to make
efficient markets during all trading sessions; and (c) it would ensure
that the information bulletin required by the Exchange's listing
standards would adequately address the special characteristics and
risks associated with trading in the Shares.\106\
---------------------------------------------------------------------------

    \106\ See Response Letter, supra note 8, at 3.
---------------------------------------------------------------------------

    In response, the opposing commenter questions: (a) How a market
maker would have any idea whether Shares were trading at a premium or a
discount during the Opening and Late Trading Sessions, if PIVs are not
being disseminated; and (b) how a market maker would have a basis to
construct hedge positions against Share inventory accumulated during
these sessions.\107\ He asserts again that the Shares should not trade
during periods when neither the contents nor any estimates of current
values of Fund holdings are known in the marketplace.\108\
---------------------------------------------------------------------------

    \107\ See Second Gastineau Letter, supra note 11, at 7.
    \108\ See id.
---------------------------------------------------------------------------

4. Potential Informational Advantages for Certain Market Participants
    The opposing commenter argues that the lack of portfolio
transparency would favor market makers and other professional traders
over other market participants, such as investors, and the opposing
commenter concludes that this disparate treatment is contrary to the
principle that all participants should be on an equal footing with
respect to knowledge of a fund's holdings.\109\ Notwithstanding the
public dissemination of the PIV, the opposing commenter argues that
market makers and other professional traders would have a significant
indirect informational advantage over other participants because of
their ability to glean information about a Fund's holdings through
sophisticated data analysis of changes in the PIV.\110\ In particular,
the

opposing commenter asserts that market makers and professional traders
could uncover a Fund's holdings and trading activity and front-run the
Fund.\111\ The opposing commenter asserts that, prior to approval, the
proposal should be amended to include: (1) A discussion of the steps to
be taken to minimize reverse-engineering risk; (2) a discussion of how
the Funds propose to resolve the conflict between providing market
makers with adequate information to support efficient Share trading and
protecting against reverse engineering; and (3) representations that
the Funds would adequately disclose reverse-engineering risk and the
conflicts the Funds face in seeking to provide for efficient market
trading and protection against reverse engineering.\112\
---------------------------------------------------------------------------

    \109\ See Gastineau Letter, supra note 5, at 14-15.
    \110\ See id. at 14.
    \111\ See id. at 15.
    \112\ See id.
---------------------------------------------------------------------------

    The Exchange states that the following information would be
publicly available to market professionals and retail investors alike:
a PIV, disseminated every 15 seconds; an NAV, disseminated daily after
the close; and the national best bid and offer and last trade for the
Shares, disseminated in real-time through the Consolidated Quotation
System and the Consolidated Tape.\113\ The Exchange also states that,
as with other ETFs, any independent view that market participants might
have about the composition of the fund holdings and the value of those
holdings would be included in the prices at which those participants
would be willing to trade the product.\114\
---------------------------------------------------------------------------

    \113\ See Response Letter, supra note 8, at 3.
    \114\ See id.
---------------------------------------------------------------------------

    The opposing commenter counters that all investors would not have
equal access to Share trading information unless, as he recommends, the
Commission conditions approval of the proposal on the Funds providing
free access to PIVs on a public Web site and PIVs being available to
the general public as soon as they are available to any party.\115\
Otherwise, the opposing commenter argues, market makers would be able
to generate an informational advantage regarding a Fund's holdings
through sophisticated time-series analysis of intraday changes in the
Fund's PIVs.\116\ He asserts that the dissemination of market
information in a manner that facilitates unfair discrimination among
market participants is inconsistent with equitable principles of trade
and, therefore, with the requirements of Section 6(b)(5) of the
Exchange Act.\117\
---------------------------------------------------------------------------

    \115\ See Second Gastineau Letter, supra note 11, at 6.
    \116\ See id.
    \117\ See id.
---------------------------------------------------------------------------

5. Potential Benefits
    One commenter supports the proposed rule change, asserting that
investors would have access for the first time to many different types
of active management strategies.\118\ This commenter also asserts that
Managed Portfolio Shares would have the benefit of intraday trading and
of creation and redemption at closing NAV and that they would, unlike
other ETFs, offer the additional advantage of allowing investors to
create or redeem directly for cash in amounts less than a creation
unit.\119\ Another commenter states that the Funds would permit
investors to ``avail themselves of the alpha-generating capabilities of
professional managers and potentially greater returns, while enjoying
greater access and information than a mutual fund can provide.'' \120\
This commenter also notes that money managers, too, would enjoy
benefits in the form of ``lower infrastructure costs, greater
efficiency and the associated flexibility to make portfolio changes,
and the ability to maintain portfolio confidentiality while avoiding
professional front running.'' \121\
---------------------------------------------------------------------------

    \118\ See DeCore Letter, supra note 8, at 1.
    \119\ See id. at 1-2.
    \120\ See Browne Letter, supra note 13, at 1.
    \121\ See Browne Letter, supra note 13, at 2.
---------------------------------------------------------------------------

    The Exchange asserts that, assuming investor protection concerns
are adequately addressed, investors and the marketplace can only
benefit from listing and trading of a variety of products with
different structures, positing that competitive forces would ultimately
decide the success or failure of such initiatives.\122\
---------------------------------------------------------------------------

    \122\ See Response Letter, supra note 8, at 5.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Under Section 19(b)(2)(C) of the Exchange Act, the Commission shall
approve a proposed rule change of a self-regulatory organization if the
Commission finds that the proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder that are applicable to that organization.\123\ The
Commission shall disapprove a proposed rule change if it does not make
such a finding.\124\ Commission Rule of Practice 700(d)(3) provides
that, when the Commission has instituted proceedings to determine
whether to approve or disapprove a rule filing, the Commission shall
makes its determination on the basis of the record, which ``shall
consist of the proposed rule change filed on Form 19b-4 by the self-
regulatory organization, including all attachments and exhibits
thereto, and all written materials received from any interested parties
on the proposed rule change, including the self-regulatory organization
that filed the proposed rule change . . . as well as any written
materials that reflect communications between the Commission and any
interested parties.'' \125\
---------------------------------------------------------------------------

    \123\ 15 U.S.C 78s(b)(2)(C)(i).
    \124\ 15 U.S.C. 78s(b)(2)(C)(i); see also 17 CFR 201.700(b)(3).
    \125\ 17 CFR 201.700(d)(3). The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis
of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. See id. Any failure of a self-regulatory
organization to provide the information solicited by Form 19b-4 may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with
the Exchange Act and the rules and regulations issued thereunder
that are applicable to the self-regulatory organization. Id.
---------------------------------------------------------------------------

    After careful consideration, the Commission does not find that the
proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange. In particular, the Commission does not
find that the proposed rule change is consistent with Section 6(b)(5)
of the Exchange Act, which requires that the rules of a national
securities exchange be designed, among other things, to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
to protect investors and the public interest.\126\
---------------------------------------------------------------------------

    \126\ 15 U.S.C. 78f(b)(5). In disapproving the proposed rule
change, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Before an ETF can list and trade on a national securities exchange,
the ETF must have exemptive relief under the 1940 Act, and a national
securities exchange must have effective rules in place to list and
trade the ETF.\127\ As noted above, the Precidian ETFs Trust has filed
an Exemptive Application under the 1940 Act.\128\ As stated in the

Notice of an Application for Exemptive Relief, however, ``the
Commission preliminarily believes that [Precidian's] proposed ETFs do
not meet the standard for exemptive relief under section 6(c) of the
[1940] Act,'' \129\ and accordingly, ``absent a request for a hearing
that is granted by the Commission, the Commission intends to deny
[Precidian's] request for an exemption under section 6(c) of the [1940]
Act as not necessary or appropriate in the public interest and as not
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the [1940] Act.'' \130\
---------------------------------------------------------------------------

    \127\ Neither an ETF that has obtained 1940 Act exemptive relief
but does not fall within Commission-approved exchange listing
standards, nor an ETF that falls within Commission-approved listing
standards but has been denied 1940 Act exemptive relief, can legally
be listed and traded on a national securities exchange.
    \128\ See note 3, supra. The Precidian ETFs Trust submitted an
application for an order under section 6(c) of the 1940 Act for an
exemption from sections 2(a)(32), 5(a)(1), 22(d) and 22(e) of the
1940 Act and rule 22c-1 under the 1940 Act; under sections 6(c) and
17(b) of the 1940 Act for an exemption from sections 17(a)(1) and
17(a)(2) of the 1940 Act; and under section 12(d)(1)(J) of the 1940
Act for an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of
the 1940 Act.
    \129\ Notice of Application for Exemptive Relief, supra note 3,
at 3.
    \130\ Id. at 29.
---------------------------------------------------------------------------

    The purpose of the Exchange's proposed rule change is to allow the
listing and trading of the proposed Funds and future Funds of the same
type. The Commission does not believe that approving this proposed rule
change would be consistent with the requirement under the Exchange Act
that an exchange's rules be consistent with the protection of investors
and the public interest, because the Commission has stated its
intention to deny the Funds exemptive relief under the 1940 Act and
because denying this exemptive relief would mean that the Funds could
not legally operate.\131\
---------------------------------------------------------------------------

    \131\ The Commission's determinations under Section 6(c) of the
1940 Act with respect to the Funds are preliminary and could change
if a hearing were requested, the Commission were to grant the
request, and persuasive new information were presented. Under
Section 19(b)(2) of the Exchange Act, however, the last date on
which the Commission can take final action to approve or disapprove
the Exchange's proposed rule change is no later than 240 days after
notice of the proposed rule change was published in the Federal
Register. As a result, the Commission must either approve or
disapprove the proposed rule change by October 24, 2014, and it must
do so on the basis of the facts as they currently exist,
irrespective of any information that might be presented to or
considered by the Commission at a later date in the context of its
final determination under Section 6(c) of the 1940 Act.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find that
the proposed rule change is consistent with the requirements of the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange, and in particular, with Section 6(b)(5)
of the Exchange Act.\132\
---------------------------------------------------------------------------

    \132\ Having found for the reasons explained above that the
Exchange's proposed rule change is not consistent with the
requirements of the Exchange Act, the Commission does not believe it
is necessary to address each of the particular objections raised by
the commenter who opposes the proposed rule change.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that the proposed rule change (SR-NYSEArca-2014-10) be,
and it hereby is, disapproved.

    By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25714 Filed 10-28-14; 8:45 am]
BILLING CODE 8011-01-P


Three References of Interest Provided by the Panel (12/2/09)

1)  Leistra, M., J.H. Smelt, J. Hilbrand Weststrate, F. Van Den Berg,
and R. Aalderink (2006) Volatilization of the pesticides chlorpyrifos
and fenpropimorph from a potato crop.  Environ. Sci. Technol. 40:
96-102.

2)  Scholtz, M.T., E. Voldner, A.C. McMillan, B.J. Van Heyst (2002a). A
pesticide emission model (PEM) Part I: model development. Atm. Environ.
36: 5005-5013.

3) Scholtz, M.T., E. Voldner, B.J. Van Heyst, A.C. McMillan, E. Pattey
(2002b) A pesticide emission model (PEM) Part IId:  model evaluation.
Atm. Environ. 36: 5015-5024.


[Federal Register: June 25, 2010 (Volume 75, Number 122)]
[Proposed Rules]
[Page 36298-36300]
[DOCID:fr25jn10-10]

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

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA-2010-0639; Directorate Identifier 2009-NM-232-AD]
RIN 2120-AA64

Airworthiness Directives; McDonnell Douglas Corporation Model DC-
8-31, DC-8-32, DC-8-33, DC-8-41, DC-8-42, and DC-8-43 Airplanes; Model
DC-8-50 Series Airplanes; Model DC-8F-54 and DC-8F-55 Airplanes; Model
DC-8-60 Series Airplanes; Model DC-8-61 Series Airplanes; Model DC-8-70
Series Airplanes; and Model DC-8-70F Series Airplanes

AGENCY: Federal Aviation Administration (FAA), Department of
Transportation (DOT).

ACTION: Notice of proposed rulemaking (NPRM).

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

SUMMARY: The FAA proposes to supersede an existing airworthiness
directive (AD) that applies to all of the McDonnell Douglas Corporation
airplanes identified above. The existing AD currently requires revising
the maintenance program to incorporate new airworthiness limitations
for fuel tank systems to satisfy Special Federal Aviation Regulation
No. 88 requirements. This proposed AD would add requirements to revise
the maintenance program to incorporate specific Critical Design
Configuration Control Limitations (CDCCL) information and install fuel
tank float switch in-line fuses. This proposed AD would also add two
Airworthiness Limitations inspections (ALIs). This proposed AD results
from a design review of the fuel tank systems. We are proposing this AD
to prevent the potential for ignition sources inside fuel tanks caused
by latent failures, alterations, repairs, or maintenance actions,
which, in combination with flammable fuel vapors, could result in a
fuel tank explosion and consequent loss of the airplane.

DATES: We must receive comments on this proposed AD by August 9, 2010.

ADDRESSES: You may send comments by any of the following methods:
     Federal eRulemaking Portal: Go to http://
www.regulations.gov. Follow the instructions for submitting comments.
     Fax:<PHONE_NUMBER>.
     Mail: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue, SE., Washington, DC 20590.
     Hand Delivery: U.S. Department of Transportation, Docket
Operations, M-30, West Building Ground Floor, Room W12-140, 1200 New
Jersey Avenue, SE., Washington, DC 20590, between 9 a.m. and 5 p.m.,
Monday through Friday, except Federal holidays.
    For service information identified in this proposed AD, contact
Boeing Commercial Airplanes, Attention: Data & Services Management,
3855 Lakewood Boulevard, MC D800-0019, Long Beach, California 90846-
0001; telephone<PHONE_NUMBER>, extension 2; fax<PHONE_NUMBER>; e-mail
<EMAIL_ADDRESS>Internet https://www.myboeingfleet.com. You may
review copies of the referenced service information at the FAA,
Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton,
Washington. For information on the availability of this material at the
FAA, call<PHONE_NUMBER>.

Examining the AD Docket

    You may examine the AD docket on the Internet at http://
www.regulations.gov; or in person at the Docket Management Facility
between 9 a.m. and 5 p.m., Monday through Friday, except Federal
holidays. The AD docket contains this proposed AD, the regulatory
evaluation, any comments received, and other information. The street
address for the Docket Office (telephone<PHONE_NUMBER>) is in the
ADDRESSES section. Comments will be available in the AD docket shortly
after receipt.

FOR FURTHER INFORMATION CONTACT: Samuel Lee, Aerospace Engineer,
Propulsion Branch, ANM-140L, FAA, Los Angeles Aircraft Certification
Office, 3960 Paramount Boulevard, Lakewood, California 90712-4137;
telephone<PHONE_NUMBER>; fax<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Comments Invited

    We invite you to send any written relevant data, views, or
arguments about this proposed AD. Send your comments to an address
listed under the ADDRESSES section. Include ``Docket No. FAA-2010-0639;
Directorate Identifier 2009-NM-232-AD'' at the beginning of your
comments. We specifically invite comments on the overall regulatory,
economic, environmental, and energy aspects of this proposed AD. We
will consider all comments received by the closing date and may amend
this proposed AD because of those comments.
    We will post all comments we receive, without change, to http://
www.regulations.gov, including any personal information you provide. We
will also post a report summarizing each substantive verbal contact we
receive about this proposed AD.

Discussion

    On April 4, 2008, we issued AD 2008-09-04, Amendment 39-15484 (73
FR 21523, April 22, 2008), for all Model DC-8-31, DC-8-32, DC-8-33, DC-
8-41, DC-8-42, and DC-8-43 airplanes; Model DC-8-50 series airplanes;
Model DC-8F-54 and DC-8F-55 airplanes; Model DC-8-60 series airplanes;
Model DC-8-60F series airplanes; Model DC-8-70 series airplanes; and
Model DC-8-70F series airplanes. That AD requires revising the
maintenance program to incorporate new airworthiness limitations for
fuel tank systems to satisfy Special Federal Aviation Regulation No. 88
requirements. That AD resulted from a design review of the fuel tank
systems. We issued that AD to prevent the potential for ignition
sources inside fuel tanks caused by latent failures, alterations,
repairs, or maintenance actions, which, in combination with flammable
fuel vapors, could result in a fuel tank explosion and consequent loss
of the airplane.

Actions Since Existing AD Was Issued

    Since we issued AD 2008-09-04, we have been notified that the float
switch wires located on the leading edges of the left and right wings
at the front spar are routed in the same bundles as power wires. If a
short circuit between a float switch wire and a power wire occurs, an
over-current can cause excessive temperatures in the float switch
wires, resulting in damage. Adding an in-line fuse as a self-contained
component in

each float switch circuit will minimize the possibility of excessive
temperatures in the float switch wires. If not corrected, and if there
is a short circuit of the float switch wire to a power wire, possible
damage to the float switch wire could occur, and it could become a
potential ignition source into the fuel tank and consequently cause
fire or an explosion.

Relevant Service Information

    We have reviewed Boeing Service Bulletin DC8-28-090, dated October
9, 2009. This service bulletin describes procedures for installing fuel
tank float switch in-line fuses in the front spar of the leading edges
of the left and right wings. This service bulletin references CDCCL 20-
10 from Boeing Special Compliance Item Report, MDC-02K9030, Revision B,
dated July 23, 2009. Boeing DC-8 Special Compliance Item Report, MDC-
02K9030, Revision B, dated July 23, 2009, adds CDCCL 20-10 ``DC-8 Float
Switch Circuit,'' and also adds ALI 30-1 for a pneumatic system decay
check to minimize the risk of hot air impingement on the fuel tank.
Boeing DC-8 Special Compliance Item Report, MDC-02K9030, Revision C,
dated January 5, 2010, adds ALI 28-1, ``DC-8 Alternate and Center
Auxiliary Tank Fuel Pump Control Systems Check.''

FAA's Determination and Requirements of the Proposed AD

    We have evaluated all pertinent information and identified an
unsafe condition that is likely to develop on other airplanes of the
same type design. For this reason, we are proposing this AD, which
would supersede AD 2008-09-04 and would retain the requirements of the
existing AD. This proposed AD would also require accomplishing the
actions specified in the service information described previously.

Changes to Existing AD

    This proposed AD would retain all requirements of AD 2008-09-04.
Since AD 2008-09-04 was issued, the AD format has been revised, and
certain paragraphs have been rearranged. As a result, the corresponding
paragraph identifiers have changed in this proposed AD, as listed in
the following table:

                      Revised Paragraph Identifiers
------------------------------------------------------------------------
                                      Corresponding  requirement in this
    Requirement in AD 2008-09-04                 proposed AD
------------------------------------------------------------------------
             paragraph (f)                        paragraph (g)
             paragraph (g)                        paragraph (h)
             paragraph (h)                        paragraph (i)
------------------------------------------------------------------------

    AD 2008-09-04 allowed the use of later revisions of the
airworthiness limitations. That provision has been removed from this
AD. Allowing the use of ``a later revision'' of specific service
documents violates Office of the Federal Register regulations for
approving materials that are incorporated by reference. We have added
paragraph (m) to this AD to allow incorporation of Boeing DC-8 Special
Compliance Item Report, MDC-02K9030, Revision B, dated July 23, 2009;
and Revision C, dated January 5, 2010; as a method of compliance with
the requirements of paragraph (g) of this AD. Affected operators,
however, may request approval to use a later revision of the referenced
service documents as an alternative method of compliance, under the
provisions of paragraph (o) of this AD.

Costs of Compliance

    There are about 125 airplanes of the affected design in the
worldwide fleet. The following table provides the estimated costs for
U.S. operators to comply with this proposed AD.

                                                                     Estimated Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Average                                       Number of U.S.-
              Action                        Work hours          labor rate   Parts      Cost per  airplane       registered            Fleet cost
                                                                 per hour                                         airplanes
--------------------------------------------------------------------------------------------------------------------------------------------------------
Revising the Maintenance Program    1........................          $85      $0  $85......................             125  $10,625.
 (required by AD 2008-09-04).
Revising the Airworthiness          1........................           85       0  $85......................             125  $10,625.
 Limitation Section (new proposed
 action).
Installing fuses (new proposed      Up to 35.................           85       0  Up to $2,975.............             125  Up to $371,875.
 action).
--------------------------------------------------------------------------------------------------------------------------------------------------------

Authority for This Rulemaking

    Title 49 of the United States Code specifies the FAA's authority to
issue rules on aviation safety. Subtitle I, section 106, describes the
authority of the FAA Administrator. Subtitle VII, Aviation Programs,
describes in more detail the scope of the Agency's authority.
    We are issuing this rulemaking under the authority described in
subtitle VII, part A, subpart III, section 44701, ``General
requirements.'' Under that section, Congress charges the FAA with
promoting safe flight of civil aircraft in air commerce by prescribing
regulations for practices, methods, and procedures the Administrator
finds necessary for safety in air commerce. This regulation is within
the scope of that authority because it addresses an unsafe condition
that is likely to exist or develop on products identified in this
rulemaking action.

Regulatory Findings

    We have determined that this proposed AD would not have federalism
implications under Executive Order 13132. This proposed AD would not
have a substantial direct effect on the States, on the relationship
between the national Government and the States, or on the distribution
of power and responsibilities among the various levels of government.
    For the reasons discussed above, I certify that the proposed
regulation:
    1. Is not a ``significant regulatory action'' under Executive Order
12866;
    2. Is not a ``significant rule'' under the DOT Regulatory Policies
and Procedures (44 FR 11034, February 26, 1979); and
    3. Will not have a significant economic impact, positive or
negative, on a substantial number of small entities under the criteria
of the Regulatory Flexibility Act.
    We prepared a regulatory evaluation of the estimated costs to
comply with this proposed AD and placed it in the AD docket. See the
ADDRESSES section for a location to examine the regulatory evaluation.

List of Subjects in 14 CFR Part 39

    Air transportation, Aircraft, Aviation safety, Incorporation by
reference, Safety.

The Proposed Amendment

    Accordingly, under the authority delegated to me by the
Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

PART 39--AIRWORTHINESS DIRECTIVES

    1. The authority citation for part 39 continues to read as follows:

    Authority:  49 U.S.C. 106(g), 40113, 44701.

Sec.  39.13  [Amended]

    2. The FAA amends Sec.  39.13 by removing Amendment 39-15484 (73 FR
21523, April 22, 2008) and adding the following new AD:

McDonnell Douglas Corporation: Docket No. FAA-2010-0639; Directorate
Identifier 2009-NM-232-AD.

Comments Due Date

    (a) The FAA must receive comments on this AD action by August 9,
2010.

Affected ADs

    (b) This AD supersedes AD 2008-09-04, Amendment 39-15484.

Applicability

    (c) This AD applies to all McDonnell Douglas Model DC-8-31, DC-
8-32, DC-8-33, DC-8-41, DC-8-42, and DC-8-43 airplanes; Model DC-8-
51, DC-8-52, DC-8-53, and DC-8-55 airplanes; Model DC-8F-54 and DC-
8F-55 airplanes; Model DC-8-61, DC-8-62, and DC-8-63 airplanes;
Model DC-8-61F, DC-8-62F, and DC-8-63F airplanes; Model DC-8-71, DC-
8-72, and DC-8-73 airplanes; and Model DC-8-71F, DC-8-72F, and DC-8-
73F airplanes; certificated in any category.

    Note 1:  This AD requires revisions to certain operator
maintenance documents to include new inspections. Compliance with
these inspections is required by 14 CFR 91.403(c). For airplanes
that have been previously modified, altered, or repaired in the
areas addressed by these inspections, the operator may not be able
to accomplish the inspections described in the revisions. In this
situation, to comply with 14 CFR 91.403(c), the operator must
request approval for an alternative method of compliance (AMOC) in
accordance with paragraph (o) of this AD. The request should include
a description of changes to the required inspections that will
ensure the continued operational safety of the airplane.

Subject

    (d) Air Transport Association (ATA) of America Code 28: Fuel.

Unsafe Condition

    (e) This AD results from a design review of the fuel tank
systems. The Federal Aviation Administration is issuing this AD to
prevent the potential for ignition sources inside fuel tanks caused
by latent failures, alterations, repairs, or maintenance actions,
which, in combination with flammable fuel vapors, could result in a
fuel tank explosion and consequent loss of the airplane.

Compliance

    (f) You are responsible for having the actions required by this
AD performed within the compliance times specified, unless the
actions have already been done.

Restatement of Requirements of AD 2008-09-04, With Revised Compliance
Method

Revise the Maintenance Program

    (g) Before December 16, 2008, revise the maintenance program to
incorporate the information specified in Appendixes B, C, and D of
the Boeing DC-8 Special Compliance Item Report, MDC-02K9030,
Revision A, dated August 8, 2006.

No Reporting Requirement

    (h) Although the Boeing DC-8 Special Compliance Item Report,
MDC-02K9030, Revision A, dated August 8, 2006, specifies to submit
certain information to the manufacturer, this AD does not require
that action.

No Alternative Inspections, Inspection Intervals, or Critical Design
Configuration Control Limitations (CDCCLs)

    (i) Except as provided by paragraph (m) of this AD, after
accomplishing the applicable actions specified in paragraph (g) of
this AD, no alternative inspections, inspection intervals, or CDCCLs
may be used unless the inspections, intervals, or CDCCLs are
approved as an AMOC in accordance with the procedures specified in
paragraph (o) of this AD.

New Requirements of This AD

Revise the Maintenance Program

    (j) Within 30 days after the effective date of this AD, revise
the maintenance program to incorporate the information required by
paragraphs (j)(1), (j)(2), and (j)(3) of this AD.
    (1) CDCCL 20-10, ``DC-8 Float Switch Circuit'' in Appendix B of
Boeing DC-8 Special Compliance Item Report, MDC-02K9030, Revision C,
dated January 5, 2010.
    (2) ALI 30-1 ``DC-8 Pneumatic System Decay Check'' in Appendix C
of Boeing DC-8 Special Compliance Item Report, MDC-02K9030, Revision
C, dated January 5, 2010.
    (3) ALI 28-1, ``DC-8 Alternate and Center Auxiliary Tank Fuel
Pump Control Systems Check,'' in Appendix C of Boeing DC-8 Special
Compliance Item Report, MDC-02K9030, Revision C, dated January 5,
2010.

Install the In-Line Fuses

    (k) Within 60 months after the effective date of this AD,
install the fuel tank float switch in-line fuses in the leading
edges of the front spars of the left and right wings, in accordance
with the Accomplishment Instructions of Boeing Service Bulletin DC8-
28-090, dated October 9, 2009.

No Alternative Inspections, Inspection Intervals, or Critical Design
Configuration Control Limitations (CDCCLs)

    (l) After accomplishing the actions specified in paragraph (k)
of this AD, no alternative inspections, inspection intervals, or
CDCCLs may be used unless the inspections, intervals, or CDCCLs are
approved as an AMOC in accordance with the procedures specified in
paragraph (o) of this AD.
    (m) Revising the maintenance program to incorporate the
information specified in Appendixes B, C, and D of the Boeing DC-8
Special Compliance Item Report, MDC-02K9030, Revision B, dated July
23, 2009; or Revision C, dated January 5, 2010; is an acceptable
method of compliance with the actions specified in paragraph (g) of
this AD.

No Reporting Requirement

    (n) Although the Boeing DC-8 Special Compliance Item Report,
MDC-02K9030, Revision B, dated July 23, 2009; and Revision C, dated
January 5, 2010; specify to submit certain information to the
manufacturer, this AD does not require that action.

Alternative Methods of Compliance (AMOCs)

    (o)(1) The Manager, Los Angeles Aircraft Certification Office
(ACO), FAA, has the authority to approve AMOCs for this AD, if
requested using the procedures found in 14 CFR 39.19. Send
information to ATTN: Samuel Lee, Aerospace Engineer, Propulsion
Branch, ANM-140L, FAA, Los Angeles Aircraft Certification Office
(ACO), 3960 Paramount Boulevard, Lakewood, California 90712-4137;
telephone<PHONE_NUMBER>; fax<PHONE_NUMBER>.
    (2) To request a different method of compliance or a different
compliance time for this AD, follow the procedures in 14 CFR 39.19.
Before using any approved AMOC on any airplane to which the AMOC
applies, notify your principal maintenance inspector (PMI) or
principal avionics inspector (PAI), as appropriate, or lacking a
principal inspector, your local Flight Standards District Office.
The AMOC approval letter must specifically reference this AD.

    Issued in Renton, Washington, on June 21, 2010.
Ali Bahrami,
Manager, Transport Airplane Directorate, Aircraft Certification
Service.
[FR Doc. 2010-15400 Filed 6-24-10; 8:45 am]
BILLING CODE 4910-13-P