annual cost of this requirement for those ETFs that could rely on
the proposed rule is calculated as 4.7% x 1,635 ETFs x $1,738.50 =
$110,541.53.
---------------------------------------------------------------------------

    The proposed rule would also require an ETF to post on its website
one ``published'' basket at the beginning of each business day. While
we believe that authorized participants already have access to this
information in the daily portfolio composition file provided to NSCC,
many market participants, such as smaller institutional investors and
retail investors, are not NSCC members and do not currently have access
to this information.
    Our exemptive orders have not included requirements for daily
website disclosures of ETF baskets. As a result, we anticipate that all
existing ETFs that rely on the proposed rule would incur additional
costs associated with this disclosure.\479\ Since specifying basket
assets is part of the regular operation of an ETF, we believe that all
ETFs already have the required data available to them. In addition, we
believe that most ETFs already have systems (such as computer
equipment, an internet connection, and a website) in place that can be
used for processing this data and uploading it to their websites.
However, these ETFs would still incur the costs associated with
establishing and following (potentially automated) processes for
processing and uploading this data to their websites. We estimate that
an average ETF would incur a one-time cost of $2,909.25 \480\ for
implementing this website disclosure and an ongoing cost of $784 \481\
per year for updating the relevant web page daily with this
information. We thus estimate the total industry cost, in the first
year, to ETFs that could rely on the proposed rule for providing this
website disclosure, of 6,038,463.75.\482\
---------------------------------------------------------------------------

    \479\ As proposed, the rule would require that basket
information be presented and contain information regarding
description, amount, value and/or unrealized gain/loss (if
applicable) in the manner prescribed within Article 12 of Regulation
S-X.
    \480\ This estimate is based on the following calculations: 4.5
hours (for website development) x $296.50 per hour (blended rate for
a senior systems analyst ($274) and senior programmer ($319)) + (3
hours (for review of website disclosures) x $325 (blended rate for a
compliance manager ($298) and a compliance attorney ($352)) + $600
for an external website developer to develop the web page =
$2,909.25.
    \481\ This estimate is based on the following calculations: 1
hour (for website updates) x $296.50 per hour (blended rate for a
senior systems analyst ($274) and senior programmer ($319)) + (1.5
hours (for review of website disclosures) x $325 (blended rate for a
compliance manager ($298) and a compliance attorney ($352) = $784.
    \482\ This estimate is based on the following calculation: 1,635
ETFs x ($2,909.25 + $784) = $6,038,463.75.
---------------------------------------------------------------------------

    As discussed in section IV.A above, the proposed disclosures on
ETFs' websites, which are publicly available and free of charge, would
enable investors to more readily obtain certain key metrics for
individual ETFs,

potentially resulting in better informed investment decisions.\483\ The
proposed conditions standardize certain content requirements to
facilitate investor analysis of information while allowing ETFs to
select a format for posting information that the individual ETF finds
most efficient and appropriate for their website. Because the
information in the proposed disclosures would be made available on
individual websites, in the format chosen by the ETF, we acknowledge
that an investor's ability to efficiently extract information from
website disclosures for purposes of aggregation, comparison, and
analysis across multiple funds and time periods may be limited.
Investors seeking to compare multiple ETFs would have to visit the
website of every ETF, navigate to the relevant section of the website,
and extract the information provided in the format chosen by the fund.
Depending on the manner in which a typical fund investor would use the
website disclosures, these considerations may decrease the information
benefits of the proposed disclosures. However, we recognize that
investors may rely on third-party providers that aggregate such
information for all ETFs into a structured format that investors can
more easily access and process for the purpose of statistical and
comparative analyses. While investors may incur costs of obtaining
information from third-party service providers, it would likely be
lower than the cost they would incur than if they performed the
collection themselves, and the cost of such services may otherwise be
reduced as a result of competition among service providers. Overall, we
believe that requiring ETFs to provide this information on their
websites would ultimately provide an efficient means for facilitating
investor access to information.
---------------------------------------------------------------------------

    \483\ See supra footnote 208.
---------------------------------------------------------------------------

c. Recordkeeping
    The proposed rule would require that ETFs preserve and maintain
copies of all written authorized participant agreements for at least
five years, the first two years in an easily accessible place. This
requirement would provide Commission examination staff with a basis to
evaluate whether the authorized participant agreement is in compliance
with the rule and other provisions of the Investment Company Act and
the rules thereunder, and would also promote internal supervision and
compliance.\484\ As the agreement forms the contractual foundation on
which authorized participants engage in arbitrage activity, compliance
of the agreement with the proposed rule is important for the arbitrage
mechanism to function properly.
---------------------------------------------------------------------------

    \484\ ETFs already will be required to provide some information
about authorized participants on Form N-CEN, including the name of
each authorized participant, additional identifying information, and
the dollar values of the fund shares the authorized participant
purchased and redeemed during the reporting period. However, this
information alone would not be sufficient for Commission staff to
evaluate whether a fund's authorized participant agreements are in
compliance with the proposed rule.
---------------------------------------------------------------------------

    We are also proposing to require ETFs to maintain information
regarding the baskets exchanged with authorized participants on each
business day the ETF exchanged creation units, including a record
stating that the custom basket complies with the ETF's custom basket
policies and procedures. As discussed above, we believe that these
records would help our examination staff understand how baskets are
being used by ETFs, evaluate compliance with the rule and other
provisions of the Act and rules thereunder, and examine for potential
overreach by ETFs in connection with the use of custom baskets or
transactions with affiliates.
    Existing exemptive orders have not required ETFs to preserve and
maintain copies of authorized participant agreements or information
about basket composition. However, we believe that most ETFs already
preserve and maintain copies of authorized participant agreements as
well as data on baskets used as a matter of established business
practice. Existing ETFs that do not already preserve and maintain
copies of these documents and data, as well as all new ETFs that would
operate under the proposed rule, would incur maintenance and storage
costs associated with these requirements. As discussed in section IV.B,
we estimate that an average ETF that does not currently comply with
these recordkeeping requirements would incur an annual cost of $380 per
year \485\ to maintain these records.\486\ Assuming that 20% of ETFs
would incur this cost, the total industry cost for ETFs that could rely
on the proposed rule would be $124,260 per year.\487\ In addition, the
existing orders have not required that ETFs prepare and maintain a
record stating that custom baskets comply with the custom basket
policies and procedures. We anticipate that all ETFs that could operate
under the proposed rule will incur additional recordkeeping costs
associated with the requirement that custom baskets comply with custom
basket policies and procedures. Assuming that 25% of the total annual
recordkeeping costs can be attributed to the new requirement for custom
baskets, we estimate a total cost per ETF of $95 per year for the
requisite five-year period and an annual industry cost of $155,325 for
ETFs that could rely on the rule.\488\
---------------------------------------------------------------------------

    \485\ See infra footnote 544.
    \486\ An average ETF would have to maintain and store 34
authorized participant agreements. See supra footnote 431 and
accompanying text.
    \487\ This estimate is based on the following calculation: 1,635
ETFs x $380 x 20% = $124,260.
    \488\ This estimate is based on a total record keeping cost of
$380 per ETF over five years, see infra note 544, 25% x $380 = $95,
$95 x 1,635 ETFs = $155,325.
---------------------------------------------------------------------------

d. Master-Feeder Relief
    The proposed rule would rescind the master-feeder relief granted to
ETFs that do not rely on the relief as of the date of this proposal. We
are proposing to rescind such relief because there generally is a lack
of interest in ETF master-feeder arrangements, and certain master-
feeder arrangements raise policy concerns discussed above. While there
are currently many exemptive orders that contain the master-feeder
relief, it is our understanding that only one fund complex currently
relies on this relief to structure several master-feeder arrangements
with one master and one feeder fund each.\489\ As discussed above, we
would also propose to grandfather existing master-feeder arrangements
involving ETF feeder funds, but prevent the formation of new ones, by
amending relevant exemptive orders.\490\ As a result, we do not expect
that the rescission of the existing master-feeder relief would impose
costs on ETFs that currently rely on the relief to structure master-
feeder arrangements.

At the same time, the rescission of the relief may benefit investors in
prospective feeder ETFs to the extent that it protects them from any
concerns associated with feeder ETFs discussed above.\491\
---------------------------------------------------------------------------

    \489\ See supra footnote 341.
    \490\ As discussed above, without this relief, the affected
funds could continue operating by effecting creation and redemption
transactions between authorized participants and the feeder fund (as
well as the transactions between the master and feeder fund) in cash
rather than in kind. As cash creations and redemptions can be less
efficient than in-kind transactions for certain ETFs, this could
impose a cost on the ETFs that are part of the fund family. Cash
redemptions and creations could also affect the current
relationships that funds have with authorized participants if the
authorized participants would be unwilling to perform the arbitrage
function when receiving cash instead of baskets of securities, which
could have unintended spillover effects on the secondary market
trading of these funds' shares. Alternatively, these feeder funds
may opt to pursue their investment objectives through direct
investments in securities and/or other financial instruments, rather
than through investments in master funds. Such a restructuring of
the funds involved would also lead to costs (primarily associated
with legal and accounting work) on the ETFs that are part of the
fund family. As a result, if this change would require portfolio
transactions to occur at the fund, there could be additional costs
such as lower overall total returns to the fund or that investors
may find the fund to be a less attractive investment.
    \491\ See supra section II.F.
---------------------------------------------------------------------------

2. Disclosure (Amendments to Forms N-1A and N-8B-2)
    The amendments to Form N-1A and N-8B-2 are designed to provide
authorized participants and investors with tailored information
regarding the costs associated with investing in ETFs. As discussed in
section IV.A above, we expect that the new disclosures would benefit
investors by helping them better understand and compare specific funds,
potentially resulting in more informed investment decisions, more
efficient allocation of investor capital, and greater competition for
investor capital among funds.
    As discussed above, we propose to add a set of Q&As related to fees
and trading information and costs that we anticipate would help
investors better understand costs specific to ETFs, such as bid-ask
spreads, brokerage commissions, and purchasing or selling ETF shares at
a premium or discount to NAV. The answers to the Q&As would include
information about trading costs specific to an ETF, such as the median
bid-ask spread over the previous year.
    In addition, the proposed amendments to Forms N-1A and N-8B-2 would
require an ETF to provide information on the ETF's median bid-ask
spread as well as an interactive calculator on the ETF's website that
can be used to determine how the bid-ask spread would impact the costs
associated with frequent trading of ETF shares. As discussed above, the
purpose of the interactive calculator is to provide investors with the
ability to customize the hypothetical calculations in Item 3 of Form N-
1A to their specific investing situation by choosing either the number
or size of the hypothetical round-trip trades, or both.
    While we believe that substantially all ETFs already have the
required data for these new disclosures on Forms N-1A and N-8B-2 and
for the interactive calculator as part of their regular operations,
these funds would still incur costs for processing the data, entering
them into the form, and programming the interactive calculator.\492\ We
estimate that each ETF would incur a one-time cost of $6,710 \493\ and
an ongoing cost of $3,355 \494\ per year.\495\ We thus estimate that
the total industry cost for ETFs in the first year would equal
$19,123,500.\496\
---------------------------------------------------------------------------

    \492\ As discussed in more detail below in section V.D, the
ongoing costs of complying with the proposed amendments to Form N-
8B-2 for all UIT ETFs as well as the one-time initial costs for
existing UIT ETFs would accrue to Form S-6.
    \493\ We estimate that each ETF would incur a one-time burden of
an additional 20 hours, at a time cost of an additional $6,710 (10
hours x $335.50 (blended rate for a compliance attorney ($352) and a
senior programmer ($319)) = $6,710) to draft and finalize the
required disclosure, amend its registration statement, implement the
interactive calculator, and update its website.
    \494\ We estimate that each ETF would incur an ongoing burden of
an additional 10 hours, at a time cost of an additional $3,355 (10
hours x $335.50 (blended rate for a compliance attorney ($352) and a
senior programmer ($319)) = $3,355) each year to review and update
the proposed disclosures.
    \495\ Like all information disclosed in Items 2, 3, or 4 of Form
N-1A, the information disclosed in amended Item 3 would have to be
tagged and submitted in a structured data format. See supra footnote
361. We note that we are adopting amendments to require the use of
Inline XBRL format in a companion release, which would apply to the
information disclosed in amended Item 3 according to the compliance
dates of those amendments. See Inline XBRL Filing of Tagged Data,
Investment Company Act Release No. 33139 (June 28, 2018). Given that
filers already have systems in place to submit the existing
information in Item 3 in a structured format and that filers will
already be required to update those systems to comply with the
Inline XBRL requirement, we believe that there would not be any
significant additional costs associated with the information in
amended Item 3 being filed in a structured format.
    \496\ This estimate is based on the following calculation: 1,900
ETFs x ($6,710 + $3,355) = $19,123,500.
---------------------------------------------------------------------------

D. Effects on Efficiency, Competition, and Capital Formation

    This section evaluates the impact of proposed rule 6c-11 and the
amendments to Forms N-1A and N-8B-2 on efficiency, competition, and
capital formation. However, as discussed in further detail below, the
Commission is unable to quantify many of the effects on efficiency,
competition and capital formation either because they are inherently
difficult to quantify or because it lacks the information necessary to
provide a reasonable estimate.
1. Efficiency
    The proposed rule would likely increase total assets of ETFs, as a
result of reducing the expense and delay of forming and operating new
ETFs organized as open-end funds, reducing the cost for certain ETFs to
monitor their own compliance with regulations, and as well increased
competition among ETFs as discussed below. At the same time, the
proposed rule could lead to a decrease in total assets of other fund
types that investors may regard as substitutes, such as certain mutual
funds.\497\ As a result, ETF ownership (as a percentage of market
capitalization) for some securities, such as stocks and bonds, would
likely increase, and ownership by other funds, such as mutual funds,
would likely decrease. The academic literature that we discuss in this
section suggest that such a shift in ownership could affect the price
efficiency (the extent to which an asset price reflects all public
information at any point in time) and liquidity of these portfolio
securities.\498\
---------------------------------------------------------------------------

    \497\ The proposed disclosure requirements would also serve to
increase investors' awareness of the trading costs that they can
incur when trading ETFs, which can be substantial in some cases. As
a result, investors who may previously not have been fully aware of
these costs may shift their demand away from ETFs and towards other
types of funds, such as mutual funds. We believe, however, that the
rulemaking as a whole is likely to increase demand for ETFs rather
than decrease it.
    \498\ In documenting the impact of ETF arbitrage on price
efficiency and liquidity, the academic literature does not generally
distinguish ETFs that could rely on the rule from those that could
not. However, these studies investigate a broad range of ETFs with
varying degrees of relief including basket flexibility. Therefore,
we believe that the subsample of ETFs that could rely on the rule
(those organized as open-end funds that are not leveraged) is
representative of those used in the academic literature. As a
result, we believe that inferences from the academic research
generally apply to ETFs that can rely on the rule.
---------------------------------------------------------------------------

    The literature suggests that a shift in stock ownership towards
ETFs may improve some dimensions of price efficiency while impeding
price efficiency along other dimensions. Specifically, the results in
one paper suggest that stock prices incorporate systematic information
more quickly when they are held in ETF portfolios.\499\ The evidence in
this paper thus indicates that ETF activity increases stock market
efficiency with regard to systematic information, i.e., information
relating to market-wide risks. On the other hand, some studies find
that an increase in ETF ownership may introduce non-fundamental
volatility into stock prices, i.e., cause temporary deviations of stock
prices from their fundamental values. For example, one paper finds that
ownership by US equity index ETFs is associated with higher volatility
among component stocks and argues that the increased volatility is non-
fundamental.\500\ Another paper finds that higher authorized
participant arbitrage activity in US equity ETFs is

associated with a higher correlation of returns among stocks in the
ETF's portfolio.\501\ The authors find evidence that changes in the
prices of these stocks tend to partially revert over the next trading
day and argue that the increased co-movement in returns is thus a sign
of excessive price movement due to non-fundamental shocks that ETF
trading helps propagate.
---------------------------------------------------------------------------

    \499\ Lawrence Glosten, Suresh Nallareddy & Yuan Zou, ETF
Trading and Informational Efficiency of Underlying Securities,
Columbia Business School Research Paper No. 16-71 (2016).
    \500\ See Itzhak Ben-David, Francesco Franzoni & Rabih Moussawi,
Do ETFs Increase Volatility?, Swiss Finance Institute Research Paper
No. 11-66 (2017). This paper also finds that mutual fund ownership
is associated with higher volatility in the underlying indexes.
Thus, to the extent that part of the increase in ETF assets would be
accompanied by a decrease in mutual fund assets, the net effect on
price efficiency would be unclear.
    \501\ Zhi Da & Sophie Shive, Exchange Traded Funds and Asset
Return Correlations, Working Paper, Notre Dame University (2016).
---------------------------------------------------------------------------

    The proposed rule could decrease the liquidity of stocks held by
ETFs, as one study finds that higher ownership of a stock by US equity
ETFs is associated with lower liquidity as measured by market
impact.\502\ Conversely, the academic literature offers mixed evidence
regarding the impact of ETFs on bond liquidity. While one paper finds
that increased ETF ownership is associated with lower bond liquidity
for investment grade bonds,\503\ another study finds that bonds
included in ETFs experience improvements in their liquidity.\504\
---------------------------------------------------------------------------

    \502\ See Sophia JW. Hamm, The effect of ETFs on stock
liquidity, Working Paper, Ohio State University (2014). However, the
study also finds the same relationship for ownership by index mutual
funds. Thus, to the extent that part of the increase in ETF assets
would be accompanied by a decrease in mutual fund assets, the net
effect on price efficiency would be unclear.
    \503\ Caitlin Dillon Dannhauser, The Impact of Innovation:
Evidence from Corporate Bond ETFs, Journal of Financial Economics,
forthcoming (2016) (``Dannhauser Article'').
    \504\ Jayoung Nam, Market Accessibility, Corporate Bond ETFs,
and Liquidity, Working Paper, Indiana University Bloomington (2017).
---------------------------------------------------------------------------

    A shift in stock ownership towards ETFs could also have an effect
on the co-movement of liquidity for stocks held by ETFs. Specifically,
one paper observes that the liquidity of a stock with high ETF
ownership co-moves with the liquidity of other stocks that also have
high ETF ownership.\505\ The authors argue that this co-movement in
liquidity represents a risk to investors, as it exposes them to the
possibility that many assets in their portfolio will be illiquid at the
same time.
---------------------------------------------------------------------------

    \505\ Vikas Agarwal, Paul Hanouna, et al., Do ETFs Increase the
Commonality in Liquidity of Underlying Stocks, Working Paper,
Villanova University (2017).
---------------------------------------------------------------------------

    Since we do not know the degree to which the proposed rule would
increase ETF ownership of stocks and bonds, we are unable to quantify
the proposed rule's effects on price efficiency and liquidity.
    As a result of the proposed rule's allowance of increased basket
flexibility, some ETFs that did not already have this flexibility in
their baskets may choose to increase the weight of more liquid
securities and decrease the weight of less liquid securities in their
baskets compared to their portfolios.\506\ During normal market
conditions, this may lead those ETFs' shares to trade at smaller bid-
ask spreads, thus benefiting investors. We note, however, that such a
reduction in bid-ask spreads by over-weighting more liquid securities
may not work during stressed market conditions, if a large proportion
of such an ETF's portfolio securities become less liquid.\507\ As a
result, the gap between bid-ask spreads of some ETFs' shares during
normal and stressed market periods may grow as a result of the proposed
rulemaking, which some investors may not anticipate and fail to fully
take into account when making their investment decisions.\508\
---------------------------------------------------------------------------

    \506\ This would be the case for those ETFs that hold less
liquid securities in their portfolios.
    \507\ Under rule 22e-4 under the Act, an ETF is required to
consider: (i) The relationship between portfolio liquidity and the
way in which, and the prices and spreads at which, ETF shares trade,
including, the efficiency of the arbitrage mechanism and the level
of active participation by market participants (including authorized
participants); and (ii) the effect of the composition of baskets on
the overall liquidity of the ETF's portfolio as part of its
assessment, management and review of liquidity risk. See LRM
Adopting Release, supra footnote 101.
    \508\ Conversely, some ETFs may choose to decrease, rather than
increase, the weight of more liquid securities and increase the
weight of less liquid securities in their basket compared to their
portfolio in order to reduce transaction costs borne by an ETF's
existing/remaining shareholders when the ETF must buy and sell
portfolio holdings. This would lead to a reduction in transaction
costs for existing/remaining shareholders and to an increase in
transactions costs for authorized participants and, ultimately,
investors buying and selling ETF shares. Thus, we believe that most
funds would choose to limit such behavior as they would likely find
it to be in their best interest to balance costs imposed on
remaining and existing/remaining shareholders.
---------------------------------------------------------------------------

    Finally, the proposed amendments to Forms N-1A and N-8B-2 as well
as the additional website disclosures required by proposed rule 6c-11
would allow investors and other market participants to better
understand and compare ETFs using more relevant and standardized
disclosure. For example, as discussed above, the proposed amendments to
Item 3 of Form N-1A would add a requirement for ETFs to disclose their
median bid-ask spread and include a statement that ETF investors may be
subject to other expenses that are specific to ETF trading, including
brokerage commissions and potential costs related to purchasing ETF
shares at a premium or discount to NAV per share.\509\ These costs are
not currently required to be disclosed by Item 3. Since these costs are
incurred by ETF investors and not mutual fund investors, we believe
that adding this disclosure would help investors and other market
participants better assess and compare fees and expenses between
certain funds and fund types, such as ETFs and mutual funds. Thus, the
proposed rule could help investors make more informed investment
decisions that are more suited for their investment objectives. The
degree to which investors would benefit from the ability to make more
informed investment decisions is inherently difficult to quantify, so
we are unable to estimate the size of this benefit.
---------------------------------------------------------------------------

    \509\ James J. Angel, Todd J. Broms, & Gary L. Gastineau, ETF
Transaction Costs Are Often Higher Than Investors Realize, 42 The
Journal of Portfolio Management 3, 65-75 (2016) find that the cost
of trading ETF shares depends both on bid-ask spreads as well as
premiums and discounts to NAV per share.
---------------------------------------------------------------------------

2. Competition
    The proposed rule would likely increase competition among ETFs that
could rely on the proposed rule. The first channel through which the
proposed rule would likely foster competition is by reducing the costs
for ETF sponsors to form new ETFs that comply with the conditions set
by the proposed rule. This cost reduction would lower the barriers to
entering the ETF market, which would likely lead to increased
competition among ETFs that could rely on the proposed rule.
    In addition, new ETFs that enter the market in reliance on the
proposed rule as well as those existing ETFs that would have their
exemptive relief rescinded and replaced by the proposed rule, would no
longer be subject to requirements that vary between exemptive orders.
Instead, these ETFs would operate under uniform requirements, which
would help promote competition among ETFs that could rely on the
proposed rule.
    An increase in competition among ETFs that could rely on the
proposed rule would likely also lead to an increase in competition
between those ETFs and ETFs that could not rely on the proposed rule as
well as other types of funds and products that investors may perceive
to be substitutes for ETFs, such as certain mutual funds.\510\
---------------------------------------------------------------------------

    \510\ The types of funds and products that investors may
consider substitutes for ETFs would depend on an individual
investor's preferences and investment objectives. Other types of
products that some investors may consider to be substitutes for ETFs
include closed-end funds and other exchange-traded products, such as
exchange-traded notes and commodity pools.
---------------------------------------------------------------------------

    Furthermore, as discussed above, the proposed website disclosures
and amendments to Forms N-1A and N-8B-2 would allow investors to
compare ETFs and other open-end investment companies, which could
further foster

competition among open-end investment companies as well as between
open-end investment companies and other types of funds that investors
may perceive to be substitutes for open-end investment companies, such
as closed-end funds and certain exchange-traded products.
    Increased competition would likely lead to lower fees for
investors, encourage financial innovation, and increase consumer choice
in the markets for ETFs, open-end investment companies, and other types
of funds that investors may perceive to be substitutes.\511\ Due to the
limited availability of data, however, we are unable to quantify these
effects.
---------------------------------------------------------------------------

    \511\ As discussed above, the proposed rule would likely lead to
increased competition both among ETFs that could rely on the
proposed rule as well as between ETFs that could rely on the rule
and those that could not. While we believe that increased
competition generally is conducive to innovation, any increased
competition in the ETF market resulting from the proposed rule would
be more likely to involve novel ETFs that would continue to need to
obtain exemptive relief from the Commission.
---------------------------------------------------------------------------

    To the extent the proposed rule would increase the number and total
assets of ETFs, more authorized participants or other market
participants may enter the market. This could lead to increased
competition among authorized participants or other market participants
and result in authorized participants or other market participants
exploiting arbitrage opportunities sooner (i.e., when premiums/
discounts to NAV per share are smaller). As a result, bid-ask spreads
may tighten and premiums/discounts to NAV per share for ETF shares may
decrease. As authorized participants and some of the other market
participants that engage in ETF arbitrage are large broker-dealers,
however, we would expect new entries of authorized participants or
other arbitrageurs as a result of the rule to be limited and any
effects on bid-ask spreads and premiums/discounts to NAV per share to
be small.
3. Capital Formation
    The proposed rule may lead to increased capital formation.
Specifically, an increase in the demand for ETFs, to the extent that it
would increase demand for intermediated assets as a whole, would likely
spill over into primary markets for equity and debt securities. As a
consequence, companies may be able to issue new debt and equity at
higher prices in light of the increased demand for these assets in
secondary markets created by ETFs. As a consequence, the cost of
capital for firms could fall, facilitating capital formation.
    The conclusion that an increase in the demand for ETFs may lower
the firm's cost of capital is further supported by a paper \512\ that
finds that bonds with a higher share of ETF ownership have lower
expected returns.\513\ Due to the limited availability of data,
however, we are unable to quantify these effects of the proposed rule
on capital formation.
---------------------------------------------------------------------------

    \512\ Dannhauser Article, supra footnote 503.
    \513\ We acknowledge that there is research (see Yakov Amihud &
Haim Mendelson, Asset Pricing and the Bid-Ask Spread, 17 Journal of
Financial Economics 2, 223-249 (1986)) that provides evidence that
expected returns of an asset are positively associated with its
liquidity. As discussed above, the academic literature suggests that
stocks with a higher share of ETF ownership have lower liquidity
(whereas the evidence on the effect of underlying bonds is mixed).
Thus, there may be an offsetting effect that could weaken the
potential benefits of the rule for capital formation through new
equity issuances by firms.
---------------------------------------------------------------------------

E. Reasonable Alternatives

1. Treatment of Existing Exemptive Relief
    As discussed above, we propose to rescind the exemptive relief we
have issued to ETFs that would be permitted to rely on the proposed
rule. As an alternative, we considered allowing ETFs with existing
exemptive relief in orders that do not contain a self-termination
clause to continue operating under their relief rather than requiring
them to operate in reliance on the rule.
    The Commission believes that allowing ETFs to continue operating
under their existing relief would create differences in the conditions
under which funds operate. Specifically, some ETFs that determine they
do not need the additional flexibility (e.g., basket flexibility) the
proposed rule would provide compared to their existing exemptive relief
could choose to continue operating under their existing relief rather
than in reliance on the rule. This could allow these ETFs to circumvent
the other requirements that are part of the rule (e.g., daily website
disclosure of the basket assets). This self-selection would create a
disparity in the conditions under which ETFs are allowed to operate.
    Measured against the baseline, the alternative would thus have
smaller benefits arising from improved disclosure, including that the
alternative would not level the playing field among ETFs with regard to
these conditions and thus not be as effective at promoting product
competition as the proposed rule. In addition, it would be more
difficult for the Commission to evaluate compliance with regulations
under the alternative compared to the proposed rule, as some of the
ETFs whose exemptive relief we propose to rescind could choose to
continue to operate under their exemptive relief. The Commission also
believes that the costs to funds associated with rescinding the
existing exemptive relief would be minimal, as we anticipate that
substantially all funds whose relief would be rescinded would be able
to continue operating with only minor adjustments, other than being
required to comply with the additional website disclosures and to
develop basket asset policies and procedures.\514\
---------------------------------------------------------------------------

    \514\ Some ETFs may change the way they operate voluntarily by
taking advantage of the increased basket flexibility of the proposed
rule.
---------------------------------------------------------------------------

2. ETFs Organized as UITs
    Proposed rule 6c-11 would be available only to ETFs that are
organized as open-end funds.\515\ As an alternative, we considered
including ETFs organized as UITs in the scope of the proposed rule.
However, as discussed above in section III.A.1, we believe that the
terms and conditions of the existing exemptive orders for UITs are
appropriately tailored to address the unique features of the UIT
structure.
---------------------------------------------------------------------------

    \515\ As discussed in above in section IV.B.1, while the vast
majority of ETFs currently in operation are organized as open-end
funds, some early ETFs, which currently have a significant amount of
assets, are organized as UITs. Examples include SPDR S&P 500 ETF
Trust (SPY) and PowerShares QQQ Trust, Series 1 (QQQ).
---------------------------------------------------------------------------

    In addition, as also discussed above, ETFs have greater investment
flexibility under the open-end fund structure than the UIT structure,
which leads us to believe that most new ETFs entering into the market
would prefer to operate under the open-end fund structure rather than
the UIT structure. No new UIT ETFs have come to market in recent years,
and we do not think that there would be significant economic benefits
to including UITs in the scope of the proposed rule, and thus we
propose to exclude ETFs organized as UITs from the proposed rule.\516\
---------------------------------------------------------------------------

    \516\ We note that fund sponsors that plan to launch a new ETF
organized as a UIT would continue to be able to rely on the
exemptive order process.
---------------------------------------------------------------------------

3. Basket Flexibility
    Proposed rule 6c-11would require ETFs relying on the rule to adopt
and implement written policies and procedures that govern the
construction of basket assets and the process that will be used for the
acceptance of basket assets. As an alternative, we considered requiring
that an ETF's basket generally correspond pro rata to its portfolio
holdings, while identifying certain limited circumstances under which
an ETF may use a non-pro rata basket, as

we have done in our exemptive orders since approximately 2006.\517\
---------------------------------------------------------------------------

    \517\ ETFs whose orders we are proposing to rescind and that are
operating under exemptive orders issued before approximately 2006,
which included few explicit restrictions, would have reduced basket
flexibility under the alternative compared to the baseline.
---------------------------------------------------------------------------

    The requirement included in these orders was designed to address
the risk that an authorized participant or other market participant
could take advantage of its relationship with the ETF (i.e., engage in
cherry picking or dumping). However, as discussed above, we believe
that the proposed rule's additional policies and procedures
requirements for custom baskets would provide a principles-based
approach that is designed to limit potential abuses so that they would
be unlikely to cause significant harm to investors. In addition, as
also discussed above in section III.C.1.b, we believe that the
increased basket flexibility under the proposed rule would benefit the
effective functioning of the arbitrage mechanism, particularly
benefiting fixed-income, international, and actively managed ETFs.\518\
---------------------------------------------------------------------------

    \518\ Section III.D discusses the possibility that some ETFs may
use the increased basket flexibility of the proposed rule to over-
or under-weight securities in their baskets compared to their
portfolios based on the liquidity of these securities. Such a
practice would not be possible under the alternative that would
require an ETF's basket to generally correspond pro rata to its
portfolio holdings.
---------------------------------------------------------------------------

4. Website Disclosure of Every Basket Used by an ETF
    Proposed rule 6c-11 would require ETFs to post, on the ETF's
website at the beginning of each business day, a published basket
applicable to orders for the purchase or redemption of creation units
to be priced based on the ETF's next calculation of NAV. Because an ETF
would be required to post only one published basket to comply with this
condition, it would not be required to post the contents of its other
custom baskets in many instances. As an alternative, we considered
proposing that ETFs be required to publish information regarding every
basket used by the ETF after the close of trading on each business day.
    The additional disclosure under this alternative could reveal
whether an authorized participant has pressured an ETF into accepting
illiquid securities in exchange for liquid ETF shares (i.e., dumping)
or into giving an authorized participant desirable securities in
exchange for ETF shares tendered for redemption (i.e., cherry-picking)
by comparing an ETF's portfolio assets and published basket to the
baskets used by various authorized participants throughout the day.
    However, the proposed rule contains additional conditions for
basket policies and procedures, which seek to prevent overreaching.
Moreover, the proposed rule would require an ETF to maintain records
regarding the baskets used, which would allow Commission staff to
examine an ETF's use of basket flexibility. Consequently, we believe
that the risk for these abusive practices under the proposed rule would
be low while, at the same time, the rule would avoid additional
operational and compliance costs for ETFs to post and review the
information, under the alternative.\519\
---------------------------------------------------------------------------

    \519\ We estimate that, under the alternative, an average ETF
would incur a one-time cost of $3,879 (6 hours (for website
development) x $296.50 per hour (blended rate for a senior systems
analyst ($274) and senior programmer ($319)) + (4 hours (for review
of website disclosures) x $325 (blended rate for a compliance
manager ($298) and a compliance attorney ($352)) + $800 for an
external website developer to develop the web page = $3,879) for
implementing this website disclosure and an ongoing cost of
$1,596.50 (1 hour (for website updates) x $296.50 per hour (blended
rate for a senior systems analyst ($274) and senior programmer
($319)) + (4 hours (for review of website disclosures) x $325
(blended rate for a compliance manager ($298) and a compliance
attorney ($352)) = $1,596.50) per year for updating the relevant web
page daily with this information.
---------------------------------------------------------------------------

5. The Use of a Structured Format for Additional Website Disclosures
and the Filing of Additional Website Disclosures in a Structured Format
on EDGAR
    As discussed in section II.C.6 above, we are proposing to require
ETFs to post on their websites certain disclosures to enable investors
to more readily obtain certain key metrics for individual ETFs. The
proposed rule would allow ETFs to select a format for posting
information that the individual ETF finds most efficient and
appropriate for the content management system of their website.
    As an alternative, we could require ETFs to post the disclosures in
a structured format on their websites. Structured disclosures are made
machine-readable by having reported disclosure items labeled (tagged)
using a markup language that can be processed by software for
analysis.\520\ Compared with each ETF selecting its own layout and
format for the website disclosures, the resulting standardization under
this alternative would allow for extraction, aggregation, comparison,
and large-scale analysis of reported information through significantly
more automated means than is possible with unstructured formats such as
HTML. This alternative would facilitate the extraction and analysis
through automated means of an individual fund's disclosures over time--
which would offer the greatest benefit for higher-frequency ETF
disclosures--and potentially the comparison of disclosures across a
small number of ETFs. However, requiring a structured disclosure format
would not lower the collection burden incurred by the requirement to
separately visit each website to obtain each ETFs disclosure.
---------------------------------------------------------------------------

    \520\ Structured information can be stored, shared and presented
in different systems or platforms. Standardized markup languages,
such as XML or XBRL, use sets of data element tags for each required
reporting element, referred to as taxonomies.
---------------------------------------------------------------------------

    The structured data requirement could impose an incremental cost on
ETFs of tagging the information in a structured format, particularly to
the extent that ETFs don't otherwise structure this data for their own
purposes. Although, if the XML format is used for the additional
disclosure, the incremental cost of tagging information in a structured
format would likely be small.\521\
---------------------------------------------------------------------------

    \521\ For example, based on staff experience with XML filings,
the costs of tagging the information in XML are expected to be
minimal given the technology that will be used to structure the
data. XML is a widely used data format, and based on the
Commission's understanding of current practices, most reporting
persons and third party service providers have production systems
already in place to report schedules of investments and other
information. Therefore, we believe systems should be able to
accommodate XML data without significant costs, and large-scale
changes will likely not be necessary to output structured data
files.
---------------------------------------------------------------------------

    As another alternative, we could require ETFs to make the
additional website disclosures available in a centralized repository in
a structured format, such as by filing them on EDGAR. Making the
information available in a structured format on EDGAR would likely
improve its accessibility and the ability of investors, the Commission,
and other data users to efficiently extract information for purposes of
aggregation, comparison and analysis of information across multiple
funds and time periods.\522\ As stated above, if the XML format is used
for the additional disclosure, the incremental cost of tagging the
information in a structured format would likely be small. However,
funds would still incur a cost of filing the disclosures on EDGAR,
which might be higher than the cost of posting the disclosures on
individual ETF websites.
---------------------------------------------------------------------------

    \522\ The Commission has implemented requirements for the
structuring of certain information disclosed by funds. See, e.g.,
Release No. 33-10231 (Oct. 13, 2016) [81 FR 81870]; Release No. IC-
29132 (Feb. 23, 2010) [75 FR 10059]; Release No. 33-9006 (Feb. 11,
2009) [74 FR 7747].
---------------------------------------------------------------------------

6. Treatment of Leveraged ETFs
    As discussed in section II.A.3. above, leveraged ETFs would not be
able to

rely on proposed rule 6c-11. As an alternative, we considered
permitting leveraged ETFs to rely on the proposed rule, while
maintaining the status quo of existing exemptive orders with respect to
the amount of leveraged market exposure that leveraged ETFs may obtain
(i.e., 300% of the return or inverse return).\523\ This alternative
would thus prohibit a leveraged ETF from seeking a performance result,
directly or indirectly, that exceeds three times the performance, or
inverse performance, of the specified market index or benchmark. This
alternative could benefit competition among leveraged ETFs as compared
to the baseline, as fund sponsors that currently do not have an
exemptive order permitting them to operate this type of ETF could enter
the market. As a result, fees for leveraged ETFs would likely decrease
and their assets could increase. However, as discussed in detail in
section II.A.3., in light of our ongoing consideration, including the
potential staff recommendation of a re-proposal on funds' use of
derivatives, we do not believe it is appropriate to permit sponsors to
form and operate leveraged ETFs in reliance on our proposed rule.
---------------------------------------------------------------------------

    \523\ See supra footnote 77.
---------------------------------------------------------------------------

F. Request for Comments

    The Commission requests comment on all aspects of this initial
economic analysis, including whether the analysis has: (1) Identified
all benefits and costs, including all effects on efficiency,
competition, and capital formation; (2) given due consideration to each
benefit and cost, including each effect on efficiency, competition, and
capital formation; and (3) identified and considered reasonable
alternatives to the proposed new rule and disclosure amendments. We
request and encourage any interested person to submit comments
regarding the proposed rule, our analysis of the potential effects of
the proposed rule and proposed amendments, and other matters that may
have an effect on the proposed rule. We request that commenters
identify sources of data and information as well as provide data and
information to assist us in analyzing the economic consequences of the
proposed rule and proposed amendments. We also are interested in
comments on the qualitative benefits and costs we have identified and
any benefits and costs we may have overlooked. In addition to our
general request for comment on the economic analysis associated with
the proposed rule and proposed amendments, we request specific comment
on certain aspects of the proposal:
     Would the proposed rule require any existing ETFs whose
exemptive orders would be rescinded to materially change the way they
operate? If so, what types of funds would have to materially change the
way they operate and it what ways? Would these funds require any
additional exemptive relief to continue operating?
     Would the elimination of the direct costs of obtaining
exemptive relief result in additional benefits to ETFs or their
investors? Are there other costs of the proposed rule that would offset
any cost savings resulting from not having to file an exemptive
application?
     Would the proposed rule result in greater product
innovation in the ETF market? Would the proposed rule result in
increased investment options?
     Are we correct to assume that substantially all ETFs that
are currently not required to make daily website disclosures of NAV,
closing price, and premiums and discounts would have the data required
to make these disclosures available to them as part of their regular
operations as well as systems (such as computer equipment, an internet
connection, and a website) in place that can be used for processing
this data and uploading it to their websites? If not, what data or
systems would currently be unavailable, which ETFs would it be
unavailable for, and what would the cost of acquiring the unavailable
data or systems be?
     Do ETFs already have policies and procedures in place
governing the composition of baskets? How long would it take and how
much would it cost to implement such policies and procedures for funds
that do not already have them in place, particularly the custom basket
policies and procedures?
     Are we correct to assume that substantially all ETFs would
already have the required data available for daily website disclosures
of bid-ask spreads and historical information regarding premiums and
discounts as well as systems (such as computer equipment, an internet
connection, and a website) in place that can be used for processing
this data and uploading it to their websites? If not, what data or
systems would currently be unavailable, which funds would it be
unavailable for, and what would the cost of acquiring the unavailable
data or systems be?
     Are we correct to assume that substantially all funds
would already have the required data to complete the new disclosures
required by the proposed amendments to Forms N-1A and N-8B-2 available
to them as part of their regular operations? If not, what data would
currently be unavailable, which funds would it be unavailable for, and
what would the cost of acquiring the unavailable data be?
     Is our estimate correct that the cost to a typical fund
for applying for an ETF exemptive order is approximately $100,000? If
not, what would be a more accurate estimate?
     How many ETFs (representing how much in assets) currently
are required to disclose on their website, free of charge, the previous
day's NAV and the price of the ETF shares, as well as the premium or
discount associated with the closing price and information pertaining
to the composition and proportion of underlying holdings? How many ETFs
(representing how much in assets) are not required to provide this
disclosure but nevertheless voluntarily provide it?
     Do commenters agree that requiring ETFs to make the
additional website disclosures available in a structured format, which
is an alternative we considered, would be associated with only a small
cost of tagging this information?
     Would the proposed rule lead to more competition and lower
fees in the leveraged ETF market if leveraged ETFs were allowed to rely
on the rule?

IV. Paperwork Reduction Act

A. Introduction

    Proposed rule 6c-11 would result in new ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\524\ In addition, the proposed
amendments to Form N-1A, Form N-8B-2, and Form N-CEN would impact the
collection of information burden under those forms and Form S-6.\525\
Proposed rule 6c-11 also would impact the current collection of
information burden of rule 0-2 under the Act.\526\
---------------------------------------------------------------------------

    \524\ 44 U.S.C. 3501-3520.
    \525\ 17 CFR 274.11A; 17 CFR 274.12; 17 CFR part 101; 17 CFR
239.16.
    \526\ 17 CFR 270.0-2.
---------------------------------------------------------------------------

    The titles for the existing collection of information are: ``Form
N-1A under the Securities Act of 1933 and under the Investment Company
Act of 1940, Registration Statement for Open-End Management Companies''
(OMB No. 3235-0307); ``Form N-8B-2 under the Investment Company Act of
1940, Registration Statement of Unit Investment Trusts Which are
Currently Issuing Securities'' (OMB No. 3235-0186); ``Form S-6 [17 CFR
239.19], for registration under the Securities Act of 1933 of Unit
Investment Trusts registered on Form N-8B-2'' (OMB Control No. 3235-
0184); ``Form N-

CEN'' (OMB Control No. 3235-0730); and ``Rule 0-2 under the Investment
Company Act of 1940, General Requirements of Papers and Applications''
(OMB Control No. 3235-0636). The title for the new collection of
information would be: ``Rule 6c-11 under the Investment Company Act of
1940, `Exchange-traded funds.' '' The Commission is submitting these
collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number.
    We published notice soliciting comments on the collection of
information requirements in the 2008 ETF Proposing Release and
submitted the proposed collections of information to OMB for review and
approval in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.\527\
We received no comments on the collection of information requirements.
---------------------------------------------------------------------------

    \527\ See 2008 ETF Proposing Release, supra footnote 3.
---------------------------------------------------------------------------

    We discuss below the collection of information burdens associated
with proposed rule 6c-11 and its impact on rule 0-2 as well as proposed
amendments to Forms N-1A, N-8B-2, S-6 and N-CEN.

B. Proposed Rule 6c-11

    Proposed rule 6c-11 would permit ETFs that satisfy certain
conditions to operate without first obtaining an exemptive order from
the Commission. The rule is designed to create a consistent,
transparent, and efficient regulatory framework for such ETFs and
facilitate greater competition and innovation among ETFs. The proposal
attempts to eliminate historical distinctions and conditions that we no
longer believe are necessary and thus appropriately level the playing
field for such ETFs that pursue the same or similar investment
strategies.
    Proposed rule 6c-11 would require an ETF to disclose certain
information on its website, to maintain certain records, and to adopt
and implement written policies and procedures governing their
constructions of baskets, as well as written policies and procedures
that set forth detailed parameters for the construction and acceptance
of custom baskets that are in the best interests of the ETF and its
shareholders. These requirements are collections of information under
the PRA.
    The respondents to proposed rule 6c-11 would be ETFs registered as
open-end management investment companies other than ETFs within
multiple-class funds or leveraged ETFs.\528\ This collection would not
be mandatory, but would be necessary for those ETFs seeking to operate
without individual exemptive orders. We estimate that 1,635 ETFs would
likely rely on rule 6c-11.\529\ Information provided to the Commission
in connection with staff examinations or investigations would be kept
confidential subject to the provisions of applicable law.
---------------------------------------------------------------------------

    \528\ See proposed rule 6c-11(a) (defining ``exchange-traded
fund'').
    \529\ See supra footnote 425 and accompanying text. This is
estimate does not include UIT ETFs, share class ETFs, or leveraged
ETFs.
---------------------------------------------------------------------------

1. Website Disclosures
    Under the proposal, ETFs would be required to post on their
websites: (i) The ETF's NAV per share, market price, and premium or
discount; and (ii) historical information regarding premiums and
discounts. In addition, proposed rule 6c-11 would require an ETF to
disclose on its website, each business day, the portfolio holdings that
will form the basis for each calculation of NAV per share,\530\ and
information regarding a published basket that will apply to orders for
the purchase or redemption of creation units each business day.\531\ As
proposed, the rule would require that portfolio holdings and basket
information be presented and contain information regarding description,
amount, value and/or unrealized gain/loss (if applicable) in the manner
prescribed within Article 12 of Regulation S-X.\532\ Additionally, the
proposed rule would require an ETF to disclose on its website a tabular
chart and line graph showing the ETF's premiums and discounts for the
most recently completed calendar year and the most recently completed
calendar quarters of the current year. For new ETFs that do not yet
have this information, the proposed rule would require the ETF to post
this information for the life of the fund. As discussed above, we
believe the disclosures provide useful information to investors who
purchase and sell ETF shares on national securities exchanges.
---------------------------------------------------------------------------

    \530\ See proposed rule 6c-11(c)(1)(i)(A).
    \531\ See proposed rule 6c-11(c)(1)(i)(B).
    \532\ See supra footnote 220.
---------------------------------------------------------------------------

    Proposed rule 6c-11(c)(1)(v) also would require any ETF whose
premium or discount was greater than 2% for more than seven consecutive
trading days to post that information on its website, along with a
discussion of the factors that are reasonably believed to have
materially contributed to the premium or discount.\533\ Given the
proposed threshold, we do not believe that many ETFs would be required
to disclose this information on a routine basis. For purposes of this
PRA, we assume that all ETFs will be required to make this disclosure
only once in their lifetime. Therefore, we believe that this
requirement will impose only initial costs and that there will be no
ongoing costs associated with it.\534\
---------------------------------------------------------------------------

    \533\ This information would be posted on the trading day
immediately following the eighth consecutive trading day on which
the ETF had a premium or discount greater than 2% and be maintained
on the ETF's website for at least one year following the first day
it was posted. See supra at text following footnote 306.
    \534\ For purposes of this analysis, we estimate that 1,635 ETFs
would be required to make this disclosure at least once in their
lifetime.
---------------------------------------------------------------------------

    For purposes of the PRA analysis, we estimate that an ETF would
incur a one-time average burden of 25 hours associated with updating
the relevant website disclosures, at a time cost of $7,697.50.\535\ The
staff estimates the initial external cost would be $2,000 for an
external website developer to develop the web page.\536\ Amortized over
a 3-year period, the hour burden per ETF would be approximately 8.3
hours, at a time cost of $2,565.8, and an external cost of
approximately $666.65. Additionally, Commission staff estimates that an
ETF each year would spend approximately 5 hours of professional time to
update the relevant web page daily with this information, at a time
cost of $1,405.50.\537\ Commission staff does not believe there will be
any ongoing external costs related to the website disclosure
requirements. Accordingly, we estimate that the total burden for
drafting, reviewing and uploading the website disclosures would be
21,745.50 hours,\538\ at a time

cost of approximately $6,493,075.50,\539\ and an external cost of
$1,089,972.75.\540\
---------------------------------------------------------------------------

    \535\ This estimate is based on the following calculations: (15
hours (for website development) x $296.50 per hour (blended rate for
a senior systems analyst ($274) and senior programmer ($319)) + (10
hours (for review of website disclosures) x $325 (blended rate for a
compliance manager ($298) and a compliance attorney ($352)) =
$7,697.50).
    \536\ Based on staff experience, the staff estimates that each
ETF initially would spend an additional $2,000 on external website
developers.
    \537\ This estimate is based on the following calculations: (2
hours (for website updates) x $296.50 per hour (blended rate for a
senior systems analyst ($274) and senior programmer ($319)) + (2.5
hours (for review of website disclosures) x $325 (blended rate for a
compliance manager ($298) and a compliance attorney ($352)) =
$1,405.50. See SIFMA Report, supra footnote 452.
    \538\ This estimate is based on the following calculation: 13.3
hours x 1,635 ETFs = 21,745.50 hours.
    \539\ This estimate is based on the following calculation:
$3,971.3 x 1,635 ETFs = $6,493,075.50.
    \540\ This estimate is based on the following calculation:
$666.65 x 1,635 ETFs = $1,089,972.75.
---------------------------------------------------------------------------

2. Recordkeeping
    The proposed rule requires that ETFs to preserve and maintain
copies of all written authorized participant agreements.\541\
Additionally, we are proposing to require ETFs to maintain records
setting forth the following information for each basket exchanged with
an authorized participant: (i) The names and quantities of the
positions composing the basket; (ii) identification of the basket as a
``custom basket'' and a record stating that the custom basket complies
with the ETF's custom basket policies and procedures (if applicable);
(iii) cash balancing amounts (if any); and (iv) the identity of the
authorized participant conducting the transaction.\542\
---------------------------------------------------------------------------

    \541\ See proposed rule 6c-11(d).
    \542\ See supra footnote 325 and accompanying text.
---------------------------------------------------------------------------

    ETFs would have to maintain these records for at least five years,
the first two years in an easily accessible place.\543\ We estimate
that the burden would be 5 hours per ETF to retain these records, with
2.5 hours spent by a general clerk and 2.5 hours spent by a senior
computer operator. We estimate a time cost per ETF of $380.\544\ We
estimate the total recordkeeping burden related to rule 6c-11 would be
8,175 hours, at an aggregate cost of $621,300.\545\
---------------------------------------------------------------------------

    \543\ Id.
    \544\ This estimate is based on the following calculations: 2.5
hours x $60 (hourly rate for a general clerk) = $150; 2.5 hours x
$92 (hour rate for a senior computer operator) = $230. $150 + $230 =
$380.
    \545\ We estimate that 1,635 ETFs would be required to maintain
these records.
---------------------------------------------------------------------------

3. Policies and Procedures
    As proposed, rule 6c-11 would require ETFs relying on the proposed
rule to adopt and implement written policies and procedures that govern
the construction of baskets and the process that will be used for the
acceptance of basket assets.\546\ Additionally, to use custom baskets,
an ETF would be required to adopt and implement written policies and
procedures setting forth detailed parameters for the construction and
acceptance of custom baskets that are in the best interests of the ETF
and its shareholders.\547\ These policies and procedures also may
include a periodic review requirement in order to ensure that the ETF's
custom basket procedures are being consistently followed.\548\ Finally,
as discussed above, such an ETF would be required to maintain records
detailing the composition of each custom basket.
---------------------------------------------------------------------------

    \546\ See proposed rule 6c-11(c)(3).
    \547\ See proposed rule 6c-11(c)(3)(i).
    \548\ See supra text accompanying footnote 256.
---------------------------------------------------------------------------

    For purposes of this PRA analysis, we estimate that an ETF would
incur a one-time average burden of 6 hours associated with setting up
the process for documenting the construction and acceptance of
baskets.\549\ Accordingly, we estimate that a total initial burden
associated with setting up the process for documenting the construction
and acceptance of baskets would be 9,810 hours,\550\ at a time cost of
$4,094,325.\551\ An ETF utilizing custom baskets would also incur a
one-time average burden of 20 hours associated with documenting and
adopting the custom basket policies and procedures. Amortized over a 3-
year period, this would be an annual burden per ETF of about 2 hours
for documenting the construction and acceptance of baskets and an
annual burden per ETF of about 6.7 hours for the custom basket policies
and procedures. Accordingly, we estimate that a total burden for
initial documentation and review of both the process for documenting
the construction and acceptance of baskets as well as an ETF's custom
basket policies and procedures would be 42,510 hours,\552\ at a time
cost of $16,788,180.\553\ Amortizing these costs over three years, the
annual burden of complying with these requirements would be 14,170
hours, at a time cost of $5,596,060. We also estimate that there would
be no external cost for an ETF associated with these requirements.
---------------------------------------------------------------------------

    \549\ We estimate that all ETFs relying on the rule will use
custom baskets to some extent. Moreover, we estimate that the cost
associated with this requirement is small because the records
detailing the composition of each custom basket are readily
available.
    \550\ This estimate is based on the following calculations: 6
hours x 1,635 ETFs = 9,810 hours.
    \551\ This estimate is based on the following calculations: 3
hours x 317 (hourly rate for a senior manager) = $951; 2 hours x 511
(hourly rate for chief compliance officer) = $1,022; 1 hour x $352
(hourly rate for compliance attorney) = $352; $951 + $1,022 + $352 =
$2,325; $2,325 x 1,635 ETFs = $3,801,375.
    \552\ This estimate is based on the following calculation: (6
hours + 20 hours) x 1,635 ETFs = 42,510 hours.
    \553\ These estimates are based on the following calculations:
12 hours x $317 (hourly rate for a senior portfolio manager) =
$3,804; 12 hours x $480 (blended hourly rate for assistant general
counsel ($449) and chief compliance officer ($511) = $5,760; 2 hours
(for a fund attorney's time to prepare and review materials) x $352
(hourly rate for a compliance attorney) = $704. $3,804 + $5,760 +
$704 = $10,268; $10,268 x 1,635 ETFs = $16,788,180. See SIFMA
Report, supra footnote 452.
---------------------------------------------------------------------------

    We estimate that each ETF would incur an ongoing burden of an
additional 10 hours, at a time cost of an additional $3,985 \554\ each
year to review and update its custom basket policies and procedures as
well as its process for documenting the construction and acceptance of
baskets. In aggregate, we estimate that the total ongoing costs
associated with these requirements are 16,350 hours, at a time cost of
$6,515,475.\555\ We do not estimate that there will be any ongoing
external costs associated with these requirements. Therefore, we
estimate that the total initial and ongoing costs associated with
complying with the policies and procedures requirements of proposed
rule 6c-11 would be 30,520 \556\ hours at a time cost of
$12,111,535.\557\
---------------------------------------------------------------------------

    \554\ These estimates are based on the following calculations: 5
hours x $317 (hourly rate for a senior portfolio manager) = $1,585;
5 hours x $480 (blended hourly rate for assistant general counsel
($449) and chief compliance officer ($511) = $2,400. $1,585 + $2,400
= $3,985.
    \555\ This estimate is based on the following calculation:
$3,985 x 1,635 ETFs = $6,515,475.
    \556\ This estimate is based on the following calculation:
14,170 hours + 16,350 hours = 30,520 hours.
    \557\ This estimate is based on the following calculation:
$5,596,060 + $6,515,475 = $12,111,535.
---------------------------------------------------------------------------

4. Estimated Total Burden
    We estimate that the total hour burdens and time costs associated
with proposed rule 6c-11, including the burden associated with: (i)
Website disclosure; (ii) recordkeeping; and (iii) developing policies
and procedures, would result in an average aggregate annual burden of
60,440.5 hours \558\ and an average aggregate time cost of
$19,225,910.50.\559\ We also estimate that there are $1,089,972.75
external costs associated with this collection of information. \560\
Therefore, to comply with rule 6c-11 each ETF would incur an annual
burden of approximately 36.97 \561\ hours, at an average time cost of
approximately $11,758.97 \562\, and an external cost of $666.65.\563\
---------------------------------------------------------------------------

    \558\ This estimate is based on the following calculation:
21,745.5 hours + 8,175 hours + 30,520 hours = 60,440.5 hours.
    \559\ This estimate is based on the following calculation:
$6,493,075.50 + $621,300 + $12,111,535 = $19,225,910.50.
    \560\ See supra footnote 540 and accompanying text.
    \561\ This estimate is based on the following calculation:
60,440.5 hours / 1,635 ETFs = 36.97 hours.
    \562\ This estimate is based on the following calculation:
$19,225,910.50 / 1,635 ETFs = $11,758.97.
    \563\ This estimate is based on the following calculation:
$1,089,972.75 / 1,635 ETFs = $666.65.

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

C. Rule 0-2

    Section 6(c) of the Act provides the Commission with authority to
conditionally or unconditionally exempt persons, securities or
transactions from any provision of the Act if and to the extent that
such exemption is necessary or appropriate in the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act. Rule 0-2 under the
Act, entitled ``General Requirements of Papers and Applications,''
prescribes general instructions for filing an application seeking
exemptive relief with the Commission.\564\ We currently estimate for
rule 0-2 a total hour burden of 5,340 hours at an annual time cost of
$2,029,200.60 and the total annual external cost burden is
$14,090,000.\565\
---------------------------------------------------------------------------

    \564\ See Supporting Statement of Rule 0-2 under the Investment
Company Act of 1940, General Requirements of Paper Applications
(Nov. 23, 2016), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201602-3235-008 (summarizing how applications are
filed with the Commission in accordance with the requirements of
rule 0-2).
    \565\ This estimate is based on the last time the rule's
information collection was submitted for PRA renewal in 2016.
---------------------------------------------------------------------------

    As discussed above, proposed rule 6c-11 would permit ETFs that
satisfy the conditions of the rule to operate without the need to
obtain an exemptive order from the Commission under the Act. Therefore,
proposed rule 6c-11 would alleviate some of the burdens associated with
rule 0-2 because it would reduce the number of entities that require
exemptive relief in order to operate.\566\ Based on staff experience,
we estimate that approximately one-third of the annual burdens
associated with rule 0-2 are attributable to ETF applications.
Therefore, we estimate that proposed rule 6c-11 would result in a
decrease of the annual burden of rule 0-2 to approximately 3,738 \567\
hours at an annual time cost of $1,420,440.42 \568\ and an annual
external cost of $9,863,000.\569\
---------------------------------------------------------------------------

    \566\ As discussed above, we expect to continue to receive
applications for complex or novel ETF exemptive relief that are
beyond the scope of the proposed rule. See supra at text following
footnote 454.
    \567\ This estimate is based on the following calculation: 5,340
hours-(5,340 hours x 0.3) = 3,738 hours.
    \568\ This estimate is based on the following calculation:
$2,029,200.60-($2,029,200.60 x 0.3) = $1,420,440.42.
    \569\ This estimate is based on the following calculation:
$14,090,000-($14,090,000 x 0.3) = $9,863,000.
---------------------------------------------------------------------------

D. Form N-1A

    Form N-1A is the registration form used by open-end management
investment companies. The respondents to the proposed amendments to
Form N-1A are open-end management investment companies registered or
registering with the Commission. Compliance with the proposed
disclosure requirements of Form N-1A is mandatory for open-end funds
(to the extent applicable) including all ETFs organized as open-end
funds. Responses to the disclosure requirements are not confidential.
We currently estimate for Form N-1A a total burden hour of 1,579,974
burden hours, with an estimated internal cost of $129,338,408, and
external cost of $124,820,197.\570\
---------------------------------------------------------------------------

    \570\ This estimate is based on the last time the form's
information collection was submitted for PRA renewal in 2017.
---------------------------------------------------------------------------

    We are proposing amendments to Form N-1A designed to provide
investors who purchase ETF shares in secondary market transactions with
tailored information regarding ETFs, including information regarding
costs associated with an investment in ETFs.\571\ Specifically, the
proposed amendments to Form N-1A would require new disclosures
regarding fees and expenses, such as brokerage commission and financial
intermediary fees, and certain trading costs.\572\ In addition, we are
proposing to include instructions in Form N-1A requiring an ETF to
provide bid-ask spread information on the ETF's website and an
interactive calculator, in a clear and prominent format on the ETF's
website, to allow investors to customize certain hypothetical
calculations to their specific investing situation.\573\
---------------------------------------------------------------------------

    \571\ See proposed Instruction 5(e) to Item 3 of Form N-1A.
    \572\ See proposed amendments to Item 3 of Form N-1A.
    \573\ Proposed Instruction 5(e) to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    We also are proposing amendments to Form N-1A designed to eliminate
certain disclosures for ETFs that are duplicative of the new
disclosures we are proposing, discussed above, or are no longer
necessary.\574\ These proposed amendments include eliminating certain
disclosures in Item 6(c) of Form N-1A relating to creation units,
secondary market transactions, premiums and discounts, as well as
certain disclosures required of ETFs issuing creation units of less
than 25,000 shares. Additionally, we are proposing to eliminate
historical premium/discount disclosure requirements in Item 11(g)(2)
and Item 27(b)(7)(iv) of Form N-1A.
---------------------------------------------------------------------------

    \574\ See supra footnotes 390-397 and accompanying text.
---------------------------------------------------------------------------

    Form N-1A generally imposes two types of reporting burdens on
investment companies: (i) The burden of preparing and filing the
initial registration statement; and (ii) the burden of preparing and
filing post-effective amendments to a previously effective registration
statement (including post-effective amendments filed pursuant to 17 CFR
230.485(a) or (b) (rule 485(a) or 485(b) under the Securities Act), as
applicable). We estimate that each ETF would incur a one-time burden of
an additional 10 hours, at a time cost of an additional $3,355,\575\ to
draft and finalize the required disclosure and amend its registration
statement. We further estimate that an ETF would incur a one-time
average burden of 10 hours associated with implementing the bid-ask
spread disclosures and interactive calculator on its website, at a time
cost of $3,355,\576\ as required by proposed Instruction 5(e) to Item
3. In the aggregate, we estimate that ETFs would incur a one-time
burden of an additional 20 hours, at a time cost of an additional
$6,710 to comply with the proposed Form N-1A disclosure requirements
for ETFs. Amortizing the one-time burden over a three-year period
results in an average annual burden of an additional 6.67 hours at a
time cost of an additional $2,236.67.
---------------------------------------------------------------------------

    \575\ This estimate is based on the following calculation: 10
hours x $335.50 (blended rate for a compliance attorney ($352) and a
senior programmer ($319)) = $3,355.
    \576\ Id.
---------------------------------------------------------------------------

    We estimate that each ETF would incur an ongoing burden of an
additional 5 hours, at a time cost of an additional $1,677.50 \577\
each year to review and update the proposed disclosures.\578\ We also
estimate that each ETF would incur an ongoing burden of an additional 5
hours, at a time cost of an additional $1,677.50,\579\ relating to the
bid-ask spread disclosures and to maintain the interactive calculator
on its website. In aggregate, we estimate that each ETF would incur an
annual ongoing burden of an additional 10 hours, at a time cost of an
additional $3,355, to comply with the proposed Form N-1A disclosure
requirements. We do not estimate any change to the external costs
associated with the proposed amendment for Form N-1A.
---------------------------------------------------------------------------

    \577\ This estimate is based on the following calculation: 5
hours x $335.50 (blended rate for a compliance attorney ($352) and a
senior programmer ($319)) = $1,677.50.
    \578\ The estimated burden associated with the amendments to
Form N-1A accounts for the proposal to remove the information
currently required by Item 11(g)(2) and Item 27(b)(7)(iv) of Form N-
1A.
    \579\ Id.
---------------------------------------------------------------------------

    In total, we estimate that ETFs, other than UIT ETFs, would incur
an average

annual increased burden of approximately 31,596.4 hours,\580\ at a time
cost of approximately $10,579,307.2,\581\ to comply with the proposed
Form N-1A disclosure requirements. We do not estimate any change to the
external costs associated with the proposed amendment for Form N-1A.
---------------------------------------------------------------------------

    \580\ This estimate is based on the following calculation: (6.7
hours + 10 hours) x 1,892 ETFs = 31,596.4 hours.
    \581\ This estimate is based on the following calculation:
($2,236.67 + $3,355) x 1,892 ETFs= $10,579,307.20.
---------------------------------------------------------------------------

E. Disclosure Amendments to Forms N-8B-2 and S-6

    Form N-8B-2 is used by UITs to initially register under the
Investment Company Act pursuant to section 8 thereof.\582\ UITs are
required to file Form S-6 in order to register offerings of securities
with the Commission under the Securities Act.\583\ As a result, UITs
file Form N-8B-2 only once when the UIT is initially created and then
use Form S-6 to file all post-effective amendments to their
registration statements in order to update their prospectuses.\584\ We
currently estimate for Form S-6 a total burden of 106,620 hours, with
an internal cost burden of approximately $34,000,000, and an external
cost burden estimate of $67,359,556.\585\ Additionally, we currently
estimate for Form N-8B-2 a total burden of 10 hours, with an internal
cost burden of approximately $3,360, and an external burden estimate of
$10,000.\586\
---------------------------------------------------------------------------

    \582\ See Form N-8B-2 [17 CFR 274.12].
    \583\ See Form S-6 [17 CFR 239.16]. Form S-6 is used for
registration under the Securities Act of securities of any UIT
registered under the Act on Form N-8B-2.
    \584\ Form S-6 incorporates by reference the disclosure
requirements of Form N-8B-2 and allows UITs to meet the filing and
disclosure requirements of the Securities Act.
    \585\ This estimate is based on the last time the form's
information collection was submitted for PRA renewal in 2014.
    \586\ This estimate is based on the last time the form's
information collection was submitted for PRA renewal in 2018.
---------------------------------------------------------------------------

    In order to assist investors with better understanding the total
costs of investing in a UIT ETF, we are proposing disclosure
requirements in Form N-8B-2 that mirror those disclosures proposed for
Form N-1A.\587\ All UIT ETFs would be subject to these disclosure
requirements. For existing UIT ETFs, the one-time and ongoing costs of
complying with the amendments to Form N-8B-2 would accrue on Form S-
6.\588\
---------------------------------------------------------------------------

    \587\ See proposed Items 13(h) and (i) of Form N-8B-2. See also
supra section II.H.5.
    \588\ See supra footnote 583.
---------------------------------------------------------------------------

    For purposes of the PRA analysis, we estimate that each UIT ETF
would incur a one-time burden of an additional 20 hours, at a time cost
of an additional $6,710 \589\ to draft and finalize the required
disclosure and amend its Form S-6. For each newly created UIT ETF,
these same costs would be incurred on Form N-8B-2.\590\ Therefore, in
the aggregate, we estimate that existing UIT ETFs would incur a one-
time burden of an additional 160 hours,\591\ at a time cost of an
additional $53,680,\592\ to comply with the proposed Form N-8B-2
disclosure requirements on Form S-6. Additionally, in the aggregate, we
estimate that newly created UIT ETFs would incur a one-time burden of
an additional 20 hours, at a time cost of an additional $6,710, to
comply with the proposed amendments and complete Form N-8B-2.
Amortizing the one-time burden for both existing and newly created UIT
ETFs over a three-year period results in an average annual burden of an
additional 6.67 hours, at a time cost of an additional $2,236.67.
---------------------------------------------------------------------------

    \589\ This estimate is based on the following calculation: 20
hours x $335.50 (blended rate for a compliance attorney ($352) and a
senior programmer ($319)) = $6,710.
    \590\ Although we noted above that no new UIT ETFs have come to
market since 2002, for purposes of calculating the time and cost
burdens associated with completing Form N-8B-2, we estimate that 1
UIT ETF will be created annually. See supra footnote 41 and
accompanying text.
    \591\ This estimate is based on the following calculation: 20
hours x 8 UIT ETFs= 160 hours.
    \592\ This estimate is based on the following calculation:
$6,710 x 8 UIT ETFs = $53,680.
---------------------------------------------------------------------------

    We estimate that each UIT ETF would incur an ongoing burden of an
additional 10 hours, at a time cost of an additional $3,355, each year
to review and update the proposed disclosures on Form S-6. In
aggregate, we estimate that UIT ETFs would incur an annual burden of an
additional 80 hours,\593\ at a time cost of an additional $26,840,\594\
to comply with the proposed Form N-8B-2 disclosure requirements on Form
S-6.
---------------------------------------------------------------------------

    \593\ This estimate is based on the following calculation: 10
hours x 8 UIT ETFs = 80 hours.
    \594\ This estimate is based on the following calculation:
$3,355 x 8 UIT ETFs = $26,840.
---------------------------------------------------------------------------

    Additionally, we estimate that newly created UIT ETFs would also
incur an average annual increased burden of approximately 10 hours, at
a time cost of an additional $3,355, to complete Form N-8B-2. We do not
estimate any change to the external costs, on either Form N-8B-2 or
Form S-6, associated with the proposed amendments to Form N-8B-2.

F. Form N-CEN

    As discussed above, Form N-CEN is a structured form that requires
registered funds to provide census-type information to the Commission
on an annual basis.\595\ The Commission is proposing amendments to Form
N-CEN to require ETFs to report if they are relying on rule 6c-11.\596\
---------------------------------------------------------------------------

    \595\ See Reporting Modernization Adopting Release, supra
footnote 147. The compliance date for Form N-CEN is June 1, 2018.
    \596\ See proposed Item C.7.k. of Form N-CEN.
---------------------------------------------------------------------------

    In the Reporting Modernization Adopting Release, we estimated that
the Commission would receive an average of 3,113 reports on Form N-
CEN.\597\ We estimated that the average annual hour burden per response
for Form N-CEN for the first year to be 32.37 hours and 12.37 hours in
subsequent years.\598\ Amortizing the burden over three years, we
estimated that the average annual hour burden per fund per year to be
19.04 hours and the total aggregate annual hour burden to be 59,272
hours.\599\ Finally, we estimated that all applicable funds will incur,
in the aggregate, external annual costs of $2,088,176 to prepare and
file reports on Form N-CEN.\600\
---------------------------------------------------------------------------

    \597\ See Reporting Modernization Adopting Release, supra
footnote 147, at text accompanying n.1524.
    \598\ See id., at text accompanying nn.1531-1532.
    \599\ See id., at text accompanying nn.1533-1534.
    \600\ See Reporting Modernization Adopting Release, supra
footnote 147, at text accompanying n.1538.
---------------------------------------------------------------------------

    Based on Commission staff experience, we believe that our proposal
to require ETFs to report if they are relying on rule 6c-11 would
increase the estimated burden hours associated with Form N-CEN by
approximately 0.1 hours, both initially and on an ongoing basis.\601\
Therefore, in the aggregate, we estimate that ETFs will incur an annual
burden of an additional 163.5 hours to comply with the proposed
amendments to Form N-CEN.\602\ We estimate that there are no additional
external costs associated with this collection of information.
---------------------------------------------------------------------------

    \601\ This estimate stems from the Commission staff's
understanding of the time it takes to complete initially complete
and review items on Form N-CEN.
    \602\ This estimate is based on the following calculation: 0.1
hours x 1,635 ETFs = 163.5 hours.
---------------------------------------------------------------------------

G. Request for Comments

    We request comment on whether these estimates are reasonable.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments
in order to: (i) Evaluate whether the proposed collections of
information are necessary for the proper performance of the functions
of the Commission, including whether the information will have
practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed

collections of information; (iii) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; and (iv) determine whether there are ways to minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
    Persons wishing to submit comments on the collection of information
requirements of the proposed rules and amendments should direct them to
the OMB, Attention Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, and should send a copy to, Brent J. Fields, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090, with reference to File No. S7-15-18. OMB is required to
make a decision concerning the collections of information between 30
and 60 days after publication of this release; therefore a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days after publication of this release. Requests for materials
submitted to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-15-18, and be
submitted to the Securities and Exchange Commission, Office of FOIA
Services, 100 F Street NE, Washington, DC 20549-2736.

V. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory
Flexibility Analysis (``IRFA'') in accordance with section 3 of the
Regulatory Flexibility Act \603\ regarding our proposed new rule 6c-11
and proposed amendments to Form N-1A, Form N-8b-2, and Form N-CEN.
---------------------------------------------------------------------------

    \603\ See 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons for and Objectives of the Proposed Actions

    As described more fully above, proposed rule 6c-11 would allow ETFs
that meet the conditions of the rule to form and operate without the
expense and delay of obtaining an exemptive order from the Commission.
The Commission's objective is to create a consistent, transparent and
efficient regulatory framework for ETFs and to facilitate greater
competition and innovation among ETFs. The Commission also believes the
proposed disclosure amendments would provide useful information to
investors who purchase and sell ETF shares in secondary markets.
Finally, the goal of the proposed amendments to Form N-CEN is for the
Commission to be able to better monitor reliance on rule 6c-11 and to
assist the Commission with its accounting, auditing and oversight
functions.

B. Legal Basis

    The Commission is proposing new rule 6c-11 pursuant to the
authority set forth in sections 6(c), 22(c), and 38(a) of the
Investment Company Act [15 U.S.C. 80a-6(c), 22(c), and 80a-37(a)]. The
Commission is proposing amendments to registration Form N-1A under the
authority set forth in sections 6, 7(a), 10 and 19(a) of the Securities
Act of 1933 [15 U.S.C. 77f, 77g(a), 77j, 77s(a)], and sections 8(b),
24(a), and 30 of the Investment Company Act [15 U.S.C. 80a-8(b), 80a-
24(a), and 80a-29]. The Commission is proposing amendments to
registration Form N-8b-2 under the authority set forth in section 8(b)
and 38(a) of the Investment Company Act [15 U.S.C. 80a-8(b) and 80a-
37(a)]. The Commission is proposing amendments to Form N-CEN under the
authority set forth sections 8(b), 30(a), and 38(a) of the Investment
Company Act [15 U.S.C. 80a-8(b), 80a-29(a), and 80a-37(a)].

C. Small Entities Subject to the Rule

    An investment company is a small entity if, together with other
investment companies in the same group of related investment companies,
it has net assets of $50 million or less as of the end of its most
recent fiscal year.\604\ Commission staff estimates that, as of
December 2017, there are approximately 8 open-end ETFs that may be
considered small entities.\605\ Commission staff estimates there are no
UIT ETFs that would be considered small entities subject to the
proposed disclosures for Form N-8B-2.\606\
---------------------------------------------------------------------------

    \604\ 17 CFR 270.0-10(a).
    \605\ This estimate is derived from an analysis of data reported
on Form N-1A with the Commission for the period ending December,
2017.
    \606\ This estimate is derived from an analysis of data reported
on Forms S-6 and N-8B-2 with the Commission for the period ending
December 2017.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

    The proposed amendments would amend current reporting requirements
for ETFs considered small entities.
1. Rule 6c-11
    Proposed rule 6c-11 would require an ETF to disclose on its
website: (i) Portfolio holding information and information regarding a
published basket on each business day; (ii) the ETF's current NAV per
share, market price, and premium or discount, each as of the end of the
prior business day; (iii) if an ETF's premium or discount is greater
than 2% for more than seven consecutive trading days, a discussion of
the factors that are reasonably believed to have materially contributed
to the premium or discount; and (iv) a table and line graph showing the
ETF's premiums and discounts.\607\ We also are proposing to require
that ETFs preserve and maintain copies of all written authorized
participant agreements, as well as records setting forth the following
information for each basket exchanged with an authorized participant:
(i) The names and quantities of the positions composing the basket;
(ii) identification of the basket as a ``custom basket'' and a record
stating that the custom basket complies with the ETF's policies and
procedures (if applicable); (iii) cash balancing amounts (if any); and
(iv) the identity of the authorized participant conducting the
transaction.\608\ Proposed rule 6c-11 would also require ETFs relying
on the proposed rule to adopt and implement written policies and
procedures that govern the construction of baskets and the process that
will be used for the acceptance of basket assets.\609\ ETFs using
custom baskets under the proposed rule must adopt custom basket
policies and procedures that include certain enumerated
requirements.\610\
---------------------------------------------------------------------------

    \607\ See proposed rule 6c-11(c)(1)(iii) and (iv).
    \608\ See supra section II.C.5.a.
    \609\ Proposed rule 6c-11(c)(3).
    \610\ Proposed rule 6c-11(c)(3).
---------------------------------------------------------------------------

    We estimate that approximately 8 ETFs are small entities that would
comply with proposed rule 6c-11, and we do not believe that their costs
would differ from other ETFs. As discussed above, we estimate that an
ETF would incur an annual burden of approximately 36.97 hours, at an
average time cost of approximately $11,758.97, and an external cost of
$666.65.\611\
---------------------------------------------------------------------------

    \611\ See supra footnote 561 and accompanying text.
---------------------------------------------------------------------------

2. Disclosure and Reporting Requirements
    We are proposing amendments to Form N-1A and Form N-8B-2 designed
to provide investors who purchase ETF shares in secondary market
transactions with tailored information regarding ETFs, including
information regarding costs associated with an investment in ETFs.
Specifically, proposed amendments to Form N-1A would require new
disclosure regarding fees and expenses, such a brokerage

commission and financial intermediary fees, and additional information
on certain trading costs.\612\ In addition, we are proposing to include
instructions in Form N-1A requiring an ETF to provide bid-ask spread
information on the ETF's website and an interactive calculator, in a
clear and prominent format on the ETF's website, to allow investors to
customize certain hypothetical calculations to their specific investing
situation.\613\ Proposed amendments to Form N-8B-2 mirror proposed
disclosures for Form N-1A. We are also proposing amendments to Form N-
CEN that would require ETFs to report on Form N-CEN if they are relying
on rule 6c-11. The proposed Form N-CEN amendments are designed to
assist us with monitoring reliance on rule 6c-11 as well with our
accounting, auditing and oversight functions, including compliance with
the PRA.
---------------------------------------------------------------------------

    \612\ See supra footnote 572 and accompanying text.
    \613\ Proposed Instruction 5(e) to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    All ETFs would be subject to the proposed disclosure and reporting
requirements, including ETFs that are small entities. We estimate that
8 ETFs are small entities that would be required to comply with the
proposed disclosure and reporting requirements.\614\
---------------------------------------------------------------------------

    \614\ See supra footnote 605.
---------------------------------------------------------------------------

    As discussed above, we estimate that each ETF, including ETFs that
are small entities, would incur a one-time burden of an additional 10
hours, at a time cost of an additional $3,355 to draft and finalize the
required disclosure and amend its registration statement.\615\ We
further estimate that ETFs, including ETFs that are small entities,
would incur a one-time average burden of 10 hours associated with
implementing the interactive calculator on its website, at a time cost
of $3,355, as required by proposed Instruction 5(e) to Item 3. In the
aggregate, we estimate that ETFs, including ETFs that are small
entities, would incur a one-time burden of an additional 20 hours, at a
time cost of an additional $6,710, to comply with the proposed Form N-
1A disclosure requirements for ETFs.\616\
---------------------------------------------------------------------------

    \615\ See supra footnote 576 and accompanying text.
    \616\ See supra footnote 576 and accompanying text.
---------------------------------------------------------------------------

    We also estimate that each ETF, including ETFs that are small
entities, would incur an ongoing burden of an additional 5 hours, at a
time cost of an additional $1,677.50, each year to review and update
the proposed disclosures. We further estimate that each ETF, including
ETFs that are small entities, would incur an ongoing burden of an
additional 5 hours, at a time cost of an additional $1,677.50, to
maintain the interactive calculator on its website. In aggregate, we
estimate that each ETF, including ETFs that are small entities, would
incur an annual ongoing burden of an additional 10 hours, at a time
cost of an additional $3,355, to comply with the proposed Form N-1A
disclosure requirements. We do not estimate any change to the external
costs associated with the proposed amendments to Form N-1A.\617\
---------------------------------------------------------------------------

    \617\ Id.
---------------------------------------------------------------------------

    As discussed above, because the amendments made to Form N-8B-2
mirror those made on Form N-1A, we believe that UIT ETFs, including UIT
ETFs that are small entities, would incur the same costs as all ETFs
associated with updating their registration statements. However, none
of the UIT ETFs are small entities.

E. Duplicative, Overlapping or Conflicting Federal Rules

    Commission staff has not identified any federal rules that
duplicate, overlap, or conflict with the proposed regulations.

F. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives
that would accomplish our stated objectives, while minimizing any
significant economic impact on small entities. We considered the
following alternatives for small entities in relation to the proposed
regulations:
     Exempting ETFs that are small entities from the proposed
disclosure, reporting or recordkeeping requirements, to account for
resources available to small entities;
     establishing different disclosure, reporting or
recordkeeping requirements or different frequency of these
requirements, to account for resources available to small entities;
     clarifying, consolidating, or simplifying the compliance
requirements under the amendments for small entities; and
     using performance rather than design standards.
    We do not believe that exempting any subset of ETFs, including
small entities, from proposed rule 6c-11 or proposed form amendments
would permit us to achieve our stated objectives. Nor do we believe
establishing different disclosure, reporting or recordkeeping
requirements or different frequency of these requirements for small
entities would permit us to achieve our stated objectives. Similarly,
we do not believe that we can establish simplified or consolidated
compliance requirements for small entities under the proposed rule
without compromising our objectives. As discussed above, the conditions
necessary to rely on proposed rule 6c-11 and the reporting,
recordkeeping and disclosure requirements are designed to provide
investor protection benefits, including, among other things, tailored
information regarding ETFs, including information regarding costs
associated with an investment in ETFs. These benefits should apply to
investors in smaller funds as well as investors in larger funds.
Similarly, we do not believe it would be in the interest of investors
to exempt small ETFs from the proposed disclosure and reporting
requirements or to exempt small ETFs from the proposed recordkeeping
requirements. We believe that all ETF investors, including investors in
small ETFs, would benefit from disclosure and reporting requirements
that permit them to make investment choices that better match their
risk tolerances. We further note that the current disclosure
requirements for reports on Form N-1A and Form N-8B-2 do not
distinguish between small entities and other funds.\618\
---------------------------------------------------------------------------

    \618\ See Reporting Modernization Adopting Release, supra
footnote 147, at section V.E (noting that small entities currently
follow the same requirements that large entities do when filing
reports on Form N-SAR, Form N-CSR, and Form N-Q, and stating that
the Commission believes that establishing different reporting
requirements or frequency for small entities (including with respect
to proposed Form N-PORT and proposed Form N-CEN) would not be
consistent with the Commission's goal of industry oversight and
investor protection).
---------------------------------------------------------------------------

    Finally, we believe that proposed rule 6c-11 and related disclosure
and reporting requirements appropriately use a combination of
performance and design standards. Proposed rule 6c-11 provides ETFs
that satisfy the requirements of the rule with exemptions from certain
provisions of the Act necessary for ETFs to operate. Because the
provisions of the Act from which ETFs would be exempt provide important
investor and market protections, the conditions of the proposed rule
must be specifically designed to ensure that these investor and market
protections are maintained. However, where we believe that flexibility
is beneficial, we proposed performance-based standards that provide a
regulatory framework, rather than prescriptive requirements, to give
funds the opportunity to adopt policies and procedures tailored to
their specific

needs without raising investor or market protection concerns.\619\
---------------------------------------------------------------------------

    \619\ See e.g., supra section II.C.5 (noting that proposed rule
6c-11 would provide an ETF with the flexibility to use ``custom
baskets'' if the ETF has adopted written policies and procedures
that set forth detailed parameters for the construction and
acceptance of custom baskets that are in the best interests of the
ETF and its shareholders).
---------------------------------------------------------------------------

G. General Request for Comment

    The Commission requests comment regarding this analysis. We request
comments on the number of small entities that would be subject to the
proposed ETF regulations and whether the proposed ETF regulations would
have any effects that have not been discussed. We request that
commenters describe the nature of any effects on small entities subject
to the proposed ETF regulations and provide empirical data to support
the nature and extent of such effects. We also request comment on the
estimated compliance burdens of the proposed ETF regulations and how
they would affect small entities.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \620\ the Commission must advise OMB
whether a proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results in
or is likely to result in:
---------------------------------------------------------------------------

    \620\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment or
innovation.
    We request comment on whether our proposal would be a ``major
rule'' for purposes of SBREFA. We solicit comment and empirical data
on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumers or
individual industries; and
     Any potential effect on competition, investment, or
innovation.

Commenters are requested to provide empirical data and other factual
support for their views to the extent possible.

VII. Statutory Authority

    The Commission is proposing new rule 6c-11 pursuant to the
authority set forth in sections 6(c), 22(c), and 38(a) of the
Investment Company Act [15 U.S.C. 80a-6(c), 80a-22(c), and 80a-37(a)].
The Commission is proposing amendments to registration Form N-1A under
the authority set forth in sections 6, 7(a), 10 and 19(a) of the
Securities Act of 1933 [15 U.S.C. 77f, 77g(a), 77j, 77s(a)], and
sections 8(b), 24(a), and 30 of the Investment Company Act [15 U.S.C.
80a-8(b), 80a-24(a), and 80a-29]. The Commission is proposing
amendments to registration Form N-8B-2 under the authority set forth in
section 8(b) and 38(a) of the Investment Company Act [15 U.S.C. 80a-
8(b) and 80a-37(a)]. The Commission is proposing amendments to Form N-
CEN under the authority set forth in sections 8(b), 30(a), and 38(a) of
the Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(a), and 80a-
37(a)].

List of Subjects

17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements,
Securities.

Text of Proposed Rules and Form Amendments

    For reasons set out in the preamble, title 17, chapter II of the
Code of Federal Regulations is proposed to be amended as follows:

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
1. The authority citation for part 239 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll,
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26,
80a-29, 80a-30, and 80a-37; and sec. 107 Pub. L. 112-106, 126 Stat.
312, unless otherwise noted.
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
2. The authority citation for part 270 continues to read, in part, and
is amended by adding a sectional authority for Sec.  270.6c-11 to read
as follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless
otherwise noted.
* * * * *
    Section 270.6c-11 is also issued under 15 U.S.C. 80a-6(c) and
80a-37(a).
* * * * *
0
3. Section 270.6c-11 is added to read as follows:

Sec.  270.6c-11   Exchange-traded funds.

    (a) Definitions. For purposes of this section:
    Authorized participant means a member or participant of a clearing
agency registered with the Commission, which has a written agreement
with the exchange-traded fund or one of its service providers that
allows the authorized participant to place orders for the purchase and
redemption of creation units.
    Basket means the securities, assets or other positions in exchange
for which an exchange-traded fund issues (or in return for which it
redeems) creation units.
    Business day means any day the exchange-traded fund is open for
business, including any day when it satisfies redemption requests as
required by section 22(e) of the Act (15 U.S.C. 80a-22(e)).
    Cash balancing amount means an amount of cash to account for any
difference between the value of the basket and the net asset value of a
creation unit.
    Creation unit means a specified number of exchange-traded fund
shares that the exchange-traded fund will issue to (or redeem from) an
authorized participant in exchange for the deposit (or delivery) of a
basket and a cash balancing amount if any.
    Custom basket means:
    (i) Baskets that are composed of a non-representative selection of
the exchange-traded fund's portfolio holdings; or
    (ii) Different baskets used in transactions on the same business
day.
    Exchange-traded fund means a registered open-end management
company:
    (i) That issues (and redeems) creation units to (and from)
authorized participants in exchange for a basket and a cash balancing
amount if any; and
    (ii) Whose shares are listed on a national securities exchange and
traded at market-determined prices.
    Exchange-traded fund share means a share of stock issued by an
exchange-traded fund.
    Foreign investment means any security, asset or other position of
the ETF issued by a foreign issuer as that term is defined in Sec.
240.3b-4 of this title, and for which there is no established United
States public trading market, as that term is used in 17 CFR 227.201
(Item 201 of Regulation S-K under the Securities Act of 1933).
    Market price means:
    (i) The official closing price of an exchange-traded fund share; or
    (ii) If it more accurately reflects the market value of an
exchange-traded

fund share at the time as of which the exchange-traded fund calculates
current net asset value per share, the price that is the midpoint
between the national best bid and national best offer as of that time.
    National securities exchange means an exchange that is registered
with the Commission under section 6 of the Securities Exchange Act of
1934 (15 U.S.C. 78f).
    Portfolio holdings means the securities, assets or other positions
held by the exchange-traded fund.
    Premium or discount means the positive or negative difference
between the market price of an exchange-traded fund share at the time
as of which the current net asset value is calculated and the exchange-
traded fund's current net asset value per share, expressed as a
percentage of the exchange-traded fund share's current net asset value
per share.
    (b) Application of the Act to Exchange-Traded Funds. If the
conditions of paragraph (c) of this section are satisfied:
    (1) Redeemable security. An exchange-traded fund share is
considered a ``redeemable security'' within the meaning of section
2(a)(32) of the Act (15 U.S.C. 80a-2(a)(32)).
    (2) Pricing. A dealer in exchange-traded fund shares is exempt from
section 22(d) of the Act (15 U.S.C. 80a-22(d)) and Sec.  270.22c-1(a)
with regard to purchases, sales and repurchases of exchange-traded fund
shares at market-determined prices.
    (3) Affiliated transactions. (i) A person who is an affiliated
person of an exchange-traded fund (or who is an affiliated person of
such a person) solely by reason of the circumstances described in
paragraphs (b)(3)(i)(A) and (B) of this section is exempt from sections
17(a)(1) and 17(a)(2) of the Act (15 U.S.C. 80a-17(a)(1) and (a)(2))
with regard to the deposit and receipt of baskets:
    (A) Holding with the power to vote 5% or more of the exchange-
traded fund's shares; or
    (B) Holding with the power to vote 5% or more of any investment
company that is an affiliated person of the exchange-traded fund.
    (4) Postponement of redemptions. If an exchange-traded fund
includes a foreign investment in its basket, and if a local market
holiday, or series of consecutive holidays, or the extended delivery
cycles for transferring foreign investments to redeeming authorized
participants prevents timely delivery of the foreign investment in
response to a redemption request, the exchange-traded fund is exempt,
with respect to the delivery of the foreign investment, from the
prohibition in section 22(e) of the Act (15 U.S.C. 80a-22(e)) against
postponing the date of satisfaction upon redemption for more than seven
days after the tender of a redeemable security if the exchange-traded
fund delivers the foreign investment as soon as practicable, but in no
event later than 15 days after the tender of the exchange-traded fund
shares. The exemption provided in paragraph (b)(4) of this section will
expire and no longer be effective on [date ten years from effective
date of rule].
    (c) Conditions. (1) Each business day, an exchange-traded fund must
disclose prominently on its website, which is publicly available and
free of charge:
    (i) Before the opening of regular trading on the primary listing
exchange of the exchange-traded fund shares and before the exchange-
traded fund starts accepting orders for the purchase or redemption of
creation units:
    (A) The portfolio holdings that will form the basis of the next
calculation of current net asset value per share;
    (B) A basket applicable to orders for the purchase or redemption of
creation units to be priced based on the next calculation of current
net asset value; and
    (C) The estimated cash balancing amount, if any;
    (ii) The exchange-traded fund's current net asset value per share,
market price, and premium or discount, each as of the prior business
day;
    (iii) A table showing the number of days the exchange-traded fund's
shares traded at a premium or discount during the most recently
completed calendar year and the most recently completed calendar
quarters since that year (or the life of the exchange-traded fund, if
shorter);
    (iv) A line graph showing exchange-traded fund share premiums or
discounts for the most recently completed calendar year and the most
recently completed calendar quarters since that year (or the life of
the exchange-traded fund, if shorter); and
    (v) If the exchange-traded fund's premium or discount is greater
than 2% for more than seven consecutive trading days, a discussion of
the factors that are reasonably believed to have materially contributed
to the premium or discount, which must be maintained on the website for
at least one year thereafter; and
    (vi) The exchange-traded fund must present the description, amount,
value and unrealized gain/loss in the manner prescribed within 17 CFR
210.12-12, 210.12-12A, 210.12-13, 210.12-13A, 210.12-13B, 210.12-13C,
and 210.12-13D (Article 12 of Regulation S-X) for each portfolio
holding or basket asset required to be disclosed pursuant to paragraphs
(c)(1)(i) of this section.
    (2) An exchange-traded fund must reflect changes in the exchange-
traded fund's portfolio holdings in the first calculation of net asset
value per share on the first business day following the trade date.
    (3) An exchange-traded fund must adopt and implement written
policies and procedures that govern the construction of baskets and the
process that will be used for the acceptance of baskets; provided,
however, if the exchange-traded fund utilizes a custom basket:
    (i) These written policies and procedures also must:
    (A) Set forth detailed parameters for the construction and
acceptance of custom baskets that are in the best interests of the
exchange-traded fund and its shareholders, including the process for
any revisions to, or deviations from, those parameters; and
    (B) Specify the titles or roles of the employees of the exchange-
traded fund's investment adviser who are required to review each custom
basket for compliance with those parameters.
    (4) The exchange-traded fund may not seek, directly or indirectly,
to provide returns that exceed the performance of a market index by a
specified multiple, or to provide returns that have an inverse
relationship to the performance of a market index, over a fixed period
of time.
    (5) Notwithstanding the definition of exchange-traded fund in
paragraph (a) of this section, an exchange-traded fund is not
prohibited from selling (or redeeming) individual shares on the day of
consummation of a reorganization, merger, conversion or liquidation.
    (d) Recordkeeping. The exchange-traded fund must maintain and
preserve for a period of not less than five years, the first two years
in an easily accessible place:
    (1) All written agreements (or copies thereof) between an
authorized participant and the exchange-traded fund or one of its
service providers that allows the authorized participant to place
orders for the purchase or redemption of creation units;
    (2) For each basket exchanged with an authorized participant,
records setting forth:
    (i) The names and quantities of the positions composing the basket
exchanged for creation units;
    (ii) If applicable, identification of the basket as a custom basket
and a record stating that the custom basket complies with policies and
procedures that the

exchange-traded fund adopted pursuant to paragraph (c)(3)(i) of this
section;
    (iii) Cash balancing amount, if any; and
    (iv) Identity of authorized participant transacting with the
exchange-traded fund.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
4. The general authority citation for part 274 continues to read, in
part, as follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203,
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *
0
5. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is amended
as follows:
0
a. In General Instruction A revise the definition of ``Exchange-Traded
Fund.''
0
b. In General Instruction A, remove the definition of ``Market Price.''
    The additions and revisions read as follows:
    Note: The text of Form N-1A does not, and this amendment will not,
appear in the Code of Federal Regulations.
Form N-1A
* * * * *
GENERAL INSTRUCTIONS
* * * * *
A. Definitions
* * * * *
    ``Exchange-Traded Fund'' means a Fund or Class, the shares of which
are listed and traded on a national securities exchange, and that has
formed and operates under an exemptive order granted by the Commission
or in reliance on rule 6c-11 [17 CFR 270.6c-11] under the Investment
Company Act.
* * * * *
0
6. Amend Item 3 of Form N-1A to read as follows:
BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TP31JY18.018

[GRAPHIC] [TIFF OMITTED] TP31JY18.019

[GRAPHIC] [TIFF OMITTED] TP31JY18.020

BILLING CODE 8011-01-C
* * * * *
0
7. Amend Instruction 1 of Item 3 of Form N-1A as follows:
* * * * *
Instructions
    1. General
    (a) Round all dollar figures to the nearest dollar and all
percentages to the nearest hundredth of 1%.
    (b) Include the narrative explanations in the order indicated. A
Fund may modify the narrative explanations if the explanation contains
comparable information to that shown. The narrative explanation
regarding sales charge discounts is only required by a Fund that offers
such discounts and should specify the minimum level of investment
required to qualify for a discount as disclosed in the table required
by Item 12(a)(1).
    (c) Include the caption ``Maximum Account Fees'' only if the Fund
charges these fees. A Fund may omit other captions if the Fund does not
charge the fees or expenses covered by the captions.
    (d)
    (i) If the Fund is a Feeder Fund, reflect the aggregate expenses of
the Feeder Fund and the Master Fund in a single fee table using the
captions provided. In a footnote to the fee table, state that the table
and Example reflect the expenses of both the Feeder and Master Funds.
    (ii) If the prospectus offers more than one Class of a Multiple
Class Fund or more than one Feeder Fund that invests in the same Master
Fund, provide a separate response for each Class or Feeder Fund.

    (e) If the Fund is an Exchange-Traded Fund, exclude any fees
charged for the purchase and redemption of the Fund's creation units.
* * * * *
0
8. Amend Instruction 5 of Item 3 of Form N-1A to read as follows:
* * * * *
    5. Exchange-Traded Fund Trading Information and Related Costs.
    (a) Include the median bid-ask spread for the Fund's most recent
fiscal year only if the Fund is an Exchange-Traded Fund. However, do
not include the median bid-ask spread for any Exchange-Traded Fund that
had its initial listing on a national securities exchange after the
beginning of the most recently completed fiscal year. For an Exchange-
Traded Fund that had an initial listing after the beginning of the most
recently completed fiscal year, explain that the Exchange-Traded Fund
did not have a sufficient trading history to report trading information
and related costs. Information should be based on the most recently
completed fiscal year end. The Fund also must provide information on
the Fund's website, which is publicly accessible, free of charge, that
investors can use to obtain the bid/ask spread information required in
this Item.
    (b) Bid-Ask Spread (Median). Calculate the median bid-ask spread by
dividing the difference between the ask and the bid by the midpoint of
the ask and the bid for each ten-second interval throughout each
trading day of the Exchange-Traded Fund's most recent fiscal year. Once
the bid-ask spread for each ten-second interval throughout the fiscal
year is determined, sort the spreads from lowest to highest. If there
is an odd number of spread intervals, then the median is the middle
number. If there is an even number of spread intervals, then the median