[Federal Register Volume 80, Number 116 (Wednesday, June 17, 2015)]
[Notices]
[Pages 34729-34743]
[FR Doc No: 2015-14890]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75165; File No. S7-11-15]

Request for Comment on Exchange-Traded Products

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
seeking public comment on topics related to the listing and trading of
exchange-traded products on national securities exchanges and sales of
these products by broker-dealers.

DATES: Comments should be received by August 17, 2015.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml);
     Send an email to<EMAIL_ADDRESS>including File
Number S7-11-15 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov), following the instructions for submitting
comments.

Paper Comments

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

All submissions should refer to File Number S7-11-15. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's Web site (http://www.sec.gov). Comments
are also available for Web site viewing and printing in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
publicly available.

FOR FURTHER INFORMATION CONTACT: Edward Cho, Special Counsel, at (202)
551-5508; Christopher Chow, Special Counsel, at<PHONE_NUMBER>; or
Sarah Schandler, Special Counsel, at<PHONE_NUMBER>, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE., Washington, DC 20549-7010.

Table of Contents

I. Discussion
    A. Introduction
    B. The Types of ETPs
    C. How Existing ETPs Function
    1. Purchases, Sales, Creations, and Redemptions
    2. Arbitrage Between an ETP's Market Price and Its NAV
    D. The Commission's Oversight of Exchange-Traded Products
    1. Exchange Act Exemptive and No-Action Relief for Existing ETPs
    2. Exchange Listing Standards and the Rule 19b-4 Process
    3. Broker-Dealer Sales Practices
II. Request For Comment
    A. Arbitrage and Market Pricing
    B. Exchange Act Exemptions and No-Action Positions
    C. Exchange Listing Standards
    D. Broker-Dealer Sales Practices and Investor Understanding and
Use of ETPs
    E. Other

I. Discussion

A. Introduction

    Exchange-traded products (``ETPs'') constitute a diverse class of
financial products that seek to provide investors with exposure to
financial instruments, financial benchmarks, or investment strategies
across a wide range of asset classes. ETP trading occurs on national
securities exchanges and other secondary markets that are regulated by
the Commission under the Securities Exchange Act of 1934 (``Exchange
Act''),\1\ making ETPs widely available to market participants, from
individual investors to institutional investors, including hedge funds
and pension funds.
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    \1\ 15 U.S.C. 78a et seq. Once listed on a national securities
exchange, ETP shares also can be traded on Alternative Trading
Systems (as defined in Rule 300 of Regulation ATS, 17 CFR 242.300)
or in other over-the-counter transactions.
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    The Commission approved the listing and trading of shares of the
first ETP--the SPDR S&P 500 ETF (``SPY'')--in 1992.\2\ Since the SPY
began trading on January 22, 1993, there has been enormous growth in
the number, aggregate market capitalization, and variety of ETPs. The
chart below depicts the growth of ETPs, both in number and market
capitalization, since 1993.
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    \2\ See Securities Exchange Act Release No. 31591 (Dec. 11,
1992), 57 FR 60253 (Dec. 18, 1992) (SR-Amex-92-18) (order approving
the adoption of listing standards for Portfolio Depositary Receipts
and the listing and trading of shares of SPY pursuant to those
listing standards).
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    As reflected in Figure 1 (below), from 2006 to 2013, the total
number of ETPs listed and traded as of year end rose by an average of
160 per year, with a net increase of more than 200 in both 2007 and
2011. By comparison, from 1993 to 2005, the total number of ETPs listed
and traded as of year end rose by an average of just 17 per year, with
a net increase of 60 in 2000. The total market capitalization of ETPs
has also grown substantially, nearly doubling since the end of 2009.
Much of this growth has been in index-based ETPs.

[GRAPHIC] [TIFF OMITTED] TN17JN15.001

    As of December 31, 2014, there were 1,664 U.S.-listed ETPs, and
they had an aggregate market capitalization of just over $2
trillion.\4\ Trading in these ETPs makes up a significant portion of
secondary-market equities trading. For example, during 2014, trading in
U.S.-listed ETPs made up about 16.7% of U.S. equity trading by share
volume and 25.7% of U.S. equity trading by dollar volume.\5\
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    \3\ The figures underlying this chart were produced by an
analysis by Commission staff of year-end market data obtained
through subscriptions to Morningstar Direct and Bloomberg
Professional services.
    \4\ These figures reflect an analysis by Commission staff of
market data obtained through subscriptions to Morningstar Direct and
Bloomberg Professional services.
    \5\ These figures reflect an analysis by Commission staff of
market data obtained through the Commission's Market Information
Data and Analytics System (``MIDAS''). The staff's analysis of MIDAS
data also shows that approximately 32.4% of the trading activity (by
share volume) in ETPs during 2014 took place on trading venues other
than national securities exchanges, which is roughly comparable to
the approximately 35.2% of share volume in all equity trading that
took place off an exchange in 2014.
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    There has also been significant growth in the range of investment
strategies that ETPs pursue. These strategies have expanded from
exchange-traded funds (``ETFs'') that track equity indices (such as the
original SPY) to include, among other things: (i) ETPs that track other
types of indices (such as those based on fixed-income securities or on
derivatives contracts on commodities and currencies); (ii) actively
managed ETPs that hold portfolios of equities, fixed-income
instruments, foreign securities, commodities, currencies, futures,
options, or other over-the-counter or exchange-traded derivatives; \6\
(iii) leveraged, inverse, and inverse leveraged ETPs; \7\ and (iv)

ETPs employing market volatility, hedging, or options-based
strategies.\8\
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    \6\ See, e.g., Securities Exchange Act Release Nos. 50603 (Oct.
28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22) (order
approving the adoption of listing standards for Equity Gold Shares
and the listing and trading of shares of the streetTRACKS Gold
Trust, which was subsequently renamed the SPDR Gold Trust); 60064
(June 8, 2009), 74 FR 28315 (June 15, 2009) (SR-NYSEArca-2009-30)
(order granting approval for the listing and trading of shares of
the iShares Diversified Alternatives Trust); 68390 (Dec. 10, 2012),
77 FR 74540 (Dec. 14, 2012) (SR-BATS-2012-042) (order granting
approval for the listing and trading of shares of the Sovereign
Screened Global Bond Fund); 68871 (Feb. 8, 2013), 78 FR 11238 (Feb.
15, 2013) (SR-NYSEArca-2012-138) (order granting approval for the
listing and trading of shares of the PIMCO Foreign Currency Strategy
Exchange-Traded Fund); 68972 (Feb. 22, 2013), 78 FR 13721 (Feb. 28,
2013) (SR-NASDAQ-2012-147) (order granting approval for the listing
and trading of shares of the First Trust High Yield Long/Short ETF);
70209 (Aug. 15, 2013), 78 FR 51769 (Aug. 21, 2013) (SR-NYSEArca-
2013-60) (order granting approval to list and trade shares of the
Market Vectors Low Volatility Commodity ETF and Market Vectors Long/
Short Commodity ETF); and 71378 (Jan. 23, 2014), 79 FR 4786 (Jan.
29, 2014) (SR-NYSEArca-2013-137) (order granting approval to list
and trade shares of the Merk Gold Trust).
    \7\ Leveraged ETPs seek to achieve performance results, over a
specified period, that are a multiple or an inverse multiple of the
performance of the index or benchmark they track. Inverse ETPs (also
called ``short'' funds) seek to deliver the opposite of the
performance of the index or benchmark they track. Like traditional
ETPs, some leveraged and inverse ETPs track broad indices, some are
sector-specific, and others are linked to commodities, currencies,
or some other benchmark. See U.S. Securities and Exchange
Commission, Leveraged and Inverse ETFs: Specialized Products with
Extra Risks for Buy-and-Hold Investors, available at http://www.sec.gov/investor/pubs/leveragedetfs-alert.htm; see also
Securities Exchange Act Release No. 52553 (Oct. 3, 2005), 70 FR
59100 (Oct. 11, 2005) (SR-Amex-2004-62) (order granting approval for
the adoption of listing standards to accommodate leveraged ETFs and
for the listing and trading of shares of the xtraShares Trust).
    \8\ For example, recent ETPs have included an ETF that seeks to
track the performance of the CBOE S&P 500 VIX Tail Hedge Index, see
Securities Exchange Act Release No. 67485 (July 23, 2012), 77 FR
44291 (July 27, 2012) (SR-NYSEArca-2012-50); an ETF that writes
covered call options on underlying ETPs that it owns, see Securities
Exchange Act Release No. 67552 (Aug. 1, 2012), 77 FR 47131 (Aug. 7,
2012) (SR-NYSEArca-2012-55); an ETF that holds long and short
positions in underlying ETFs and ETNs, see Securities Exchange Act
Release No. 67559 (Aug. 1, 2012), 77 FR 47482 (Aug. 8, 2012) (SR-
NYSEArca-2012-57); an ETF that holds a portfolio including equities,
equity futures, and volatility-related instruments, see Securities
Exchange Act Release No. 68158 (Nov. 5, 2012), 77 FR 67412 (Nov. 9,
2012) (SR-NYSEArca-2012-101); and an ETF that seeks to track the
performance of an index of over-the-counter put options on volatile
stocks, see Securities Exchange Act Release No. 69373 (Apr. 15,
2013), 78 FR 23601 (Apr. 19, 2013) (SR-NYSEArca-2012-108).
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    The increasing scope and complexity of ETP investment strategies in
recent years have led to an increase in the number and complexity of
requests by issuers for exemptive relief under the Exchange Act (to
allow ETPs to be offered for sale on exchanges) and in the number and
complexity of proposed rule changes filed with the Commission by
exchanges seeking to establish listing standards for the securities of
new ETPs. Accordingly, the Commission believes that this is an
opportune time to seek public comment on topics associated with its
oversight of the listing and trading of ETPs on national securities
exchanges.\9\
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    \9\ The Commission has previously sought comment on topics
related to exchange-traded funds, most recently in 2008. See
Exchange-Traded Funds, Investment Company Act Release No. 28193
(Mar. 11, 2008), 73 FR 14618 (Mar. 18, 2008) (proposed rule),
available at http://www.sec.gov/rules/proposed/2008/33-8901.pdf. The
Commission has not adopted the rule that was proposed in the 2008
release.
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B. The Types of ETPs

    Although ETPs constitute a diverse class of financial products, for
purposes of this Request for Comment they are classified into three
broad categories.\10\
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    \10\ Recently, the Commission approved an exchange proposal to
adopt rules that provide for the listing and trading of Exchange-
Traded Managed Fund Shares (``ETMFs''), which would operate
differently from existing ETPs. See Securities Exchange Act Release
No. 73562 (Nov. 7, 2014), 79 FR 68309 (Nov. 14, 2014) (SR-NASDAQ-
2014-020) (Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1 thereto, Relating to the Listing and Trading of
Exchange-Traded Managed Fund Shares) (``ETMF Approval Order''). No
ETMFs are currently listed or traded on an exchange, and this
Request for Comment does not therefore address their listing and
trading.
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Exchange-Traded Funds (ETFs)
    The first, and largest, category comprises ETFs, which are open-end
fund vehicles or unit investment trusts that are registered as
investment companies under the Investment Company Act of 1940 (``1940
Act'').\11\ Like an open-end fund, an ETF pools the assets of multiple
investors and invests those assets according to its investment
objective and principal investment strategies, and each share of an ETF
represents an undivided interest in the underlying assets of the ETF.
However, unlike open-end funds--shares of which are purchased or
redeemed at the fund's current net asset value (``NAV''),\12\ which is
typically calculated at the end of the trading day--ETF shares may be
bought or sold by investors throughout the day through a broker-dealer
at a market-determined price.\13\
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    \11\ 15 U.S.C. 80a-1 et seq.
    \12\ The NAV of an investment company is the net value of all
the assets and liabilities in the investment company's portfolio
divided by the number of the shares issued by the investment
company.
    \13\ Closed-end funds are also registered 1940 Act investment
companies that issue securities that are traded on an exchange, and
they may pursue investment strategies similar to those of ETFs. The
trading of closed-end funds differs from that of ETFs, however, in
that closed-end funds do not operate with the creation and
redemption mechanism that, as described below, helps to keep an
ETF's market price closely tied to the value of the assets it holds.
See infra at Section I.C.
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Non-1940 Act Pooled Investment Vehicles
    The second category comprises ETPs that, generally, are trust or
partnership vehicles that are not registered under the 1940 Act because
they do not invest primarily in securities. Examples of ETPs in this
category include those that physically hold a precious metal or that
hold a portfolio of futures or other derivatives contracts on certain
commodities or currencies. Offerings of securities issued by ETPs in
this second category are registered only under the Securities Act of
1933 (``Securities Act'') \14\ and are not also registered under the
1940 Act.
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    \14\ 15 U.S.C. 77a et seq.
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Exchange-Traded Notes (ETNs)
    The third category comprises exchange-traded notes (``ETNs''). ETNs
are senior debt instruments issued by financial institutions, and they
pay a return based on the performance of a ``reference asset''--an
asset, market benchmark, or other investment strategy, such as the
return on the S&P 500 Index, the performance of commodities or
commodity indices, or the performance of the common stock of an
individual public company. Unlike the other two categories of ETPs
described above, ETNs are not pooled vehicles, and they do not hold an
underlying portfolio of securities, futures, over-the-counter
derivatives, or other assets. Offerings of ETNs are registered under
the Securities Act, and the performance of the reference assets
generally determines the amount owed by the issuer of the ETN to the
holder of the ETN at maturity.
Market Statistics
    To provide a general overview of the distribution of market
capitalization and trading volume across broad categories of ETPs, the
table below shows the number of ETP products (by underlying or
reference asset and by type of ETP), their aggregate market
capitalization, and the total value traded as of year end 2014.

                      ETPs by Underlying or Reference Asset Type, as of Year End 2014 \15\
----------------------------------------------------------------------------------------------------------------
                                                                                Total value
         Underlying or reference asset or strategy               Number       Total market cap   traded in 2014
                                                                                (millions)        (millions)
----------------------------------------------------------------------------------------------------------------
Asset Allocation..........................................                36            $7,435           $14,380
    ETF...................................................                34             7,402            14,344
    ETN...................................................                 2                33                36
Alternative Strategies....................................               330            42,985         1,952,802
    ETF...................................................               209            31,865         1,296,485
    Non-1940 Act Pooled Investment Vehicles...............                25             4,727           142,465

    ETN...................................................                96             6,392           513,852
Commodities...............................................               118            55,366           406,728
    ETF...................................................                 7               213               810
    1940 Act Pooled Investment............................
Vehicles..................................................                38            50,880           390,213
    ETN...................................................                73             4,273            15,705
International Equity......................................               367           380,023         2,497,521
    ETF...................................................               361           376,941         2,495,865
    ETN...................................................                 6             3,082             1,657
Municipal Bond............................................                32            14,273            20,186
    ETF...................................................                32            14,273            20,186
Sector Equity.............................................               297           304,588         2,782,522
    ETF...................................................               281           293,673         2,764,385
    ETN...................................................                16            10,915            18,137
Taxable Bond..............................................               217           290,245         1,000,086
    ETF...................................................               214           290,219         1,000,037
    ETN...................................................                 3                26                49
U.S. Equity...............................................               267           909,677         8,581,038
    ETF...................................................               252           907,557         8,579,330
    ETN...................................................                15             2,119             1,707
                                                           -----------------------------------------------------
    Grand Total...........................................             1,664         2,004,591        17,255,263
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C. How Existing ETPs Function
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    \15\ These figures reflect an analysis by Commission staff of
market data obtained through subscriptions to Morningstar Direct and
Bloomberg Professional services. Figures are as of the last trading
day of 2014.
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1. Purchases, Sales, Creations, and Redemptions
    Most investors in an ETP buy and sell the ETP's securities in the
secondary market, at a market-determined price, with other market
participants, including other investors, broker-dealers, and market
makers, on the other side of the transaction. The ETP securities that
are listed for trading on an exchange (``ETP Securities'') are either
(i) shares issued by the ETP or (ii) in the case of ETNs (which are, as
noted above, debt instruments issued by a financial institution), the
debt instruments themselves.
    Although most investors can buy or sell ETP Securities only in the
secondary market through a broker-dealer, certain large market
participants, typically broker-dealers, can become authorized
participants (``Authorized Participants'') with respect to most
ETPs.\16\ Each Authorized Participant enters into a contractual
relationship with the ETP issuer that allows it to engage in purchases
and redemptions of ETP Securities directly with that issuer.
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    \16\ ETNs, as credit instruments issued by a financial
institution, do not have Authorized Participants.
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    For almost all ETPs,\17\ the issuance and redemption of ETP
Securities operates in essentially the same manner.\18\ ETPs generally
issue ETP Securities only in large aggregations or blocks (for example,
50,000 ETP shares) called creation units (``Creation Units''). Most
ETPs are structured so that an Authorized Participant will purchase a
Creation Unit with a portfolio deposit (``Portfolio Deposit''), which
is a basket of assets (and sometimes cash) that generally reflects the
composition of the ETP's portfolio.\19\ The ETP makes public the
contents of the Portfolio Deposit before the beginning of the trading
day.\20\ Because the purchase price of a Creation Unit and its
aggregate NAV must be equal, an amount of cash will be exchanged
between the Authorized Participant and the ETP at the time of purchase
when necessary to balance the value of the Portfolio Deposit with that
of the Creation Unit. After purchasing a Creation Unit, an Authorized
Participant may hold the ETP Securities or sell (or lend) some or all
of them to investors in the secondary market.
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    \17\ ETNs may or may not be redeemable, and they employ
different calculations and procedures to issue and redeem ETN units
based on the value or performance of the underlying reference asset
or benchmark. The issuance and redemption process for ETNs is
generally performed by institutional investors, as issuers require
issuance or redemption to occur in large blocks of ETNs (e.g.,
25,000 to 50,000 ETNs). ETNs are issued and redeemed (where
redeemable) solely for cash.
    \18\ Some ETPs, however, do not permit regular creations after
the initial public offering of the ETP, allowing only ETP
redemptions. See, e.g., Securities Exchange Act Release No. 66930
(May 7, 2012), 77 FR 27817 (May 11, 2012) (SR-NYSEArca 2012-18)
(APMEX Physical--1 oz. Gold Redeemable Trust).
    \19\ Some issuers may allow or require Creation Units to be
created for cash only.
    \20\ In most cases, ETPs publish the contents of their Portfolio
Deposit through the National Securities Clearing Corporation
(``NSCC''). The NSCC provides its members with several methods to
access this information. See http://www.dtcc.com/clearing-services/equities-trade-capture/etf.aspx.
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    Similarly, for most ETPs, when an Authorized Participant wishes to
redeem ETP Securities, it presents a Creation Unit to the ETP for
redemption and receives in return a redemption basket (``Redemption
Basket''), the contents of which are made public by the ETP before the
beginning of the trading day. The Redemption Basket (which is usually,
but not always, the same as the Portfolio Deposit) typically consists
of securities or commodities and a small amount of cash.\21\ As with
purchases from the ETP, redemptions to the ETP are priced at NAV,\22\
and an amount of cash will be exchanged when necessary to balance the
value of the Redemption Basket with that of the Creation Unit.
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    \21\ Some issuers may allow or require cash-only Redemption
Baskets.
    \22\ Certain ETPs that hold physical commodities and are not
ETFs redeem Creation Units, at the Authorized Participant's option,
either for commodities with a value equal to the NAV of the Creation
Unit or for cash at less than the NAV of the Creation Unit. See,
e.g., Securities Exchange Act Release No. 66930, supra note 18.
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    When creation and redemption transactions occur wholly or partly
``in kind''--in other words, when securities constituting the ETP's
portfolio are exchanged for ETP Securities and vice versa--certain
benefits can accrue to the ETP and its investors. In-kind exchanges
generally result in lower trading expenses (because securities received
or

delivered in kind do not need to be purchased or sold in the market by
the ETP, thus avoiding brokerage fees) and lower taxable gains to
shareholders (because appreciated securities are not sold but are
delivered in kind to redeeming Authorized Participants).
2. Arbitrage Between an ETP's Market Price and Its NAV
    Because of the creation and redemption mechanisms, most existing
ETPs present market participants, including Authorized Participants,
market makers, and institutional investors, with opportunities to
engage in arbitrage, which generally helps to prevent the market price
of ETP Securities from diverging significantly from the value of the
ETP's underlying or reference assets.\23\ Although most ETPs calculate
and disseminate their official NAV only once per day as of the close of
regular trading hours, market participants can use other methods during
the trading day to calculate or approximate the value of the assets
underlying or referenced by a share of an ETP.\24\
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    \23\ Arbitrage for ETNs may operate differently from that for
other existing ETPs, because the in-kind creation and redemption
process for most ETPs differs from the cash-only issuance and
redemption process for ETNs. The Commission seeks comment on the
operation of arbitrage for ETNs. See infra at Section II.A (Question
8).
    \24\ ETNs do not calculate a NAV because they do not hold an
underlying portfolio of assets. See supra Section I.B. See also
infra note 26.
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    For example, exchange listing standards require every currently
traded, actively managed ETP to make daily disclosure of its entire
portfolio.\25\ Current exchange listing standards do not require
similar disclosures for index-based ETPs, but the make-up and value of
the underlying indices are widely available, and most index-based ETPs,
as a matter of practice, make daily disclosure of their portfolios.
With this information, market participants can access pricing data
about an ETP's portfolio assets and perform their own calculations of
the per-share value of that portfolio.
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    \25\ See, e.g., NYSE Arca Equities Rule 8.600(d)(2)(B)(i). An
actively managed ETP does not seek to track the return of a
particular securities index. Instead, an actively managed ETP's
investment adviser selects investments designed to meet a particular
investment objective or policy.
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    In addition, exchange listing standards require existing ETPs to
publicly disseminate during the trading day an intraday indicative
value (``IIV''), which is designed to provide investors with
information on the value of the investments held by the ETP (or, in the
case of an ETN, the reference assets).\26\ The IIV is typically
calculated and disseminated at least every 15 seconds during the
trading day and is typically disseminated over the Consolidated Tape or
via an exchange data feed. The IIV may or may not be based on the
entire portfolio held by an ETP, and it may or may not be equal to the
per-share value of an ETP's underlying portfolio or reference
assets.\27\
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    \26\ See, e.g., NYSE Arca Equities Rule 5.2(j)(3), Commentary
.01(c). The IIV is also referred to as an ``Indicative Optimized
Portfolio Value,'' ``Intraday Value,'' or ``Portfolio Indicative
Value.'' Most ETN issuers also make publicly available on their Web
sites or through third-party vendors a value called the closing
indicative value, which is determined as of the close of each
trading day. The closing indicative value, in contrast to the
intraday indicative value, represents the value of the ETN at that
point in time and is used to calculate the amounts due to investors
at maturity or on redemption.
    \27\ For example, the IIV for some ETPs is based on the current
value of the securities or cash required to be deposited in exchange
for a creation unit, which may differ from the composition of
portfolio holdings on any given day. See, e.g., Securities Exchange
Act Release No. 67320 (June 29, 2012), 77 FR 39763 (July 5, 2012)
(SR-NYSEArca-2012-44) (order granting approval for the listing and
trading of shares of the iShares Strategic Beta U.S. Large Cap Fund
and iShares Strategic Beta U.S. Small Cap Fund). The IIV for certain
other ETPs is based on the current value of some, but not all,
assets held in the investment portfolio. See, e.g., Securities
Exchange Act Release No. 61881 (Apr. 9, 2010), 75 FR 20028 (Apr. 16,
2010) (SR-NYSEArca-2010-14) (order granting approval to list and
trade partnership units of the United States Brent Oil Fund, LP, a
commodity pool that seeks to track changes in Brent crude oil
futures traded on the ICE Futures Exchange and that calculates and
disseminates an IIV based solely on these futures contracts,
excluding other crude-oil-related investments held in the
portfolio).
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    A simplified example of ``riskless'' arbitrage will help to clarify
how the arbitrage process for existing ETPs is intended to work. If the
shares of an ETP that uses an in-kind creation and redemption process
begin to trade at a discount to the value of the underlying portfolio
at any point during the trading day, arbitrageurs can capture this
difference (minus expenses) by: (i) Purchasing ETP Securities in the
secondary market in an amount equal to a Creation Unit while
simultaneously selling short the securities or commodities in the
Redemption Basket; (ii) redeeming the Creation Unit with the ETP at the
end-of-day NAV (either as an Authorized Participant or through a
relationship with an Authorized Participant), thereby receiving the
securities or commodities in the Redemption Basket; and (iii) using the
contents of the Redemption Basket to close out the arbitrageur's short
position. Purchasing the ETP Securities and selling short the
securities or commodities in the Redemption Basket also apply market
pressure that tends, all other things being equal, to bring the ETP
Security's market price closer to the value of the underlying portfolio
assets.
    Similarly, if the shares of this same ETP begin to trade at a
premium to the value of the underlying portfolio, arbitrageurs may
profit by: (i) Selling short the ETP Securities; (ii) purchasing the
securities or commodities that make up the Portfolio Deposit; (iii)
exchanging the Portfolio Deposit for a Creation Unit through an
Authorized Participant; and then (iv) using the ETP Securities in the
Creation Unit to close out the short position. Again, the sales of the
ETP Securities and the purchases of the contents of the Portfolio
Deposit apply market pressure that tends, all other things being equal,
to bring the price of the ETP Securities closer to the value of the
underlying portfolio assets.
    Market participants can also engage in arbitrage activities that do
not necessarily require them to engage in creations or redemptions. For
example, if a market participant believes that an ETP is overvalued
relative to its underlying or reference assets, the market participant
may sell ETP Securities; buy the underlying or reference assets; and,
if the trading prices move toward parity, close out the positions in
both the ETP Securities and the underlying or reference assets. The
market participant would thereby realize a profit from the relative
movement of those trading prices without engaging in an ETP creation.
Similarly, a market participant could buy ETP Securities and sell the
underlying or reference assets in an attempt to profit when an ETP
Security is trading at a discount to its underlying or reference
assets. As discussed above, the trading of an ETP Security and its
underlying or reference assets applies market pressure that may bring
the prices of the ETP Security and those assets closer together.

D. The Commission's Oversight of Exchange-Traded Products \28\
---------------------------------------------------------------------------

    \28\ In addition to the exemptive or no-action relief provided
with respect to the Exchange Act rules and regulations described
infra, in 1998 and 1999 the Commission's staff provided no-action
relief under Section 13(d) of the Exchange Act, 15 U.S.C. 78m(d),
and Section 16(a) of the Exchange Act, 15 U.S.C. 78p(a), to certain
funds registered under the 1940 Act with respect to the required
filing of ownership reports by insiders and five percent beneficial
owners of the shares of the ETFs. See Letter from James J. Moloney,
Division of Corporation Finance, and Evan Geldzahler, Division of
Investment Management, Securities and Exchange Commission, to Sam
Scott Miller, Orrick, Herrington & Sutcliffe LLP, 1998 SEC No.-Act.
LEXIS 1050 (Dec. 14, 1998) (providing no-action relief under Section
13(d) of the Exchange Act); Letter from Anne M. Krauskopf, Division
of Corporation Finance, and Evan Geldzahler, Division of Investment
Management, Securities and Exchange Commission, to Stuart M.
Strauss, Gordon, Altman, Butowsky, Weitzen, Shalov & Wein, 1999 SEC
No-Act. LEXIS 500 (May 6, 1999) (``Select Sector SPDR Trust
Letter'') (providing no-action relief under Section 16(a) of the
Exchange Act). This no-action relief was based, in large part, on
the representation that the trading prices of the ETFs did not
deviate materially from their NAV. See id. Having stated its views
on whether insiders and five percent beneficial owners of ETPs must
file ownership reports under Sections 16(a) and 13(d) of the
Exchange Act, the Division staff stated that it would not respond to
further requests for no-action relief in this area unless the
request presented a ``novel or unusual issue.'' See Select Sector
SPDR Trust Letter, 1999 SEC No-Act. LEXIS 500, *9.
---------------------------------------------------------------------------

    Before ETP Securities can be listed and traded on a national
securities

exchange, those securities and their issuer must comply with, or obtain
exemptions from, several provisions of the securities laws. First, as
with other securities, the offer and sale of ETP Securities must be
registered under the Securities Act.\29\ In addition, in the case of
ETFs, certain relief from the requirements of the 1940 Act is
necessary,\30\ because ETFs differ from other open-end investment
companies in that they issue and redeem shares only in Creation Units
and their shares trade in the secondary market at market prices.
---------------------------------------------------------------------------

    \29\ For ETPs that are not registered under the 1940 Act,
offerings of ETP Securities require the filing of a registration
statement on Form S-1 or Form S-3, depending on the issuer.
Depending on the form type used to register the offering, the staff
of the Division of Corporation Finance may review the disclosures
included in the registration statement and may issue comments. ETN
offerings in many cases are made through takedowns off of effective
shelf registration statements. For ETFs registered under the 1940
Act, offerings require the filing of a registration statement on
Form N-1A. The staff of the Division of Investment Management
reviews the information disclosed in the Form N-1A and may issue
comments requesting that the issuer revise or expand its disclosures
before the registration statement becomes effective.
    \30\ For an ETF to operate, it must first obtain 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 from Rule
22c-1 thereunder, and under Sections 6(c) and 17(b) for an exemption
from Sections 17(a)(1) and 17(a)(2) of the 1940 Act.
---------------------------------------------------------------------------

    While ETPs are governed by various provisions of the securities
laws, including the Securities Act and, in certain cases, the 1940 Act,
the focus of this Request for Comment is on the listing of ETP
Securities on an exchange and the trading of ETP Securities on
exchanges and other venues. Therefore, in issuing this Request for
Comment, the Commission seeks public comment relating specifically to
the oversight of ETPs under the provisions of the Exchange Act and the
rules thereunder, including both (i) the exemptive and no-action relief
granted to ETPs under the Exchange Act and (ii) the requirement that a
national securities exchange have Commission-approved listing standards
applicable to the ETP Securities being traded.
1. Exchange Act Exemptive and No-Action Relief for Existing ETPs
    The trading of ETP Securities on an exchange generally will require
that the issuer obtain exemptive or no-action relief from various
provisions of, or rules promulgated under, the Exchange Act. As
explained more fully below, the normal operation of an ETP would
usually violate these provisions absent relief.
a. Regulation M
    Regulation M proscribes certain activities that may increase a
security's offering price (and so increase the offering proceeds);
stabilize the market price of an offered security in order to avoid a
price decline during the sales period or in the immediate aftermarket;
or induce or attempt to induce prospective investors to buy in the
aftermarket.\31\ Rules 101 and 102 of Regulation M generally prohibit
distribution participants, issuers, selling security holders, and their
affiliated purchasers from purchasing, bidding for, or attempting to
induce others to purchase or bid for covered securities during the
restricted period of a distribution of securities.\32\ Because most
ETPs are in continuous distribution, meaning that they are continually
creating and distributing new securities, this restricted period
usually extends indefinitely.\33\ Absent relief, the purchase of ETP
Securities by an Authorized Participant (who would be considered a
distribution participant), or by the issuer in the redemption process,
would violate Rules 101 and 102 of Regulation M.
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    \31\ See Amendments to Regulation M: Anti-Manipulation Rules
Concerning Securities Offerings, Securities Exchange Act Release No.
50831 (Dec. 9, 2004), 69 FR 75774 (Dec. 17, 2004) (S7-41-04)
(proposed rule).
    \32\ 17 CFR 242.101 and 242.102. See also 17 CFR 242.100
(defining ``distribution participants,'' ``selling security
holder,'' ``affiliated purchaser,'' and other terms for purposes of
Regulation M). In addition to being promulgated under the Exchange
Act, Rules 101 and 102 of Regulation M are also promulgated under
the Securities Act and under the 1940 Act. See Anti-Manipulation
Rules Concerning Securities Offerings, Securities Exchange Act
Release No. 38067 at n. 10 (Dec. 20, 1996), 62 FR 520, 521 n. 10
(Jan. 3, 1997) (S7-11-96).
    \33\ See 17 CFR 242.100 (definition of ``Restricted Period'').
---------------------------------------------------------------------------

    When it has granted relief with respect to Regulation M, the
Commission has relied upon representations from ETPs that the
continuing existence of effective and efficient arbitrage mechanisms
help ensure that the secondary market price of ETP Securities does not
vary substantially from the ETP's NAV or underlying index value.\34\
The relief is based in part on an ETP issuer's representation that the
continuing existence of effective and efficient arbitrage mechanisms
makes it difficult to manipulate distributions of ETP Securities.
Relief for classes of ETPs relies on similar bases.\35\ The
consideration of effective and efficient arbitrage mechanisms for
purposes of Regulation M, and the Commission's overall consideration of
ETPs, can take into account not only the end-of-day differences between
an ETP Security's closing market price and the ETP's NAV, but also any
intra-day premiums or discounts between the secondary market price of
an ETP Security and the value of its underlying portfolio or reference
assets.
---------------------------------------------------------------------------

    \34\ See, e.g., Letter from W. John McGuire, Morgan, Lewis &
Bockius LLP, to Josephine Tao, Division of Trading and Markets,
Securities and Exchange Commission, re: AdvisorShares Trust
Actively-Managed ETF WCM/BNY Mellon Focused Growth ADR (June 18,
2010) (representing that a close alignment between market price and
NAV is expected for the relevant ETP due in part to an effective and
efficient arbitrage mechanism), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2010/advisorshares061810.pdf. See
also Letter from Josephine Tao, Division of Trading and Markets,
Securities and Exchange Commission, to W. John McGuire, Morgan,
Lewis & Bockius LLP, re: AdvisorShares Trust Actively-Managed ETF
WCM/BNY Mellon Focused Growth ADR (June 18, 2010), available at
http://www.sec.gov/divisions/marketreg/mr-noaction/2010/advisorshares061810.pdf.
    \35\ See Letter from James A. Brigagliano, Division of Trading
and Markets, Securities and Exchange Commission, to Stuart M.
Strauss, Clifford Chance US LLP, re: Class Relief for Exchange
Traded Index Funds (Oct. 24, 2006) (``Equity Index-Based ETF
Letter'') (noting that relief is only appropriate when the secondary
market price of the ETF's shares does not vary substantially from
NAV), available at http://www.sec.gov/divisions/marketreg/mr-noaction/etifclassrelief102406-msr.pdf.
---------------------------------------------------------------------------

    In granting relief, the Commission also has relied on
representations by ETP issuers that the characteristics of their
proposed ETPs will mitigate against the types of abuses that Regulation
M is intended to address.\36\ In the case of ETFs, for example, this
includes representations that the shares are issued by an open-end
investment company or unit investment trust registered with the
Commission under the 1940 Act and that the index underlying an index-
based ETP has at least 20 different component securities to promote
sufficient diversification. It also includes representations that those
components have publicly available trade information, to facilitate the

availability of sufficient information for arbitrage.\37\
---------------------------------------------------------------------------

    \36\ See supra note 31 and accompanying text.
    \37\ See, e.g., Equity Index-based ETF Letter, supra note 35.
Broadly speaking, ETP sponsors seeking relief make the same
representations as those made by similar products that have
previously been granted relief.
---------------------------------------------------------------------------

b. Exchange Act Section 11(d)(1) and Rule 11d1-2
    Section 11(d)(1) of the Exchange Act generally prohibits a broker-
dealer from extending or maintaining credit, or arranging for the
extension or maintenance of credit, on shares of new-issue securities
if the broker-dealer participated in the distribution of the new-issue
securities within the preceding 30 days.\38\ The Commission's view is
that, because ETP Securities are distributed in a continuous manner,
broker-dealers that sell these securities are thereby participating in
the ``distribution'' of a new issue for purposes of Section
11(d)(1).\39\ Further, if an ETF held a portfolio composed solely or
largely of newly issued securities, there is a risk that Authorized
Participants--rather than lending on, or arranging for lending on, the
newly issued securities directly--could use the ETF structure to avoid
the new-issue lending restriction.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78k(d)(1).
    \39\ See, e.g., Letter from Catherine McGuire, Division of
Trading and Markets, Securities and Exchange Commission, to
Securities Industry Association (Nov. 21, 2005), available at http://www.sec.gov/divisions/marketreg/mr-noaction/sia112105.htm.
---------------------------------------------------------------------------

    The Commission has granted ETP issuers exemptions from, and the
staff has issued no-action positions regarding, Section 11(d)(1) in
circumstances in which these evasion concerns are reduced because: (i)
the portfolio is sufficiently diversified that evasion becomes
impractical; \40\ (ii) the portfolio is composed of securities that are
not subject to Section 11(d)(1) (e.g., government securities); \41\ or
(iii) the portfolio is not composed of securities at all (e.g., the
product is an ETP that invests in commodities).\42\
---------------------------------------------------------------------------

    \40\ See, e.g., Letter from Catherine McGuire, Division of
Trading and Markets, Securities and Exchange Commission, to
Securities Industry Association (Nov. 21, 2005) (conditionally
exempting from Section 11(d)(1) an ETF that consists of a basket of
twenty or more component securities, with no one component security
constituting more than 25% of the total value of the ETF), available
at http://www.sec.gov/divisions/marketreg/mr-noaction/sia112105.htm;
Letter from Joseph Furey, Division of Trading and Markets,
Securities and Exchange Commission, to W. John McGuire, Morgan,
Lewis & Bockius LLP, re: AdvisorShares Madrona & Meidell ETFs (June
16, 2011) (``Madrona & Meidell Letter'') (providing conditional
staff no-action relief to ETFs whose portfolios consist of other
diversified ETFs), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2011/advisorsharesmadrona061611.pdf.
    \41\ See, e.g., Letter from James A. Brigagliano, Division of
Market Regulation, Securities and Exchange Commission, to Richard F.
Kadlick, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, re: MACRO
Securities Depositor, LLC (Dec. 22, 2006) (``MACRO Securities
Depositor Letter'') (providing conditional staff no-action relief),
available at http://www.sec.gov/divisions/marketreg/mr-noaction/macro122206-11d1.pdf.
    \42\ See, e.g., Letter from James A. Brigagliano, Division of
Market Regulation, Securities and Exchange Commission, to Michael
Schmidtberger, Sidley Austin Brown & Wood LLP, re: DB Commodity
Index Tracking Fund (Jan. 19, 2006) (``DB Commodity Index Tracking
Fund Letter'') (providing conditional staff no-action relief),
available at http://www.sec.gov/divisions/marketreg/mr-noaction/commodityidxtf011906.htm.
---------------------------------------------------------------------------

c. Exchange Act Rule 10b-10
    Rule 10b-10 under the Exchange Act \43\ requires broker-dealers to
provide their customers with certain disclosures at or before the
completion of a securities transaction, including the identity, price,
and number of shares or units (or principal amount) of the security
purchased or sold. As described above, ETP Securities are issued and
redeemed only in Creation Units of a minimum size, and a Portfolio
Deposit or Redemption Basket may comprise dozens or hundreds of
securities. Because it would be administratively burdensome for broker-
dealers to provide transaction confirmations for each security in a
Portfolio Deposit or Redemption Basket, the Commission has issued
exemptive relief from Rule 10b-10 to permit broker-dealers to omit this
information with respect to ETPs, provided that (i) the Creation Unit
is sufficiently large (at least 25,000 shares and $500,000), (ii) it is
probable that creation and redemption transactions are entered into
only by sophisticated investors, and (iii) the broker-dealer provides
the omitted confirmation information to customers upon request.\44\
---------------------------------------------------------------------------

    \43\ 17 CFR 240.10b-10.
    \44\ See, e.g., Letter from Catherine McGuire to Securities
Industry Association, supra note 40.
---------------------------------------------------------------------------

d. Exchange Act Rule 10b-17
    Rule 10b-17 under the Exchange Act generally requires issuers to
give notice 10 days in advance of certain specified actions (e.g., a
dividend distribution, stock split, or rights offering) relating to
their securities, in accordance with the procedures laid out in the
rule.\45\ Generally this rule is relevant to an ETP when it must
distribute cash--for example, income from fixed-income holdings or cash
from a realized investment gain--to its shareholders. Because some ETP
Securities are continuously being issued or redeemed, issuers have
represented that it is impractical to project, and to provide, some of
the information required by Rule 10b-17 ten days in advance.\46\
According to these issuers, particularly difficult are the requirements
for the issuer to disclose (i) in the case of a distribution in cash,
the amount of cash to be paid or distributed per share, and (ii) in the
case of a distribution in the same security, the amount of the
securities outstanding immediately before and immediately after the
dividend or distribution and the rate of the dividend or
distribution.\47\
---------------------------------------------------------------------------

    \45\ 17 CFR 240.10b-17.
    \46\ See e.g., Letter from Jeremy Senderowicz, Dechert LLP, to
Josephine Tao, Division of Trading and Markets, Securities and
Exchange Commission, re: ALPS ETF Trust, ALPS/GS Momentum Builder
Growth Markets Equities and U.S. Treasuries Index ETF, ALPS/GS
Momentum Builder Multi-Asset Index ETF, and ALPS/GS Momentum Builder
Asia Ex-Japan Equities and U.S. Treasuries Index ETF (Dec. 18,
2012), available at http://www.sec.gov/rules/exorders/2012/34-68459-letter.pdf.
    \47\ These disclosures are required by 17 CFR 240.10b-
17(b)(1)(v)(a) and (b).
---------------------------------------------------------------------------

    When the Commission has granted exemptions to permit these
distributions to occur without ETP issuers providing 10-day advance
notice of the two items of information noted above, this relief has
been conditioned on the issuer providing the two items of information
to the national securities exchange on which the ETP Securities are
registered (pursuant to Section 12 of the Exchange Act) as soon as
practicable before trading begins on the ex-dividend date, but in no
event later than the time (on the day before the ex-dividend date) the
exchange last accepts information relating to distributions.\48\ The
Commission has granted these exemptions because, other than receiving a
delayed notice of these two items of information, market participants
will have timely notice of the existence and timing of a pending
distribution, as required by Rule 10b-17.\49\ Further, under the terms
of the exemption, the timing of the availability of the two items of
information should allow market participants time to update their
systems to reflect the accurate price of the ETP Securities before
trading begins on the ex-dividend date.\50\
---------------------------------------------------------------------------

    \48\ See, e.g., Order Granting a Limited Exemption from Exchange
Act Rule 10b-17, Securities Exchange Act Release No. 67215 (June 19,
2012), 77 FR 37941 (June 25, 2012) (TP-11-07) (``10b-17 Actively
Managed ETP Exemption'').
    \49\ See id.
    \50\ See id.
---------------------------------------------------------------------------

e. Exchange Act Rule 14e-5
    Rule 14e-5 under the Exchange Act \51\ is designed to prevent the
manipulation

of tender offers. In particular, Rule 14e-5 prohibits ``covered
persons'' \52\ from purchasing or arranging to purchase any securities
subject to a tender offer except as part of that tender offer.\53\ This
prohibition is in effect from the announcement of the tender offer
until the expiration of the tender offer. An Authorized Participant
acting as the dealer-manager of a tender offer for a component security
is a covered person for purposes of Rule 14e-5.\54\
---------------------------------------------------------------------------

    \51\ 17 CFR 240.14e-5.
    \52\ For purposes of Exchange Act Rule 14e-5, a ``covered
person'' is defined as: (i) The offeror and its affiliates; (ii) the
offeror's dealer-manager and its affiliates; (iii) any advisor to
any of the persons specified in (i) or (ii) whose compensation is
dependent on the completion of the offer; and (iv) any person
acting, directly or indirectly, in concert with any of the persons
specified in (i), (ii), or (iii) in connection with any purchase or
arrangement to purchase the securities or any related securities.
See 17 CFR 240.14e-5(c)(3).
    \53\ Rule 14e-5 is designed to protect investors by preventing
an offeror from extending greater or different consideration to some
security holders outside the offer, while other security holders are
limited to the offer's terms, and by ensuring that large security
holders do not demand greater consideration. See Securities Exchange
Act Release No. 8712 (Oct. 8, 1969), 34 FR 15838 (Oct. 15, 1969)
(order adopting Rule 10b-13, which was later redesignated as Rule
14e-5 in Securities Exchange Act Release No. 42055 (Oct. 22, 1999),
64 FR 61408 (Nov. 10, 1999)). In addition, Rule 14e-5 prevents
purchases outside the offer that, depending on the conditions in the
market and the nature of the purchases, may be fraudulent or
manipulative in nature, such as purchases that are used to defeat a
tender offer by driving the market price above the offer price or by
otherwise reducing the number of shares tendered below the stated
minimum. See id.
    \54\ See 17 CFR 240.14e-5(c)(3)(ii).
---------------------------------------------------------------------------

    The Commission has granted relief to various entities with respect
to the application of Rule 14e-5 so that Authorized Participants may
redeem Creation Units and purchase ETP Securities even though component
securities may be subject to a Rule 14e-5 restricted period.\55\ ETP
issuers generally seek relief on the basis that: (i) Acquiring
individual securities held by an ETP through redemptions of the ETP's
securities would be impractical and inefficient; (ii) facilitating a
tender offer in a particular security included in a Portfolio Deposit
by means of purchasing all of the specific portfolio securities
constituting the Portfolio Deposit would be inefficient; and (iii)
applying the Rule 14e-5 prohibition would impede the valid and useful
market and arbitrage activity that would assist secondary market
trading and improve the pricing efficiency of ETP Securities.\56\
Moreover, the issuers generally represent that the type of trading
described above does not result in the abuses that Rule 14e-5 was
designed to prevent.\57\ As a condition of the relief that has been
issued, the issuer of ETP Securities generally also represents that the
purchases or redemptions would not, in fact, be used to facilitate a
tender offer.
---------------------------------------------------------------------------

    \55\ See, e.g., Equity Index-Based ETF Letter, supra note 35, at
6. The entities to which relief has been granted include open-end
investment companies that issue ETP Securities, the listing exchange
and any other national securities exchange on or through which the
ETP Securities may subsequently trade, and persons or entities
engaging in transactions in ETP Securities.
    \56\ See, e.g., Letter from W. John McGuire, Bingham McCutchen
LLP, to Michele M. Anderson and David Orlic, Division of Corporation
Finance, Securities and Exchange Commission, re: SSgA Active ETF
Trust (July 3, 2013), available at http://www.sec.gov/divisions/corpfin/cf-noaction/2013/ssga-active-etf-trust-14e5.pdf.
    \57\ See supra note 53.
---------------------------------------------------------------------------

f. Exchange Act Rules 15c1-5 and 15c1-6
    Rule 15c1-5 under the Exchange Act \58\ requires a broker-dealer to
disclose to its customers if it has a control relationship with an
issuer prior to a customer's purchase or sale of the issuer's
securities. Rule 15c1-6 under the Exchange Act \59\ requires a broker-
dealer to disclose to its customer, at or before the completion of a
transaction, that the broker-dealer is participating in the primary or
secondary distribution of the securities that it is selling or
purchasing for the customer's account. Because applying these rules to
all the securities in a creation or redemption transaction would be
administratively burdensome for broker-dealers, and because creations
and redemptions are consummated at prices that are fixed by the ETP,
there appears to be little potential for a broker-dealer to manipulate
the price of the securities in the creation and redemption
transactions.\60\ Therefore, the staff has stated that it will not
recommend enforcement action to the Commission with respect to
Authorized Participants' compliance with Rules 15c1-5 and 15c1-6 in
creation and redemption transactions if a broker-dealer executes
transactions in shares of ``Qualifying ETFs'' without disclosing any
control relationship with an issuer of a security in the Portfolio
Deposit or Redemption Basket.\61\ The staff has similarly stated that
it will not recommend enforcement action if a broker-dealer executes
transactions in shares of Qualifying ETFs without disclosing its
participation or interest in a primary or secondary distribution of a
security included within the Portfolio Deposit or Redemption
Basket.\62\
---------------------------------------------------------------------------

    \58\ 17 CFR 240.15c1-5.
    \59\ 17 CFR 240.15c1-6.
    \60\ See, e.g., Letter from Catherine McGuire to Securities
Industry Association, supra note 40.
    \61\ A ``Qualifying ETF'' was initially limited to an ETF
meeting certain conditions, including that it is issued by an open-
end investment company or unit investment trust registered with the
Commission under the 1940 Act; that it is listed and traded on a
national securities exchange; that it comprises twenty or more
diversified component securities, with no one component security
constituting more than 25% of the total value of the ETF; and that
it is managed to track a particular index, all components of which
are publicly available. Id. Subsequent staff no-action positions
have provided no-action relief to more ETPs with respect to
treatment as Qualifying ETFs. See, e.g., DB Commodity Index Tracking
Fund Letter, supra note 42 (certain commodity-based exchange-traded
trusts); MACRO Securities Depositor Letter, supra note 41 (an ETP
holding government securities); Letter from Brian A. Bussey,
Division of Trading and Markets, Securities and Exchange Commission,
to W. Thomas Conner and Eric C. Freed, Sutherland Asbill & Brennan
LLP, re: Ameristock ETF Trust (June 29, 2007) (certain fixed income
ETFs), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/ameristock062907-msr.pdf; Letter from James A.
Brigagliano, Division of Trading and Markets, Securities and
Exchange Commission, to Kathleen H. Moriarty, Carter, Ledyard &
Milburn, re: Proshares Trust (Jan. 24, 2007) (certain ETFs tracking
a multiple, inverse, or multiple inverse of an index), available at
http://www.sec.gov/divisions/marketreg/mr-noaction/2007/proshares012407-msr.pdf; Letter from Josephine J. Tao, Division of
Trading and Markets, Securities and Exchange Commission, to Richard
F. Morris, Deputy General Counsel, WisdomTree Asset Management, Inc.
(May 9, 2008) (certain actively-managed ETFs not tied to an index),
available at http://www.sec.gov/divisions/marketreg/mr-noaction/2008/wisdomtree050908-msr.pdf; and Madrona & Meidell Letter, supra
note 40 (certain ETFs whose portfolios consist of other diversified
ETFs).
    \62\ Id.
---------------------------------------------------------------------------

g. Class Relief
    In connection with the application of the Exchange Act provisions
described above, the Commission has issued a number of ``class''
exemptions to the trading of ETP Securities.\63\ Class exemptions for
ETPs from the Exchange Act provisions discussed above are generally
issued only if the Commission and the staff have had experience with
individual exemptions and no-action positions and have determined that
class relief is appropriate.\64\ In the case of exemptions, the
Commission must also determine that a class exemption meets the
statutory standard of being necessary or appropriate in the public
interest and consistent with the protection of investors.\65\ An ETP
relying on a class exemption or no-action position must meet all of the
conditions of the relevant Commission order or staff letter for the
life of the product (or until the relief is no longer necessary), just
as if the ETP had obtained its own individual relief. Class exemptions
or no-action positions have been issued for equity index-based

ETFs,\66\ commodity-based investment vehicles that are not registered
under the 1940 Act,\67\ fixed-income index-based ETFs,\68\
``combination'' index-based ETFs,\69\ ETNs,\70\ and actively-managed
ETFs.\71\ These orders and no-action positions cover a number of the
Exchange Act rules and regulations described above.\72\
---------------------------------------------------------------------------

    \63\ See, e.g., Equity-Index Based ETF Letter, supra note 35.
    \64\ See Letter from Catherine McGuire to Securities Industry
Association, supra note 40.
    \65\ See 15 U.S.C. 78mm(a)(1).
    \66\ See Equity Index-Based ETF Letter, supra note 35.
    \67\ See Letter from Racquel L. Russell, Division of Trading and
Markets, Securities and Exchange Commission, to George T. Simon,
Foley & Lardner LLP, re: CurrencyShares British Pound Sterling Trust
et al. (June 21, 2006), available at http://www.sec.gov/divisions/marketreg/mr-noaction/currencyshares062106-10a1.pdf.
    \68\ See Letter from James A. Brigagliano, Division of Trading
and Markets, Securities and Exchange Commission, to Benjamin J.
Haskin, Willkie Farr & Gallagher LLP, re: Class Relief for Fixed
Income ETFs (Apr. 9, 2007), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/fietfclassrelief040907-msr.pdf.
    \69\ See Letter from Josephine Tao, Division of Trading and
Markets, Securities and Exchange Commission, to Domenick Pugliese,
Paul, Hastings, Janofsky and Walker LLP, re: Combination ETFs (June
27, 2007), available at http://www.sec.gov/Archives/edgar/vprr/07/9999999997-07-047147.
    \70\ See, e.g., Letter from Josephine Tao, Division of Trading
and Markets, Securities and Exchange Commission, to Arthur S. Long,
Davis Polk & Wardwell LLP, re: Deutsche Bank AG ETNs (Oct. 12, 2007)
(``ETN No-action Letter''), available at http://www.sec.gov/divisions/marketreg/mr-noaction/2007/dbab101207.pdf.
    \71\ See 10b-17 Actively Managed ETP Exemption, supra note48,
and Division of Trading and Markets: Staff Legal Bulletin No. 9
``Frequently Asked Questions About Regulation M'' (as revised Sep.
10, 2010) (regarding Regulation M), available at http://www.sec.gov/interps/legal/mrslb9.htm.
    \72\ See supra Sections I.D.1.a through I.D.1.f.
---------------------------------------------------------------------------

2. Exchange Listing Standards and the Rule 19b-4 Process
    Before ETP Securities can trade on a national securities exchange,
that exchange must agree to list the ETP Securities for trading on its
market, and it must have Commission-approved initial and continued
listing standards that permit listing of that type or ``class'' of ETP
Security.\73\ ETP listing standards can be broadly categorized as
either generic or non-generic.
---------------------------------------------------------------------------

    \73\ See 15 U.S.C. 78s(b) and 17 CFR 240.19b-4. The Exchange Act
also permits an exchange to trade a security that is listed on
another exchange. The non-listing exchange that trades the security
is said to extend ``unlisted trading privileges'' (or ``UTP'') to
the security. See Section 12(f) of the Exchange Act, 15 U.S.C.
78l(f); Exchange Act Rule 12f-5 (17 CFR 240.12f-5) (providing that
an exchange shall not extend UTP to a security unless the exchange
has in effect a rule or rules providing for transactions in the
class or type of security to which the exchange extends UTP).
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    Generic listing standards permit an exchange to list and trade
specific ETP Securities of a broader class of ETPs without filing a
product-specific proposed rule change with the Commission.\74\ When
listing ETP Securities in this way, however, exchanges are required to
file a notice with the Commission within five business days after
trading commences.\75\ Examples of ETP classes for which generic
listing standards exist include what are commonly called index-based
ETFs (which the exchanges' rules call Investment Company Units, Index-
Fund Shares, Portfolio Depositary Receipts, or security-based Trust
Issued Receipts), and certain ETNs (which the exchanges' rules call
Index-Linked Securities or Linked Securities).\76\
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    \74\ See 17 CFR 240.19b-4(e)(1). In 1998, the Commission issued
a final rule setting forth the standards under which exchanges can
list and trade ``new derivatives securities products'' (a category
that encompasses ETPs) under ``generic listing standards.'' See
Amendments to Rule Filing Requirements for Self-Regulatory
Organizations Regarding New Derivative Securities Products,
Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR
70952 (Dec. 22, 1998) (S7-13-98).
    \75\ See 17 CFR 240.19b-4(e)(2)(ii). The required notice is
filed on Form 19b-4(e). 17 CFR 249.820.
    \76\ See, e.g., Securities Exchange Act Release Nos. 42787 (May
15, 2000), 65 FR 33598 (May 24, 2000) (SR-Amex-2000-14) (approving
generic listing standards for ETFs called Portfolio Depositary
Receipts and Index Fund Shares); 45718 (Apr. 9, 2002), 67 FR 18965
(Apr. 17, 2002) (SR-NYSE-2002-07) (approving generic listing
standards for Trust Issued Receipts); and 55687 (May 1, 2007), 72 FR
25824 (May 7, 2007) (SR-NYSE-2007-27) (approving generic listing
standards for Index-Linked Securities). See also, e.g., BATS Rules
14.11(b) (Portfolio Depositary Receipts), 14.11(c) (Index Fund
Shares), 14.11(d) (ETNs), and 14.11(f) (Trust Issued Receipts),
available at http://batstrading.com/resources/regulation/rule_book/BATS_Exchange_Rulebook.pdf; NASDAQ Rules 5705 (Index Fund Shares and
Portfolio Depositary Receipts), 5710 (ETNs), and 5720 (Trust Issued
Receipts), available at http://nasdaq.cchwallstreet.com/NASDAQTools/PlatformViewer.asp?selectednode=chp%5F1%5F1%5F4%5F3&manual=%2Fnasdaq%2Fmain%2Fnasdaq%2Dequityrules%2F; NYSE Arca Equities Rules 5.2(j)(3)
(Investment Company Units), 5.2(j)(6) (ETNs), 8.100 (Portfolio
Depositary Receipts), and 8.200 (Trust Issued Receipts), available
at http://nysearcarules.nyse.com/PCX/.
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    Generic ETP listing standards approved by the Commission contain
quantitative criteria with respect to components included in the ETP's
underlying or reference index or benchmark. With respect to underlying
indices, these quantitative criteria provide minimum thresholds
regarding trading volume, market capitalization, number of index
components, and index concentration limits.\77\ To mitigate the
potential for manipulation and other trading abuses, and to help
maintain a fair and orderly market for the ETP Securities, these
quantitative criteria are designed to help ensure a minimum degree of
liquidity and diversification for the underlying or reference
securities, assets, or instruments.
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    \77\ For example, with respect to equity-index-based ETFs, the
generic listing standards generally contain the following
requirements with respect to the underlying index: (1) That each
component have a minimum market value; (2) that each component have
a minimum monthly trading volume over the most recent six-month
period; (3) that the index observe certain concentration limits
(e.g., that no component may exceed 30% of the weight of the index
and that the five most heavily weighted components may not exceed
65% of the weight of the index); (4) that there be a minimum number
of components in the index; and (5) that each component either be an
exchange-listed NMS stock or, if a non-U.S. stock, be listed and
traded on an exchange that has last-sale reporting. See, e.g., BATS
Rule 14.11(c); NASDAQ Rule 5705; NYSE Arca Equities Rule 5.2(j)(3),
Commentary .01. With respect to ETNs, the generic listing standards
also include minimum requirements relating to the issuer of the
securities (e.g., minimum tangible net worth and minimum amount of
assets), which are designed to mitigate issuer credit risk. See,
e.g., BATS Rule 14.11(d); NASDAQ Rule 5710; NYSE Arca Equities Rule
5.2(j)(6).
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    Non-generic listing standards permit an exchange to list and trade
a specific ETP Security (within a class of ETPs) only after the
exchange has filed and the Commission has approved a proposed rule
change that is specific to the new ETP Security.\78\ Because of their
security-specific nature, non-generic listing standards typically do
not contain generalized quantitative criteria for the components
included in an ETP's underlying or reference index or benchmark.
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    \78\ The ETP product classes that have non-generic listing
standards include the following: Trust Issued Receipts based on
investments in ``investment shares'' or ``financial instruments,''
Commodity-Based Trust Shares, Commodity Index Trust Shares,
Commodity Futures Trust Shares, Partnership Units, Paired Trust
Shares, Trust Units, Managed Fund Shares, Managed Trust Securities,
and Trust Certificates. See, e.g., BATS Rules 14.11(e)(3) (Trust
Certificates), 14.11(e)(4) (Commodity-Based Trust Shares),
14.11(e)(6) (Commodity Index Trust Shares), 14.11(e)(7) (Commodity
Futures Trust Shares), 14.11(e)(8) (Partnership Units), 14.11(e)(9)
(Trust Units), 14.11(e)(10) (Managed Trust Securities), and 14.11(i)
(Managed Fund Shares); NASDAQ Rules 5711(c) (Trust Certificates),
5711(d) (Commodity-Based Trust Shares), 5711(f) (Commodity Index
Trust Shares), 5711(g) (Commodity Futures Trust Shares), 5711(h)
(Partnership Units), 5711(i) (Trust Units), 5711(j) (Managed Trust
Securities), and 5735 (Managed Fund Shares); NYSE Arca Equities
Rules 8.200 (Commentary .02) (Trust Issued Receipts based on
investment shares or financial instruments), 8.201 (Commodity-Based
Trust Shares), 8.203 (Commodity Index Trust Shares), 8.204
(Commodity Futures Trust Shares), 8.300 (Partnership Units), 8.400
(Paired Trust Shares), 8.500 (Trust Units), 8.600 (Managed Fund
Shares), 8.700 (Managed Trust Securities).
---------------------------------------------------------------------------

    Exchanges seeking to adopt listing standards applicable to a new
ETP product class--or to list and trade specific ETP Securities
pursuant to existing non-generic listing standards for an ETP product
class--are required to file proposed rule changes under Section
19(b)(1) of the Exchange Act \79\ and Rule 19b-4 thereunder.\80\ Once
an

exchange files a proposed rule change that complies with the Exchange
Act, the rules thereunder, and the form governing such filings,
statutory deadlines apply to Commission consideration of the filing.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 78s(b).
    \80\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Section 19(b)(2) of the Exchange Act, as amended by the Dodd-Frank
Act,\81\ effectively requires the Commission to publish notice of a
proposed rule change within 15 days of filing.\82\ In general, for
proposals that must be approved by the Commission before they may take
effect (such as a filing concerning a new ETP), the Commission is
required to take action within 45 days (which can be extended by the
Commission or the exchange for another 45 days) after the date of
publication of the proposal in the Federal Register.\83\ The Commission
may, however, institute proceedings to determine whether to disapprove
a proposal, in which case the Commission is required to take final
action to approve or disapprove a proposed rule change no later than
240 days after the proposal is published in the Federal Register.\84\
If the Commission fails to meet any of the deadlines for final action
on a proposed rule change, that proposed rule change is, pursuant to
the Exchange Act, deemed to have been approved by the Commission.\85\
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    \81\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. 111-203, Sec.  916(a), 124 Stat. 1376, 1833-34 (2010).
    \82\ 15 U.S.C. 78s(b)(2)(E).
    \83\ Certain proposed rule changes are entitled to become
``immediately effective'' upon filing, without prior Commission
approval. See 15 U.S.C. 78s(b)(3)(A) and 17 CFR 240.19b-4(f)
(setting forth certain limited conditions under which a proposed
rule change may take effect immediately upon filing with the
Commission).
    \84\ See 15 U.S.C. 78s(b)(2)(B)(ii).
    \85\ 15 U.S.C. 78s(b)(2)(D).
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    To approve an exchange's proposed rule change, the Commission must
find that the proposed rule change is consistent with the applicable
requirements of the Exchange Act and the rules and regulations
thereunder.\86\ The requirements imposed by the Exchange Act include
those set forth in Section 6(b)(5), which provides that the rules of an
exchange must be designed to do the following: (i) Prevent fraudulent
and manipulative acts and practices; (ii) promote just and equitable
principles of trade; (iii) foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities; (iv) remove impediments to and perfect the mechanism of a
free and open market and a national market system; and (v) in general,
to protect investors and the public interest.\87\ With respect to the
listing standards for ETP Securities, most exchange filings in
connection with proposed rule changes include a general description of
the following: (i) the ETP and its permitted investments or reference
assets; (ii) how the ETP will seek to meet its investment objective;
(iii) whether and to what extent information is available to investors
about the pricing and valuation of the ETP Securities, the ETP's
underlying assets, and the relevant index or reference assets; \88\
(iv) how the exchange will monitor trading in the ETP Securities; and
(v) the information that will be available to investors about the ETP
Securities.\89\
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    \86\ 15 U.S.C. 78s(b)(2)(C).
    \87\ 15 U.S.C. 78f(b)(5). In addition, the proposed rule change
must not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers or to regulate by virtue of
any authority conferred by the Exchange Act matters not related to
the purposes of the Exchange Act or the administration of the
exchange. Id.
    \88\ For index-based ETPs, exchange rules generally require that
the underlying or reference index or benchmark be calculated and
disseminated throughout the trading day. The frequency of
dissemination depends on whether the components are U.S. equities,
foreign equities, or fixed-income securities. See, e.g., Commentary
.01(b)(2) to NYSE Arca Equities Rule 5.2(j)(3) (requiring that the
current index value be widely disseminated every 15 seconds during
the exchange's Core Trading Session for investment company units
that track a U.S. equity index and every 60 seconds for investment
company units that track an international or global equity index);
Commentary .02(b)(ii) to NYSE Arca Equities Rule 5.2(j)(3)
(requiring that the current index value for investment company units
that track a fixed-income index be disseminated at least once per
day). For ETNs, exchange rules generally require that the value of
the reference assets be calculated and disseminated throughout the
trading day. See, e.g., NYSE Arca Equities Rule
5.2(j)(6)(B)(II)(1)(b)(ii) (requiring that the value of the
commodity reference asset be calculated and widely disseminated on
at least a 15-second basis during the exchange's Core Trading
Session for commodity-linked securities). As noted above, most ETN
issuers also make publicly available a closing indicative value that
is determined as of the close of each trading day. See supra note
26.
    \89\ Exchanges are required by their listing standards to
distribute information circulars or bulletins to exchange members
relating to the listing of ETP Securities. See, e.g., NYSE Arca
Equities Rules 5.1(a)(2), 5.2(j)(3) Commentary .01(g), 8.100(c), and
8.600 Commentary .05. The information to be contained in these
circulars is generally specified in a Commission order approving the
listing and trading of new ETP Securities and typically includes:
(a) The special characteristics and risks associated with trading
ETP Securities; (b) the procedures for creations and redemptions of
ETP Securities; (c) the exchange requirements relating to the
members' obligations to learn the essential facts in connection with
every customer prior to trading ETP Securities and other suitability
requirements, such as information contained in guidance issued by
FINRA with respect to the trading and sales of leveraged and
inverse-leveraged ETPs and other complex securities products; (d)
how information regarding the IIV is disseminated and the risks
involved in trading ETP Securities outside of regular trading hours
when an updated IIV is not calculated or available; (e) applicable
prospectus delivery requirements; and (f) other information (e.g.,
fees and expenses of the ETP and the time at which the NAV will be
calculated and published daily). See, e.g., Securities Exchange Act
Release Nos. 65136 (Aug. 15, 2011), 76 FR 52037, 52040 (Aug. 19,
2011) (SR-NYSEArca-2011-24); 68390 (Dec. 10, 2012), 77 FR 74540,
74543 (Dec. 14, 2012) (SR-BATS-2012-042); and 70829 (Nov. 7, 2013),
78 FR 68482, 68485 (Nov. 14, 2013) (SR-NASDAQ-2013-122).
---------------------------------------------------------------------------

3. Broker-Dealer Sales Practices
    Broker-dealers, which are registered with and regulated by the
Commission under the Exchange Act, are also subject to regulation by
the self-regulatory organizations (``SROs'') to which they belong--
e.g., FINRA and the exchanges. Both federal and SRO regulations impose
duties on broker-dealers when dealing with their customers and, in
particular, when recommending the purchase or sale of securities by
their customers.\90\ These duties include making suitable
recommendations, engaging in fair and balanced communications with the
public, disclosing conflicts of interest, and receiving fair
compensation both in agency and principal transactions.\91\
---------------------------------------------------------------------------

    \90\ See e.g., Exchange Act Section 15(c) and FINRA Rule 2111.
    \91\ See, e.g., A Joint Report of the SEC and CFTC on
Harmonization of Regulation, at 8 (Oct. 16, 2009), http://www.sec.gov/news/press/2009/cftcjointreport101609.pdf (``Under the
federal securities laws and SRO rules, broker-dealers are required
to deal fairly with their customers. This includes having a
reasonable basis for recommendations given the customer's financial
situation (suitability), engaging in fair and balanced
communications with the public, . . . disclosing conflicts of
interest, and receiving fair compensation both in agency and
principal transactions. In addition, the SEC's suitability approach
requires BDs [i.e., broker-dealers] to determine whether a
particular investment recommendation is suitable for a customer,
based on customer-specific factors and factors relating to the
securities and investment strategy. A BD must investigate and have
adequate information regarding the security it is recommending and
ensure that its recommendations are suitable based on the customer's
financial situation and needs. The suitability approach in the
securities industry is premised on the notion that securities have
varying degrees of risk and serve different investment objectives,
and that a BD is in the best position to determine the suitability
of a securities transaction for a customer. Disclosure of risks
alone is not sufficient to satisfy a broker-dealer's suitability
obligation.'')
---------------------------------------------------------------------------

    In addition, a broker-dealer that recommends buying, holding, or
selling an ETP, or an investment strategy involving an ETP, may be
subject to additional or heightened scrutiny regarding ETPs with
respect to brokerage customers, as described in FINRA guidance
regarding complex products and non-traditional ETPs.\92\
---------------------------------------------------------------------------

    \92\ See FINRA Notice to Members (``FINRA NTM'') 12-03 (Jan.
2012) (Heightened Supervision of Complex Products). See also FINRA
NTM 10-51 (Oct. 2010) (Sales Practice Obligations for Commodity
Futures-Linked Securities); FINRA NTM 09-73 (Dec. 2009) (FINRA
Reminds Firms of their Sales Practice Obligations Relating to
Principal-Protected Notes); FINRA NTM 09-31 (June 2009) (FINRA
Reminds Firms of Sales Practice Obligations Relating to Leveraged
and Inverse Exchange-Traded Funds); FINRA NTM 08-81 (Dec. 2008)
(FINRA Reminds Firms of their Sales Practice Obligations with Regard
to the Sale of Securities in a High Yield Environment); NASD Notice
to Members (``NASD NTM'') 05-59 (Sept. 2005) (NASD Provides Guidance
Concerning the Sale of Structured Products); and NASD NTM 03-71
(Nov. 2003) (NASD Reminds Members of Obligations When Selling Non-
Conventional Instruments).

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

II. Request for Comment

    The Commission is soliciting public comment to help inform its
review of the listing and trading of new, novel, or complex ETPs,
including requests by ETPs for exemptive and no-action relief under the
Exchange Act and filings by exchanges to adopt listing standards
applicable to ETPs. The Commission is also soliciting comment regarding
the ways in which broker-dealers, which are regulated under the
Exchange Act, market these products, especially to retail investors.
Finally, the Commission seeks comment on investor understanding of the
nature and uses of ETPs, particularly by retail investors.
    The Commission periodically has solicited public comment on issues
relating to ETFs since their inception over two decades ago. In 2001,
the Commission issued a Concept Release on Actively Managed Exchange-
Traded Funds.\93\ That release sought comment on a number of issues
relating to actively managed ETFs, focusing in particular on the
operation of actively managed ETFs as open-end investment companies and
on the exemptive relief under the 1940 Act that would be required for
such funds.\94\ Then, in 2008, the Commission proposed and sought
comment on a rule that would exempt ETFs from certain provisions of the
1940 Act and permit certain ETFs to begin operating without the need to
obtain an exemptive order under the 1940 Act.\95\ Once again, the focus
of that release was on the operation of ETFs as open-end investment
companies under the 1940 Act and on the exemptive relief provided to
such funds under the 1940 Act.\96\
---------------------------------------------------------------------------

    \93\ Concept Release: Actively Managed Exchange-Traded Funds,
Investment Company Act Release No. IC-25258 (Nov. 8, 2001), 66 FR
57614 (Nov. 15, 2001) (S7-20-01), available at http://www.sec.gov/rules/concept/ic-25258.htm.
    \94\ In response, the Commission received 20 comment letters,
which are available on the Commission's Web site at http://www.sec.gov/rules/concept/s72001.shtml.
    \95\ See Exchange-Traded Funds (proposed rule), supra note 9.
    \96\ In response to these proposals, the Commission received 25
comment letters, which are available on the Commission's Web site at
http://www.sec.gov/comments/s7-07-08/s70708.shtml.
---------------------------------------------------------------------------

    Here, the Commission seeks comment on the treatment of a broader
group of products--ETPs, rather than just ETFs--and the Commission
seeks public comment specifically with respect to its oversight of ETPs
under the Exchange Act. As noted above, ETP trading makes up a
significant percentage of equity trading in the United States.\97\ And,
while the Commission has gained extensive experience and familiarity
with the topics discussed in the questions below, the Commission
believes that it would be beneficial to engage broader public comment
on these important topics.
---------------------------------------------------------------------------

    \97\ See supra note 5 and accompanying text.
---------------------------------------------------------------------------

    To inform the Commission's review of new, novel, or complex ETPs
under the Exchange Act, commenters are invited to provide their views
regarding the listing and trading of ETP Securities, such as the manner
in which ETP Securities are initially listed on a national securities
exchange, the manner in which ETP Securities trade in the secondary
market, and the exemptive or no-action relief that has been granted to
ETPs under the Exchange Act. Commenters are further invited to provide
their views regarding how broker-dealers (which are regulated under the
Exchange Act) recommend and sell ETPs to investors, how broker-dealers
fulfill their obligations to investors when they recommend and sell
ETPs, and investors' understanding and use of ETPs. Commenters should
be as specific as possible in their responses, explain the reasoning
supporting those responses, and provide supporting data wherever
possible.

A. Arbitrage and Market Pricing

    As discussed above, existing ETPs trade at market prices rather
than at a price based on NAV. When providing exemptive or no-action
relief under the Exchange Act, the Commission and its staff have
analyzed and relied upon the representations from ETP issuers regarding
the continuing existence of effective and efficient arbitrage to help
ensure that the secondary market prices of ETP Securities do not vary
substantially from the value of their underlying portfolio or reference
assets.
    In the Commission's experience, the deviation between the daily
closing price of ETP Securities and their NAV, averaged across broad
categories of ETP investment strategies and over time periods of
several months, has been relatively small. For example, the average
absolute value of the daily difference between the NAV and the closing
market price during a six-month period ending in December 2014 was just
0.21% for ETPs based on U.S. equities indices and 0.38% for actively
managed ETPs based on U.S. equities.\98\ The respective figures for
index-based and actively managed ETPs based on U.S. fixed-income
securities were 0.26% and 0.19%.\99\
---------------------------------------------------------------------------

    \98\ The average of the absolute value of these differences is
used because the closing market price of an ETP can deviate either
above or below its NAV on any given day, and a calculation that
allowed positive deviations to offset negative deviations would
understate the extent of the deviations.
    \99\ Figures in this paragraph represent an analysis by
Commission staff of market data obtained through a subscription to
Bloomberg Professional services.
---------------------------------------------------------------------------

    Other types of ETPs have had a somewhat higher deviation between
NAV and their closing price. For example, ETPs based on international
indices had an average absolute value of daily difference of 0.52%
between NAV and the closing price, while actively managed ETPs based on
international fixed-income securities had an average absolute value of
daily difference of 0.44% between NAV and the closing price during the
six-month period studied.\100\ These numbers, however, represent only
broad averages with respect to end-of-day differences, and intraday
premiums or discounts between an ETP's market price and the value of
its portfolio or reference assets (or, for certain ETNs, the value of
the note according to its terms) can be greater under certain
circumstances.\101\ Moreover, these numbers represent broad averages,
and the Commission seeks public comment and data in response to the
specific questions below.
---------------------------------------------------------------------------

    \100\ The figures in this paragraph reflect an analysis by the
staff of the Office of Analytics and Research in the Division of
Trading and Markets of market data obtained through a subscription
to Bloomberg Professional services.
    \101\ As an extreme example, during the so-called ``Flash
Crash'' of May 6, 2010, many ETP Securities temporarily traded at
significant discounts to their IIV, even though their prices
recovered before the end of the day. See Findings Regarding the
Market Events of May 6, 2010, Report of the Staffs of the CFTC and
SEC to the Joint Advisory Committee on Emerging Regulatory Issues
(Sept. 30, 2010), available at http://www.sec.gov/news/studies/2010/marketevents-report.pdf.
---------------------------------------------------------------------------

    The Commission seeks comment with respect to all aspects of the
arbitrage mechanism for ETPs, including the nature, extent, and
potential causes of premiums and discounts across the wide range of ETP
strategies and holdings. Additionally, in connection with its review of
the listing and trading of ETPs, the Commission seeks comment on the
trading of ETPs investing in less-liquid assets,\102\

including fixed-income instruments, during periods of market stress.
---------------------------------------------------------------------------

    \102\ As used in this release, ``liquidity'' generally refers to
the ability of a market participant to buy or sell an asset
immediately without significantly affecting the market price for
that asset. Although certain fixed-income instruments, such as on-
the-run U.S. Treasury securities, trade in markets with substantial
liquidity, fixed-income instruments generally trade with less
liquidity than equity securities.
---------------------------------------------------------------------------

    1. Arbitrage mechanisms are designed to keep intraday trading
prices of ETP Securities equal (or nearly equal) to the contemporaneous
value of the underlying portfolio or reference assets. Do these
mechanisms work better for some types or categories of ETPs? To what
extent do arbitrage mechanisms help ensure efficient market pricing for
ETPs throughout periods of market volatility, including times of market
stress?
    2. Do commenters believe that there are other mechanisms besides
arbitrage mechanisms that do, or could, help ensure efficient market
pricing of ETPs? Do other factors play a role in efficient market
pricing of ETPs? If so, what are these mechanisms or factors, and how
effective are they? Are these mechanisms or factors more effective for
certain types or categories of ETPs? To what extent are these
mechanisms or factors effective during periods of market volatility?
    3. What characteristics of an ETP facilitate or hinder the
alignment of secondary market share prices with the value of the
underlying portfolio or reference assets? What characteristics of an
ETP's underlying or reference assets facilitate or hinder the alignment
of secondary market share prices with the value of the underlying
portfolio or reference assets? Does liquidity in the market for an
ETP's underlying or reference assets affect arbitrage, and if so, how
and to what extent? Does the availability of current and historical
pricing information, as well as trading history, for the underlying or
reference assets affect arbitrage, and if so, how and to what extent?
To what extent does the availability of correlated hedges for the ETP's
underlying or reference assets affect arbitrage and pricing efficiency?
To what extent does an ETP's use of a sampling methodology (investing
in a subset of the components of an index) to track an index affect
arbitrage and pricing efficiency? Does the use of over-the-counter
instruments by an ETP affect the opportunity for market makers or other
participants to engage in arbitrage, and if so, how and to what extent?
Do non-synchronous market hours between an ETP and its underlying
assets (e.g., international equities) affect the pricing of an ETP and
the opportunity for arbitrage, and if so, how? Does the use of cash-
only creation or redemption baskets and variable cash fees affect
efficient market pricing, and if so, how?
    4. How closely do investors or other market participants expect the
intraday trading price of ETP Securities to be aligned with the
contemporaneous value of their underlying portfolio or reference
assets? Do these expectations differ depending on the type of ETP, the
nature of the underlying assets, or market conditions? What methods, if
any, do investors use to determine whether the intraday trading price
of ETP Securities closely tracks the value of their underlying
portfolio or reference assets?
    5. Do market participants conduct analyses of how well intraday
prices of ETP Securities track the value of their underlying portfolio
or reference assets? If so, how much weight do market participants
place on such analyses?
    6. Under what circumstances might the prices of ETP Securities not
track (on an intraday, temporary end-of-day, or permanent basis) the
value of their underlying portfolio or reference assets? Are there
circumstances in which the price of an ETP's Securities, though
different from its NAV, might be a more accurate measure of the value
of the ETP's underlying assets? What are the implications for investors
(both individual and institutional) and other market participants if
intraday prices for ETP Securities do not closely track the value of
their underlying portfolio or reference assets, either on an intraday,
temporary end-of-day or permanent basis?
    7. To what extent do arbitrage mechanisms affect trading in an
ETP's underlying or reference assets? Does the answer vary depending on
whether the underlying or reference assets are equities, fixed-income
securities, commodities, derivatives, or another type of asset? If so,
how?
    8. To what extent do ETNs offer opportunities for arbitrage? How do
market participants engage in arbitrage for ETNs? How is arbitrage
affected by ETN issuers' ability to suspend and restart issuances of
notes at their discretion? How are arbitrage opportunities affected
when an issuer suspends the issuance of its ETNs? Are certain ETNs
easier or more difficult to arbitrage due to the nature of the ETN's
reference asset or index, and, if so, which ones?
    9. As noted above, the IIV for an ETP is generally designed to
provide investors information during the trading day on the value of
the ETP's portfolio (or, in the case of an ETN, on the value of a
reference asset or index). The IIV may be subject to various
calculation methodologies. How does the calculation of IIV vary, if at
all, among ETPs? Does the calculation methodology depend on the class
or type of ETP, and if so, how? Does the calculation methodology depend
on the nature of the underlying portfolio or reference assets, and if
so, how? Are certain IIV calculation methodologies more or less useful
for investors, market makers, or other market participants?
    10. To what extent do market participants make use of the IIV for
an ETP based on less-liquid securities? If underlying assets trade
infrequently or are priced only at the end of the trading day for
purposes of NAV calculation, does an IIV that is disseminated every 15
seconds (as is currently the case) contain useful pricing information?
Would a different dissemination frequency be more appropriate, and if
so, what would that be?
    11. Do investors or other market participants use intraday or
closing indicative values for ETNs? If so, for what purpose? How does
the intraday or closing indicative value differ from the market value
of an ETN or its redemption amount?
    12. How much disclosure about the contents of an ETP's underlying
portfolio is necessary for arbitrage to function efficiently to keep
the market price of an ETP aligned with the contemporaneous value of
its underlying or reference portfolio? Please explain.
    13. In the absence of daily portfolio disclosure for an ETP, could
other mechanisms enable market makers or other market participants to
make efficient markets in that ETP? If so, what are those mechanisms
and how would they function? What, if any, information disclosure,
characteristics of the ETP, or other circumstances would be necessary
for those mechanisms to function?
    14. Under what circumstances would an ETP suspend creations? Under
what circumstances could an ETP (other than a 1940-Act registered ETF)
suspend redemptions? What effect does this or could this have on
arbitrage mechanisms or the market value of these products? How might
suspension of creations or redemptions affect the ETP's continued
compliance with the conditions of its exemptive and no-action relief
under the Exchange Act? How would an ETP issuer be likely to respond to
the suspension of creation or redemption activity by one or more of its
Authorized Participants?
    15. How do arbitrage mechanisms work in the case of ETPs with less-
liquid underlying or reference assets? Are arbitrage mechanisms for
ETPs with less-liquid underlying or reference assets effective and
efficient in aligning

share prices with the value of the underlying portfolio or reference
assets?
    16. To what extent do arbitrage mechanisms help ensure efficient
market pricing throughout rising and falling markets, including times
of market stress, for ETPs with underlying or reference assets that are
less-liquid? Do periods of market stress affect arbitrage mechanisms
for such ETPs, and if so, how? Could there be a point at which the
amount of ETP Securities outstanding relative to the amount of
underlying or reference assets outstanding results in an imbalance that
inhibits the redemption process during periods of market stress?
    17. To what extent, if any, does trading activity in ETP Securities
affect price discovery, price correlation, liquidity, or volatility in
the ETP's underlying or reference assets? What role, if any, do ETP
Securities that are based on less-liquid underlying securities have in
providing additional price discovery for the underlying securities?
    18. Should the listing exchange for an ETP have an obligation to
monitor the effectiveness of that ETP's arbitrage mechanism? If yes,
what should be the nature of that obligation?

B. Exchange Act Exemptions and No-Action Positions

    The Commission believes it is useful and timely to examine the
application of Rules 101 and 102 of Regulation M in the context of
ETPs--particularly those ETPs with an underlying trust or other
collection of underlying assets--given the increasing complexity of ETP
investment strategies and the expansion of the types of underlying and
reference assets and benchmarks. The Commission solicits comment on
approaches for preventing manipulation of an ETP Securities
distribution by persons who may have an incentive to do so in light of
the nature, variety, and complexity of ETP investment strategies and
ETP markets.
    19. The staff has issued no-action relief from Rules 101 and 102 of
Regulation M to ETNs in part on the basis of assumptions that the
secondary market price for such products should not vary substantially
from the value of the relevant reference index.\103\ Given that the
secondary market price of an ETN can substantially deviate from its
reference assets when the issuer of that ETN suspends issuances, how
should Rules 101 and 102 of Regulation M apply to such products? Should
relief from these rules be limited to ETNs where there is a clear,
independent index, where there is no limitation on issuances or
redemptions, or where an ETN's secondary market price does not vary
substantially from the relevant reference index? What effect would such
a change have? Are there any other relevant factors in this context?
Are there any risks in maintaining the current relief for ETNs? What
are the benefits of the relief? How should the Commission balance the
risks against any benefits resulting from the ability of Authorized
Participants to suspend issuances or redemptions? Should relief for
ETNs contain different conditions than relief for other ETPs?
---------------------------------------------------------------------------

    \103\ See, e.g., ETN No-action Letter, supra note 70.
---------------------------------------------------------------------------

    20. Because ETPs are in continuous distribution, they generally
need, on an ongoing basis, to meet the conditions of the Regulation M
relief that has been extended to them and to meet the representations
made in seeking relief under Regulation M.\104\ What would an ETP do if
it could no longer meet one or more of these conditions or
representations and could no longer rely on the relief? In such
situations, would the ETP halt creations or, for ETPs not registered
under the 1940 Act, redemptions? What effect would that have on the
market for that ETP's securities? What would be the effect if this
resulted in a halt or suspension of trading activity in the ETP
Securities, or in the ETP Securities being delisted? How would
investors be affected?
---------------------------------------------------------------------------

    \104\ Conditions and representations concerning relief under
Regulation M are discussed in section I.D.1.a, supra.
---------------------------------------------------------------------------

    21. What purchasing activities do distribution participants (such
as Authorized Participants) engage in during the distribution of ETP
Securities? Are these activities limited to the purchasing of shares to
accumulate a redemption unit, or are there other reasons for
distribution participants to engage in purchases of ETP Securities?
    The Commission also invites comment on the conditions pertaining to
ETPs' exemptions from, and the criteria relied on by the staff in no-
action positions regarding, Section 11(d)(1) of the Exchange Act and
Exchange Act Rules 10b-10, 11d1-2, 14e-5, 15c1-5, and 15c1-6.
    22. How well do the conditions of the ETPs' exemptions and the
staff no-action relief from Section 11(d)(1) and Rule 11d1-2
thereunder, as discussed in section I.D.1.b above, achieve Section
11(d)(1)'s purpose of prohibiting broker-dealers from using favorable
margin arrangements to aid in the distribution of securities in which
they have an interest? Could different conditions be more effective at
achieving this purpose?
    23. How often do ETP investors request detailed confirmation
information, as discussed in Section I.D.1.c above, in creation and
redemption transactions as provided for in the Commission's exemptions
from Rule 10b-10 and the related staff no-action positions? What is the
cost to broker-dealers of providing this information? Has the
availability of modern information technology reduced these costs? Who
bears those costs? Do ETP investors use and benefit from this
information, and if so, how? What would be the effect of eliminating
the exemptions and no-action relief from Rule 10b-10, thereby requiring
broker-dealers to provide detailed confirmations to ETP purchasers in
all transactions? What would be the effect of eliminating the
requirement to send this information to ETP investors upon request?
Could different conditions achieve the purposes of Rule 10b-10 at less
cost or burden to broker-dealers? If so, what trade-offs would there
be, if any?
    24. Has Rule 14e-5, discussed in Section I.D.1.e above, affected
the structure of ETPs and, if so, in what ways?
    25. Authorized Participants generally have no-action relief from
the requirements in Rules 15c1-5 and 15c1-6, as discussed in Section
I.D.1.f above, to disclose the Authorized Participants' control
relationships or interest in the distribution of securities that
compose Portfolio Deposits and Redemption Baskets. Given the large
number of securities included in many ETPs, would investors realize any
benefit from receiving this information in creation and redemption
transactions? What would be the cost of providing this information in
all transactions or, alternatively, upon an ETP investor's request, and
who would bear those costs? Has the availability of modern information
technology made it easier or less costly to provide such information?
Could different conditions for ``Qualifying ETFs''\105\ achieve the
purposes of those rules at less cost or burden to broker-dealers? If
so, what trade-offs would there be, if any?
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    \105\ See note 62, supra.
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C. Exchange Listing Standards

    26. The exchanges (as SROs) and the Commission both have
responsibilities with respect to determining whether the proposed
listing and trading of ETP Securities is consistent with the Exchange
Act and the rules and

regulations thereunder.\106\ Do commenters believe that these
independent obligations, in practice, complement each other? Do
commenters believe that these obligations overlap each other? To the
extent that these obligations overlap, how do commenters believe they
should be allocated between the exchanges and the Commission?
---------------------------------------------------------------------------

    \106\ Exchanges seeking to adopt listing standards applicable to
a new ETP product class--or to list and trade specific ETP
Securities pursuant to existing non-generic listing standards for an
ETP product class--are required to file proposed rule changes on
Form 19b-4. See 17 CFR 249.819. The instructions to Form 19b-4 state
that an exchange filing the form must provide ``a statement of the
purpose of the proposed rule change and its basis under the
[Exchange] Act and the rules and regulations thereunder applicable
to the [exchange]'' and this statement ``should be sufficiently
detailed and specific to support a finding that the proposed rule
change is consistent with the requirements of the [Exchange] Act and
the rules and regulations thereunder. . . .'' To approve an
exchange's proposed rule change, the Commission must find that the
proposed rule change is consistent with the applicable requirements
of the Exchange Act and the rules and regulations thereunder. 15
U.S.C. 78s(b)(2)(C). See also supra notes 79-89 and accompanying
text.
---------------------------------------------------------------------------

    27. Do the business practices of an exchange with respect to
attracting, listing, and trading ETP Securities differ from an
exchange's business practices with respect to more traditional equity
listing services? If so, how do these business practices align with the
existing regulatory framework for exchanges as SROs?
    28. Are current exchange listing standards (including standards
with respect to component eligibility, diversification, and pricing)
effective, given the increasing complexity of ETP investment strategies
and the expansion of the types of underlying and reference assets and
benchmarks? For example, do existing listing standards adequately
address the use by ETPs of non-exchange-listed derivatives or of
leverage?
    29. Given the increasing complexity of ETP investment strategies
and the expansion of the types of underlying or reference assets and
benchmarks, what types of information do commenters believe would
assist the Commission in evaluating whether a proposed rule filing by
an exchange to list and trade a specific ETP is consistent with the
Exchange Act?
    30. Should certain characteristics of an ETP receive particular
emphasis in the Commission's evaluation of whether a proposed rule
filing related to that ETP is consistent with the Exchange Act? If so,
which ones? For example, should the Commission's evaluation focus on
the nature, characteristics, or liquidity of the specific investments,
holdings, indices, or reference assets of the ETP and on the public
availability of information about these underlying or reference assets?
Should the Commission's evaluation focus on the effectiveness or
efficiency of the creation and redemption process in facilitating
arbitrage opportunities with respect to an ETP? What other factors, if
any, should the Commission consider in its evaluation of whether a
proposed rule filing related to an ETP is consistent with the Exchange
Act?
    31. Exchange listing standards for ETP Securities often contain
both initial listing criteria and continuing listing criteria. The
initial listing criteria include requirements that must be met when ETP
Securities are initially listed on an exchange. The continuing listing
criteria include requirements that must be met on an ongoing basis.
Should exchange listing standards always contain both initial and
continuing listing criteria? Should initial and continuing listing
standards for ETP Securities be substantially identical?
    32. What, if any, is the appropriate role of an exchange that lists
ETP Securities with respect to monitoring creation and redemption
activity? For example, should the exchange be informed of an ETP's
decision to suspend creations or redemptions during the trading day? If
so, should the exchange be required to alert its members, investors,
and other market participants?
    33. What, if any, is the appropriate role of an exchange that lists
ETP Securities with respect to monitoring or overseeing the calculation
of IIV or NAV?
    34. Do market participants believe that certain types of ETPs are
more susceptible to manipulation than others? If so, please explain. To
what extent, if at all, does the nature, characteristics, liquidity, or
volatility of an ETP's underlying or reference assets affect the ETP's
susceptibility to manipulation?

D. Broker-Dealer Sales Practices and Investor Understanding and Use of
ETPs

    The Commission seeks comment on the use of ETPs by investors and
the ways in which ETPs are recommended or sold to investors,
particularly retail investors. In particular, the Commission seeks
comment on the extent to which individual investors buy or sell ETPs
with complex investment strategies based on the recommendation of a
broker-dealer and the extent to which individual investors understand
the nature and operation of such ETPs. The Commission also seeks
comment on how broker-dealers meet their obligations to customers when
recommending ETPs. While the questions below focus on broker-dealer
sales practices, the Commission recognizes that investment advisers
also play a role in the purchase or sale of ETPs by investors.
Consequently, the Commission invites commenters to address the role of
investment advisers in their responses, where applicable.
    35. Do individual investors tend to buy and hold ETP Securities?
Does the answer depend on the type of ETP (e.g., investment objective,
structure, or type of underlying asset)? Do investments by individual
investors tend to be solicited or unsolicited? Please explain and
provide data where available. If solicited, are solicitations limited
to certain categories of investors (e.g., retail investors or high-net-
worth individuals) and certain types of ETPs? If so, which categories
of investors receive solicitations and how are the parameters of the
category determined--e.g., net worth, income, investment experience,
options trading eligibility? In addition, which types of ETPs are
recommended and what are the parameters being used to determine whether
those ETPs should be recommended? Are individual investors purchasing
ETPs on the basis of recommendations by brokers?
    36. How effective are the suitability requirements applicable to
brokerage accounts in addressing broker-dealer sales practices for ETPs
in light of the breadth of available ETP options and the growing
complexity of ETP investment strategies?
    37. What methods do, or could, broker-dealers employ to meet their
sales-practice and suitability obligations for ETP Securities?
    38. Do investors have access to sufficient information to
understand ETPs, how ETP Securities trade, the costs associated with
trading ETP Securities, and how their prices and valuations are
determined, particularly as ETPs encompass increasingly complex
benchmarks, asset classes, and investment strategies? What is the
source of information (e.g., exchanges, broker-dealers, market
intermediaries, prospectuses, SEC releases, or investor alerts)
available to investors? Are there ways to better enable investors to
access information about the listing and trading of ETP Securities? If
yes, what are they?
    39. What roles, if any, should the exchanges have in communicating
information about ETP Securities to their members, their members'
customers, and the general public? Should the answer depend on whether
the exchange is the listing exchange or

an exchange that trades the ETP pursuant to unlisted trading
privileges?
    40. How do broker-dealers communicate information about ETP
Securities to their customers? Are investors introduced to ETPs through
information provided generally by broker-dealers (e.g., posted on a
broker-dealer's Web site for all investors to consider)? Do broker-
dealers provide information to investors regarding the type of investor
for which a specific product is suitable and what holding periods are
appropriate? Are there any other ways that broker-dealers should
communicate information relevant to the ETP Securities to their
customers? Do broker-dealers restrict or otherwise limit access by
certain types of investors to certain types of ETP Securities? If so,
please describe these restrictions.
    41. Do broker-dealer communications concerning ETPs provide enough
information for a retail investor to evaluate the facts concerning
ETPs? Do the communications disclose the risks and benefits potentially
associated with ETPs? Are those disclosures reasonably understandable
for retail investors, and are they presented in a balanced manner? What
types of broker-dealer communications about ETPs are most effective?
    42. Are there specific aspects of ETP trading that should be
communicated to investors to better inform their investment decisions
(e.g., the specific risks of investing in certain products or that
certain products may not be suitable for certain types of investors)?
Are there types of risks in particular ETPs that should be highlighted?
If so, in what way, and who should have the responsibility for
communicating that information? When should that information be
communicated (e.g., prior to making recommendations or prior to
accepting a customer order)?
    43. Should broker-dealers have additional responsibility to make
available or provide information to investors about the risks of
investing in ETPs with complex strategies prior to making a
recommendation or accepting a customer order for such securities? What
costs would broker-dealers incur in providing such information? Who
would bear those costs? What costs do broker-dealers currently incur in
providing information to customers about ETPs? Who bears those costs?
    44. Do broker-dealer communications to investors about ETPs present
any performance data? If so, how is that data presented? What types of
disclosures accompany the performance data?
    45. Are there aspects of ETP arbitrage mechanisms that should be
prominently disclosed to investors? If so, how and where? Do investors
understand the arbitrage mechanisms of ETPs, and, if so, do they
consider the effectiveness and efficiency of these mechanisms when
making an investment decision? If so, how?
    46. Do broker-dealers use the term ``ETF'' to describe all types of
ETPs (as opposed to only those products registered under the 1940 Act)?
If so, is this confusing to investors?
    47. What use do investors or other market participants make of
publicly available information such as the index value, IIV, NAV, or
portfolio holdings of an ETP? Does the answer depend on the type of
market participant? If so, why do certain market participants use
certain information? If market participants do not use certain
information, why not? Do the answers depend on the type of underlying
asset?
    48. Do investors understand what an ETP's IIV represents and what
it does not? For example, do they understand that the IIV is not a
``real-time'' update of the NAV and that it is not the price at which
they can purchase ETP Securities? Do investors understand how the IIV
calculation method can differ from the method used to calculate NAV? Do
investors understand that IIV may be a lagging indicator of actual
portfolio values during periods of rapid price movements? Please
describe the basis for any views expressed regarding the understanding
of investors.
    49. Do investors' expectations of the nature of the liquidity, the
bid-ask spreads, and the market prices of an ETP holding less-liquid
underlying securities differ from their expectations of the
characteristics of those underlying securities? If so, in what ways do
investors expect ETPs based on less-liquid securities to trade
differently than the underlying securities themselves?

E. Other

    50. The Commission notes that, over the years, there have been ETPs
that have closed after being listed and traded for some period of time.
What are the consequences to investors of the closure and liquidation
or termination of an ETP?
    51. How are the types and complexity of the investment strategies
and investment objectives of ETPs, and the nature of the market for
ETPs, likely to develop in the future? How might these changes affect
the listing and trading of ETP Securities? How might these changes
affect any underlying securities held by an ETP--for example with
respect to liquidity, volatility, and capital formation?
    52. As noted above, the total market capitalization of ETPs has
grown significantly, nearly doubling since the end of 2009. What do
commenters believe are the main reasons for this growth? Do commenters
expect significant growth in the number, variety, and market
capitalization of ETPs to continue? If such growth continues, how might
that affect the exchanges' listing and trading of ETP Securities? How
might this growth affect investors, broker-dealers, or other market
participants?
    53. The Commission provides market structure research, interactive
data visualization tools, and advanced market metrics on its Market
Structure Data and Analysis Web site, http://www.sec.gov/marketstructure/index.html. Users of the Web site and its data can,
among other things, compare quoting and trading characteristics of ETPs
to those of other equity securities. Have commenters drawn any
observations or conclusions from this data about the listing and
trading of ETPs? What effects, if any, does market structure have on
the quoting and trading of ETPs? What effects, if any, does the quoting
and trading of ETPs have on the general characteristics of current
equity market structure? Do any specific aspects of current equity
market structure facilitate or hinder the fair and efficient quoting
and trading of ETPs? What types of additional information or data would
commenters like to see regarding the quoting and trading
characteristics of ETPs?
    The Commission welcomes all comments and encourages commenters to
discuss any other questions, issues, concerns, or data regarding the
listing and trading of ETP Securities on national securities exchanges.

    By the Commission.
    Dated: June 12, 2015.
Brent J. Fields,
Secretary.
[FR Doc. 2015-14890 Filed 6-16-15; 8:45 am]
 BILLING CODE 8011-01-P