(i) The prior business day's NAV per share; (ii) the market closing
price or the midpoint of the bid-ask spread at the time of the
calculation of NAV; and (iii) a calculation of the premium or discount
of the market closing price or midpoint of the bid-ask spread against
NAV per share.\277\ Similarly, Form N-1A currently provides an ETF with
the option to omit certain historical information regarding premiums
and discounts from its prospectus and annual report if the disclosure
is provided on its website.\278\ Based on our experience overseeing
ETFs, we are proposing additional website disclosure requirements that
have not been part of our exemptive relief or Form N-1A requirements.
We also are requesting comment regarding ways to better inform
investors about intraday deviations between an ETF's market price and:
(i) NAV per share; (ii) the contemporaneous value of its portfolio; or
(iii) both. Each of the proposed website disclosures is discussed
below.
---------------------------------------------------------------------------

    \276\ See, e.g., Barclays Global 2008, supra footnote 58.
    \277\ See supra footnote 134 and accompanying text.
    \278\ See infra section II.H.
---------------------------------------------------------------------------

a. Daily NAV, Market Price, and Premiums and Discounts
    Proposed rule 6c-11(c)(1)(ii) would require ETFs to post on their
websites, on each business day, the ETF's current NAV per share, market
price, and premium or discount, each as of the end of the prior
business day. This disclosure provides investors with a ``snapshot''
view of the difference between an ETF's NAV per share and market price
on a daily basis. It is designed to alert investors to the relationship
between NAV per share and the market price of the ETF's shares and that
they may sell or purchase ETF shares at prices that do not correspond
to NAV of the ETF. It also is designed to allow investors to compare
this information across ETFs. For example, an investor using this
information likely would notice that ETFs tracking emerging markets
tend to have greater premiums or discounts than ETFs tracking broad-
based domestic indexes. We believe that daily website disclosure of
this information would promote transparency and help investors better
understand the risk that an ETF's market price may be higher or lower
than the ETF's NAV per share. We further believe that ETF investors use
this information today, as ETFs currently provide this website
disclosure pursuant to the terms of their exemptive orders.
    This proposed requirement is consistent with our exemptive orders
and generally consistent with our 2008 proposal, except we have changed
the definition of ``market price''.\279\ Proposed rule 6c-11 would
define the term ``market price'' to mean: (i) The official closing
price of an ETF share; or (ii) if it more accurately reflects the
market value of an ETF share at the time as of which the ETF calculates
current NAV per share, the price that is the midpoint of the national
best bid and national best offer (``NBBO''), calculated as of the time
NAV per share is calculated.\280\
---------------------------------------------------------------------------

    \279\ See 2008 ETF Proposing Release, supra footnote 3.
    \280\ See proposed rule 6c-11(a).
---------------------------------------------------------------------------

    The 2008 proposed rule would have defined ``market price'' only as
the last price at which ETF shares trade on their principal U.S.
trading market during a regular trading session. However, we believe
that using the ``official closing price,'' as opposed to the ``closing
market price,'' is a better measure of an ETF's market price,
particularly in situations where the last trade of the day was not
reflective of the actual market price (e.g., due to an erroneous
order). Exchanges have detailed rules regarding the determination of
the official closing price of a security.\281\ For example, if a
listing exchange experiences a systems disruption and cannot conduct
closing auctions, exchanges use their back-up procedures to determine
the ``official closing price'' for the affected securities (such as
relying on a backup exchange's closing auction). As a result, we
preliminarily believe that using the ``official closing price''
provides a more precise measurement of an ETF's market price, including
during disruptive market events.
---------------------------------------------------------------------------

    \281\ See, e.g. Self-Regulatory Organizations; New York Stock
Exchange LLC; NYSE MKT LLC; Notice of Filings of Amendment No. 1,
and Order Granting Accelerated Approval of Proposed Rule Changes, as
Modified by Amendment No. 1, to Provide for How the Exchanges Would
Determine an Official Closing Price if the Exchanges are Unable to
Conduct a Closing Transaction, Exchange Act Release No. 78015 (June
8, 2016) [81 FR 38747 (June 14, 2016)] (NYSE backup procedures).
---------------------------------------------------------------------------

    Commenters on the 2008 ETF Proposing Release who addressed this
aspect of the proposal opposed the proposed definition of market price
because of concerns that the last price at which an ETF trades could be
stale at the time as of which NAV per share is calculated.\282\ These
commenters suggested that ETFs instead be permitted to use the midpoint
between the highest bid and the lowest offer at the time as of which
the ETF's NAV is calculated.\283\ We generally agree and, as a result,
we are proposing to permit ETFs to use a price that is the midpoint of
the NBBO as of that time, if it is more accurate.\284\ Because security
information processors calculate NBBO continuously during the trading
day, NBBO has the benefit of being a verifiable third-party quote. We
believe that this approach provides an appropriate degree of
flexibility to an ETF when its last reported sales price may be stale,
while at the same time providing a consistent and verifiable
methodology for how ETFs determine market price.
---------------------------------------------------------------------------

    \282\ See, e.g., Chapman 2008 Comment Letter (noting that shares
of some smaller ETFs may not trade often or at all on a particular
day); ICI 2008 Comment Letter (noting that closing price may be less
accurate because the last trade occurred at a much earlier time than
the time as of which NAV is calculated).
    \283\ See, e.g., Chapman 2008 Comment Letter.
    \284\ See proposed rule 6c-11(a) (defining ``market price'');
see also rule 600(b)(42) of Regulation NMS (defining NBBO). [17 CFR
242.600]. The NBBO represents the highest bid and lowest offer for
an ETF share consolidated across all exchanges.
---------------------------------------------------------------------------

    As discussed in more detail below, the proposed definition of
market price also differs from the definition currently used in Form N-
1A.\285\ Form N-1A defines ``market price'' as the last reported sale
price or, if it more accurately reflects the current market value of
the ETF's shares, ``a price within the range of the highest bid and
lowest offer.'' \286\ We believe specifying that an ETF must use the
midpoint of the NBBO, rather than ``a price within the range of the
highest bid and lowest offer'' still provides the ETF with flexibility
in determining a market price for its shares that accurately reflects
the shares' market value. At the same time, requiring ETFs to use the
midpoint in these circumstances would mitigate the potential for gaming
practices that could inaccurately minimize a deviation between market
price and NAV per share when showing premiums and discounts.\287\ We
are proposing to amend Form N-1A to remove the definition of market
price in that form

as it would no longer be used in the same manner.\288\
---------------------------------------------------------------------------

    \285\ See infra section II.H.1.
    \286\ See General Instruction A to Form N-1A.
    \287\ An ETF would use the market price of an ETF share in
calculating premiums and discounts. See proposed rule 6c-11(a)
(defining ``premium or discount'' to mean the positive or negative
difference between the market price of an ETF share and the ETF's
current NAV per share, expressed as a percentage of the ETF's
current NAV per share).
    \288\ See infra section II.H.1.
---------------------------------------------------------------------------

    We believe that the daily premium/discount disclosures (and
calculation methodology) we are proposing would provide investors with
useful information regarding ETFs that frequently trade at a premium or
discount to NAV per share. For example, some ETFs have frequent
deviations between closing market price and NAV per share. These ETFs
typically hold non-U.S. securities and trade during hours when the
markets for their non-U.S. holdings are closed, allowing the trading
price of ETF shares to reflect expected changes in the next opening
price of the non-U.S. holdings (i.e., to help ``discover'' the price of
the holdings). ETFs also may have greater premiums and discounts to the
extent that there are greater transaction costs associated with
assembling baskets. In addition, an ETF with less liquid portfolio
holdings also may show a deviation between closing market price and NAV
per share,\289\ and an ETF with a less efficient arbitrage mechanism
may frequently show this type of end of day deviation.\290\
---------------------------------------------------------------------------

    \289\ See LRM Adopting Release, supra footnote 101, at n.33 and
accompanying text.
    \290\ See id at text following n.524 (``[S]hares of an ETF whose
underlying securities are relatively less liquid may not be able to
be counted on to provide liquidity to a fund investing in these
shares during times of stress. In the case of a significant decline
in market liquidity, if authorized participants were unwilling or
unable to trade ETF shares in the primary market, and the majority
of trading took place among investors in the secondary market, the
ETF's shares could trade continuously at a premium or a discount to
the value of the ETF's underlying portfolio securities.'').
---------------------------------------------------------------------------

    We understand, however, that proposed premium/discount disclosure
would not provide investors with information regarding intraday
deviations between market prices and the next-calculated NAV or the
contemporaneous value of the ETF's underlying securities, even if the
deviation is significant. Some commentators have stated that the lack
of disclosure regarding intraday deviations could, in some
circumstances, be misleading.\291\ For example, some ETFs had
relatively large intraday deviations between market price and intraday
indicative values on August 24, 2015 that were not reflected as a
``premium'' or ``discount'' because market price and NAV per share were
tightly correlated by the end of the day.\292\
---------------------------------------------------------------------------

    \291\ See, e.g., Henry T.C. Hu and John D. Morley, A Regulatory
Framework for Exchange-Traded Funds, 91 S. Cal. Law Review
(forthcoming 2018) (``Hu and Morley'') at 53 (``While simplicity and
other reasons help explain the SEC's decision to look only at the
close and not intra-day performance, the result was an emphatically
reassuring picture being presented to investors. As a result, an
investor may have a misleading sense as to the true risks and
returns of the ETF.'').
    \292\ See supra footnote 128 and accompanying text.
---------------------------------------------------------------------------

    While we believe that additional information regarding intraday
deviations could help ETF investors understand both the potential for
intraday deviations and the circumstances under which deviations have
occurred in the past, developing an accurate and cost-effective
methodology to calculate intraday deviations for all types of ETFs is
challenging. For example, there are many ways to calculate a market
price metric, such as the average of execution prices on a business day
or the midpoint of the NBBO measured at specific intervals during the
course of the trading day. These measures, however, often do not
provide a meaningful picture of intraday deviations because they can
give outliers either outsized importance (in the case of averages),
particularly for ETFs with low trading volume, or insufficient
importance (in the case of medians). In addition, the systems necessary
to calculate and track these measures can be complex and costly.
    Similarly, developing an accurate measure of the contemporaneous
value of the ETF's portfolio is complex. As we noted in our discussion
of the IIV,\293\ calculations of contemporaneous value can be stale or
inaccurate for ETFs with foreign securities or less liquid debt
instruments for which market quotations are not readily available. For
such an ETF, a contemporaneous value calculated using last available
market quotations or stale prices may show a premium/discount to any
ETF share price that factors in fair valuations of the ETF's portfolio
holdings. Moreover, without prescribed uniform methodology
requirements, contemporaneous values can be calculated in different,
and potentially inconsistent, ways and lead to non-comparable premium/
discount disclosure. We request comment below on potential alternative
calculations and disclosure requirements that could inform investors
about intraday deviations.\294\
---------------------------------------------------------------------------

    \293\ See supra section II.C.3.
    \294\ Many ETFs provide qualitative disclosures in their
prospectuses regarding the potential for periods of market
volatility that could lead to deviations from NAV per share. See,
e.g., supra footnote 126.
---------------------------------------------------------------------------

b. Bid-Ask Spread Disclosure
    As discussed in more detail below, our proposed amendments to Form
N-1A would include new requirements for an ETF to disclose information
regarding bid-ask spreads on its website and in its prospectus.\295\
Specifically, an ETF would be required to disclose the median bid-ask
spread for the ETF's most recent fiscal year. A bid-ask spread is the
difference between the highest price a buyer is willing to pay to
purchase shares of the ETF (bid) and the lowest price a seller is
willing to accept for share of the ETF (ask).\296\ The proposed website
disclosures are designed to inform investors that they may bear bid-ask
spread costs when trading ETFs on the secondary market, which
ultimately could impact the overall cost of the investment. We are
concerned that investors may not be aware of the impact trading costs
may have on their investments in ETFs,\297\ and therefore, propose to
require ETFs to disclose median bid-ask spread information pursuant to
a prescribed methodology that would be set forth in Form N-1A. We
believe that this information would provide ETF investors with greater
understanding of these costs and would allow investors to compare this
information across ETFs. Spread costs for ETFs can vary significantly,
and disclosure regarding these costs could aid comparisons of ETFs
pursuing similar investment strategies. We believe this information
also would allow investors to better understand the costs of investing
in an ETF.\298\
---------------------------------------------------------------------------

    \295\ See proposed amendment to Item 3 of Form N-1A. See also
infra section II.H.2. for a discussion of the bid-ask spread
disclosure requirements. We are also proposing to require ETFs to
provide an interactive calculator that would provide investors with
the ability to customize the hypothetical bid-ask spread disclosures
in Item 3 of Form N-1A to the investor's specific investing
situation. See id.
    \296\ See proposed amendment to Item 3 of Form N-1A.
    \297\ See, e.g., Simon Constable, How to Measure ETF Spreads,
The Wall Street Journal (Nov. 5, 2017), available at https://www.wsj.com/articles/how-to-measure-etf-spreads-1509937200.
    \298\ As discussed in more detail below, mutual fund investors
typically do not incur bid-ask spread costs in connection with their
investment in a mutual fund. See infra section II.H.2.
---------------------------------------------------------------------------

    We are proposing to require the disclosure of the bid-ask spread
information on an ETF's website to provide trading information that can
help investors make better informed investment decisions in a format
that is easily accessible and relied upon by a growing segment of
investors. Given the importance of this information to understanding
the total expenses an investor may bear when investing in an ETF, we
preliminarily believe that bid-ask spread information also should be
included in an ETF's prospectus. Without this bid-ask spread
information, we preliminarily believe

the fee and expense information provided in a prospectus may not always
provide a complete picture of an investment's true costs and/or allow
investors to easily compare prospectus disclosures across certain
investment options.\299\
---------------------------------------------------------------------------

    \299\ Required prospectus disclosures for open-end funds
currently include shareholder fees such as sales charges and
redemption fees, as well as annual fund operating expenses. See Item
3 of Form N-1A.
---------------------------------------------------------------------------

c. Historical Information Regarding Premiums and Discounts
    We also are proposing to require that ETFs disclose on their
websites historical information about the extent and frequency of an
ETF's premiums and discounts. In particular, proposed rule 6c-
11(c)(1)(iii) and (iv) would require an ETF to post on its website both
a table 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. Alternatively, 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.
    Currently, an ETF is required to disclose historical premium/
discount information in its prospectus by providing tabular disclosure
of the number of trading days during the most recently completed
calendar year and quarters since that year ended on which the market
price of the ETF shares was greater than the ETF's NAV per share and
the number of days it was less than the ETF's NAV per share.\300\ An
ETF currently may omit the disclosure of specific premium/discount
information in its prospectus or annual report if the ETF provides the
information on its website and discloses in the prospectus or annual
report a website address where investors can locate the
information.\301\ We believe that investors may find this tabular
information helpful in understanding how often an ETF trades at a
premium or discount and the size of such premiums and discounts and are
proposing to require publication of a table on the ETF's website as
part of proposed rule 6c-11.\302\
---------------------------------------------------------------------------

    \300\ Instruction 2 to Item 11(g)(2) of Form N-1A. ETFs are also
required to include a table with premium/discount information in
their annual reports for the five most-recently completed fiscal
years. Item 27(b)(7)(iv) of Form N-1A.
    \301\ Item 11(g)(2) of Form N-1A; Item 27(b)(7)(iv) of Form N-
1A. Although the time period required in the disclosure is different
in the prospectus and annual report, ETFs are permitted to omit both
disclosures by providing on their websites only the premium/discount
information required by Item 11(g)(2) (the most recently completed
fiscal year and quarters since that year).
    \302\ See proposed rule 6c-11(c)(1)(iii).
---------------------------------------------------------------------------

    We additionally believe that graphic disclosure could assist some
investors with understanding how the arbitrage mechanism performs for
an ETF under various market conditions. Depending on a variety of
factors, an ETF could have persistent premiums or discounts (or both)
from the ETF's NAV. For example, certain classes of ETFs, such as those
that invest in less liquid securities, like high-yield bonds, and
securities that trade on international markets, have more persistent
deviations in ETF share prices from the ETF's NAV.\303\ Additionally,
for certain types of ETFs, the disclosure may inform investors about
the pricing of the ETF's portfolio holdings. ETFs holding foreign
securities that are traded on markets that are closed during U.S.
trading hours, for example, may have persistent premiums or discounts
resulting from this timing differential. In other cases, a persistent
deviation between market price and NAV per share could demonstrate
inefficiencies in an ETF's arbitrage mechanism.\304\
---------------------------------------------------------------------------

    \303\ See Hu and Morley, supra footnote 291, at 12 (noting that
certain kinds of ETFs have much higher 95% confidence intervals of
almost 600 basis points) (internal citations omitted).
    \304\ See, e.g., Crystal Kim, This Levered Gold Mining ETF Looks
Super Scary, Barrons (Apr. 20, 2017), available at https://www.barrons.com/articles/this-levered-gold-mining-etf-looks-super-scary-1492700892 (linking an ETF trading at a significant premium to
NAV to the ETF's suspension of creation units, and in turn, linking
the suspension to the limited availability of certain investments
the ETF needed to make in order to seek its investment objective).
---------------------------------------------------------------------------

    While past performance cannot predict how an ETF will trade in the
future, we believe that it is important that investors, and
particularly retail investors, understand that certain classes of ETFs
could have a larger and more persistent deviation from NAV, which could
result in a higher cost to investors and a potential drag on returns.
In addition to alerting secondary market investors that an ETF's NAV
per share and market price may differ, these disclosures would provide
information regarding the frequency and extent of these deviations.
These disclosures thus would help investors understand the value of
their investment and could help shape whether they want to invest in a
particular ETF.
    We believe that presenting the data as both a table and a line
graph would provide investors with useful information in a variety of
formats that are easy to view and understand, depending on the
investor's preference. For example, investors may find the proposed
tabular disclosure an easy to understand demonstration of how often the
ETF traded at a premium or discount. However, the tabular disclosure
does not allow investors to observe the degree of those deviations,
particularly during periods of market stress. For example, two ETFs may
have traded at a discount for the same number of days. One ETF's daily
deviations could have been small with little effect on investors
trading on those days, whereas the other ETF could have had significant
discounts. These distinctions would not be apparent based on the
required tabular disclosure, but would be observable with the graphic
disclosure we are proposing. As a result, in order to assist investors
with understanding an ETF's premiums and discounts, we are proposing
both tabular and graphical representations of daily premium and
discounts.\305\ In order to eliminate potentially duplicative
disclosure requirements, 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.\306\
---------------------------------------------------------------------------

    \305\ Under the proposal, the historical premium/discount
information would be required for the most recently completed
calendar year and the most recently completed calendar quarters of
the current year. This period was chosen as it was consistent with
existing requirements in Item 11(g)(2) of Form N-1A. We believe the
time period would allow investors to readily observe the extent and
frequency of deviations from NAV per share in a graphic format.
    \306\ See infra section II.H.4.
---------------------------------------------------------------------------

    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. We propose that ETFs
posting this information be required to post it on their websites on
the trading day immediately following the day on which the ETF's
premium or discount triggered this provision (i.e., on the trading day
immediately following the eighth consecutive trading day on which the
ETF had a premium or discount greater than 2%) and maintain it on their
websites for at least one year following the first day it was posted.
    We believe that this proposed disclosure of information about ETFs'
premiums and discounts would promote transparency regarding the
significance and/or persistency of deviations between market price and
NAV per share, and thus may permit investors to make more informed

investment decisions. This information also may provide the market (and
the Commission) with information regarding the efficiency of an ETF's
arbitrage mechanism. As noted above, in the Commission's experience,
the deviation between the market price of ETFs and NAV per share,
averaged across broad categories of ETF investment strategies and over
time periods of several months, has been relatively small.\307\
Therefore, we believe that limiting this disclosure to ETFs that have a
premium or discount of greater than 2% for more than seven consecutive
trading days would serve to highlight potentially unusual circumstances
when an ETF has a persistent premium or discount.\308\
---------------------------------------------------------------------------

    \307\ See supra footnotes 119-120 and accompanying text.
    \308\ This belief is based on data obtained from Morningstar and
Bloomberg.
---------------------------------------------------------------------------

    Given the proposed threshold, we do not believe that many ETFs
would be required to disclose this information.\309\ However, there
could be certain categories of ETFs that could be particularly
affected. An ETF that invests in foreign securities, for example, may
be more likely to experience a persistent deviation between market
price and NAV per share given that many foreign markets are closed
during the U.S. trading day. Such deviations may be pronounced if the
market on which the ETF's underlying securities trade is closed.\310\
---------------------------------------------------------------------------

    \309\ See infra footnote 477 and accompanying text.
    \310\ See Tom Lyndon, China A-Shares ETFs Trading at Steep
Discount to NAV, ETF Trends (Jul. 9, 2015), available at http://www.etftrends.com/2015/07/china-a-shares-etfs-trading-at-steep-discount-to-nav/ (reporting that U.S.-listed China A-shares ETFs
were trading at a steep discount to the underlying market because of
the fact that a significant number of companies stopped trading on
China's mainland stock exchanges).
---------------------------------------------------------------------------

    The proposed rule would require the disclosure to include a
discussion of the factors that are reasonably believed to have
contributed to the premium or discount. We believe that this
requirement would provide secondary market investors with useful
context for the disclosed deviations. In addition, we believe that
requiring ETFs to maintain it on their website for at least one year
following the first day it was posted would identify those ETFs that
historically have had such an instance of persistent deviation between
market price and NAV per share.\311\
---------------------------------------------------------------------------

    \311\ We recognize that historical information relating to these
deviations may not be predictive of future deviations, and request
comment below regarding whether the rule should require ETFs to
include a legend in proximity to the historical information warning
of its limitations.
---------------------------------------------------------------------------

    We request comment on our proposed website disclosure requirements
for ETFs.\312\
---------------------------------------------------------------------------

    \312\ For our specific requests for comment regarding an ETF's
daily portfolio and basket website disclosure, see our discussions
of those subjects, at supra sections II.C.4 and II.C.5,
respectively.
---------------------------------------------------------------------------

     Would the proposed website disclosures be useful in
informing investors of certain ETF characteristics and risks? For
example, would the disclosures alert investors to the relationship
between NAV per share and the market price of the ETF's shares? Would
they assist investors in understanding that they may sell or purchase
ETF shares at prices that do not correspond to NAV per share of the ETF
or that may reflect a premium or discount to NAV per share that is not
in line with the typical premium or discount for the same ETF? Would
they assist investors in assessing costs associated with premiums and
discounts and/or bid-ask spreads? Would the proposed requirements
promote the goals of enhancing transparency and encouraging market
discipline on ETFs? Understanding that ETF investors would be required
to access each ETF's website, would this information allow investors to
compare data across ETFs? Should we require ETFs to present their
disclosures in a structured format on their websites or in a filing
with the Commission in order to facilitate comparisons among ETFs?
     To what extent would the proposed website disclosure
requirements increase ETFs' costs or result in operational challenges?
     Should we require that information regarding NAV per
share, market price, and premiums and discounts be posted on an ETF's
website each business day as proposed? Should we specify the time by
which such information must be posted? For example, should we require
that an ETF post the information on its website before the opening of
trading each business day?
     Should we define ``market price'' as proposed? Does the
proposed definition provide ETFs with too much discretion in
determining market price? Should we define market price using only the
``official closing price''? Is there an alternative price that we
should require instead of ``official closing price'' that would more
accurately reflect the ETF's share price at market close? Should we
provide an alternative calculation of market price, by using the
midpoint of the NBBO, as proposed? Is the midpoint of the NBBO an
appropriate alternative? If not, what method is appropriate? Do ETFs
and their service providers currently receive the NBBO for their
securities? If not, what are the additional costs, if any, of receiving
a NBBO quote? Should we require ETFs to disclose if, for example, they
use the midpoint of the NBBO rather than the official closing price?
Should we define an alternative closing price? For example, should we
use a definition similar to the one used by NYSE ARCA? \313\
Alternatively, should we adopt the definition of ``market price''
currently used in Form N-1A, which may provide even more discretion by
not referencing the midpoint? What definition of market price would
provide the most accurate presentation of market value? Would there be
investor confusion because of the proposed change?
---------------------------------------------------------------------------

    \313\ See NYSE Arca Rule 1.1(ll) (defining how official closing
price is determined if the exchange does not conduct a closing
auction or if a closing auction trade is less than a round lot); see
also Securities Exchange Act Release No. 82907 (March 20, 2018) [83
FR 12980 (March 26, 2018)] (order).
---------------------------------------------------------------------------

     Does calculating premiums and discounts using market close
information provide investors with information they would use?
     Should we instead require a calculation and disclosure of
an intra-day premium or discount as compared to the next-calculated
NAV? How would investors use the disclosure of intraday deviations
between market prices and the next-calculated NAV? Would such
disclosure be costly and/or burdensome to produce? What calculation
methodology should we require for this disclosure? For example, should
we require ETFs to disclose information regarding the difference
between: (i) The mean or median of execution prices on a business day;
and (ii) the next-calculated NAV per share, in order to capture
situations where deviations between market price and NAV per share
significantly widened during the trading day, but were tightly
correlated at the time as of which NAV is calculated? Alternatively,
should we require ETFs to disclose information regarding the difference
between: (i) The midpoint of the NBBO calculated every minute; and (ii)
the next-calculated NAV? If so, should the midpoint of the NBBO be
calculated more or less frequently? Are there other ways to calculate
intraday market prices that would provide investors with meaningful
information regarding intraday deviations between market price and NAV
per share? If we require this type of disclosure, should it be in
addition to, or an alternative of, current premium/discount
disclosures? Alternatively, would 5th and/or 95th percentile data be
useful in this context? How frequently should ETFs disclose

information regarding intraday deviations between market prices and the
next-calculated NAV? How long should ETFs be required to maintain this
information on their website?
     Should we instead require calculation and disclosure of an
intra-day premium or discount as compared to the contemporaneous value
of the ETF's portfolio? How would investors use the disclosure of
intraday deviations between market price and the contemporaneous value
of the ETF's portfolio? Would such disclosure be costly and/or
burdensome to produce? What calculation methodology should we require
for this disclosure? For example, despite the limitations of the IIV in
the context of arbitrage activity, could the IIV be useful for the
measurement and long-term tracking of an ETF's intraday market prices?
If so, should we prescribe a uniform methodology for the calculation of
the IIV? Should we require ETFs to value their portfolio holdings more
frequently for purposes of assessing any deviations between market
prices and the ETF's portfolio holdings, such as hourly or three times
a day? Are there other ways to value an ETF's portfolio on an intraday
basis that we should consider? How frequently should ETFs disclose
information regarding intraday deviations with the contemporaneous
value of the ETF's portfolio? How long should ETFs be required to
maintain this information on their website?
     Alternatively, should we require ETFs to assess the
efficiency of their arbitrage mechanism pursuant to internal
methodologies and require ETFs to provide narrative disclosure
regarding intraday deviations between market price and (i) NAV; (ii)
the contemporaneous value of the ETF's portfolio; or (iii) both?
     We are proposing to require ETFs to disclose the ETF's
median bid-ask spread for the most recent fiscal year. How would
investors use this information? Is the median bid-ask spread an
appropriate metric? For example, the median bid-ask spread would not
capture extreme events and stress periods. Should we require additional
bid-ask spread metrics, such as average spread, high-end spread (e.g.,
95th percentile) or effective spread? \314\ If so, why is it preferable
and how should it be calculated? Should we require ETFs to provide the
median or mean spreads for the year?
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    \314\ For the purposes of this comment request, we consider the
effective spread the ``actual'' spread (i.e., the difference between
bid and the ask). We consider the average spread to be the figure
that takes the average bids and asks over a period of time and finds
the difference between them. As noted in the comment request, we
also are soliciting input on calculation methodology.
---------------------------------------------------------------------------

     Should we require that the bid-ask spread information be
included on both an ETF's website and in its prospectus? Would
investors benefit from having this information in both places? Should
we instead require it only on an ETF's website? Should the information
be required to be updated more or less frequently than proposed? If so,
how frequently? For example, should we require an ETF to disclose on
its website a trailing average spread over the course of a year,
updated daily? Are there particular categories of investors that may
not use or have access to the internet? If so, are there alternative
ways of communicating this information to them in a cost-effective
manner?
     Proposed rule 6c-11(c)(1)(iii) would require an ETF to
post on its website a table 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. As we discussed above,
this disclosure is a condition in many of our exemptive orders and
required by Form N-1A. Do investors or their advisers use this
information? Are there other forms of presenting this data that would
be easier for investors to understand?
     Proposed rule 6c-11(c)(1)(iv) would require an ETF to post
on its website a 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. How would investors
and their advisers use a line graph? Are there other forms of
presenting this data that would be easier for investors to understand?
     Should ETFs be required to include intra-day premiums and
discounts (calculated using one of the methodologies for which we
request comment above) as part of the line graph? How would this
disclosure be used by investors?
     Should we require ETFs to provide both forms of disclosure
(i.e., table and line graph)? Would investors use this information?
Should we require more layered disclosure, such as an interactive tool
where investors can enter different variables to better understand
historical premiums and discounts?
     Should the table and line graph cover the most recently
completed calendar year and the most recently completed calendar
quarters of the current year as proposed or are there other periods we
should consider? Should the period be longer or shorter? Should we
consider fiscal year periods instead of calendar year periods? If so,
what period and why? How would this change impact the comparability of
the information across ETFs? In order to give investors more
information on market dislocations that particularly affect ETFs,
should we also require tabular and graphic disclosure for major market
events over past five or ten years?
     Proposed rule 6c-11(c)(1)(v) 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 threshold. Should we
require this proposed disclosure? Is 2% an appropriate premium or
discount? If not, should we consider a higher or lower threshold for
this disclosure (e.g., 1% or 5%)? If so, why? Should we vary the
premium or discount based on other factors, such as fund strategy,
asset class, geographic region, or historic premium/discount for the
class? Should we instead base the reporting threshold on a different
statistic, such as standard deviation? Should it be based on the
average absolute value of the premium or discount over a seven-day
period? \315\
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    \315\ See supra footnote 120 (describing calculation of absolute
value).
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     Is the seven consecutive trading day requirement
appropriate? Should we require a shorter or longer period of time? If
so, what period and why? Is there a more appropriate balance between
the magnitude (2%) and length (seven consecutive trading days) of an
ETF's premium or discount than we have proposed (e.g., 10% for one day
or 5% for two days)?
     Should we permit ETFs to determine what percentage premium
or discount threshold is appropriate and what time period to disclose,
based on the ETF's particularized circumstances?
     Should we require any additional measures to trigger the
proposed rule 6c-11(c)(1)(v) disclosure requirement? Should we require
a second measure of non-consecutive days in addition to the seven
trading day requirement? For example, should we also require a
disclosure of factors if the ETF's premium or discount was greater than
2% for seven of the past 30 days?
     We propose that ETFs posting this information be required
to post it by the end of the trading day immediately following the day
on which the requirement was triggered. Is this a reasonable period of
time to post this information? Why or why not? We also propose that
ETFs posting this

information be required to maintain it on their websites for at least
one year following the first day it was posted. Should these time
periods be shorter or longer?
     As an alternative (or in addition) to requiring disclosure
of this information on an ETF's website, should we require disclosure
in an ETF's prospectus or shareholder reports? Or should we require
that it be publicly filed on EDGAR in a different regulatory filing?
     Would this disclosure requirement disproportionately
affect particular types of ETFs? Would investors use this information
in assessing ETFs, or could it lead to confusion?
     Should we require a discussion of the factors that are
reasonably believed to have materially contributed to the premium or
discount? Would this requirement provide investors with useful context
for deviations between market price and NAV per share or would ETFs
rely on boilerplate disclosure?
     Should we provide additional guidance or impose additional
requirements for cases where a deviation persists for an extended
period (i.e., much longer than seven days)?
     In addition to the disclosures regarding instances where
the premium or discount was greater than 2% for more than seven
consecutive trading days, should we require that ETFs disclose other
information relating to premiums and discounts? For example, should we
require ETFs to disclose rolling average premium and discount for a
prior period? If so, what period? Should we require ETFs to provide the
greatest premium and/or discount for the previous month, quarter, or
year? If so, what period would be most useful to investors and other
market participants?
     Should we require ETFs to disclose index tracking error,
if applicable? If so, how should we define tracking error? For what
period should we require tracking error? Where should such disclosure
be made and how frequently?
     Should we require ETFs to include a disclaimer indicating
the potential limitations of historical disclosures on its website? If
so, should the rule prescribe the legend that should be used and where
the legend should be placed? Should we require a legend similar to the
current performance-related disclosure legend in Form N-1A, which
states that ``past performance . . . is not necessarily an indication
of how the Fund will perform in the future''? \316\
---------------------------------------------------------------------------

    \316\ See Item 4(b)(2)(i) of Form N-1A.
---------------------------------------------------------------------------

     We are proposing that ETFs provide certain disclosures on
their websites on a daily basis. Should we require funds to provide
these disclosures less frequently? Are there other places that funds
should be required to report this information?
     Should we require this information to be posted
``prominently'' on the ETF's website? Should we provide any other
instruction as to the presentation of this information, in order to
highlight the information and/or lead investors efficiently to the
information? For example, should we require that the information be
posted on the main page of a particular ETF series? Should the
information be accessible in no more than two clicks from the ETF
complex's home page? Should we adopt presentation requirements that
would aid in the comparability of this information for different ETFs?
In particular, should we adopt presentation requirements for the
premium/discount line graph?
     In our discussion of the proposed amendments to Item 3 of
Form N-1A, we are proposing an exception from the disclosure
requirements of trading information and related costs for newly created
ETFs with limited trading history. Should there be a similar exception
for newly created ETFs from the website disclosure requirements of the
ETF's NAV per share, market price, premium or discount, and bid-ask
spreads as of the end of the prior business day? Should the exception
apply to the requirement to disclose historical information regarding
the ETF's premiums and discounts? Why or why not?
     Should we require ETFs to post the proposed additional
website disclosures in a structured format and/or to file them on EDGAR
or make them available in another centralized repository?
7. Marketing
    Our exemptive orders and our 2008 proposal included a condition
requiring each ETF to identify itself in any sales literature as an ETF
that does not sell or redeem individual shares and to explain that
investors may purchase or sell individual ETF shares through a broker
via a national securities exchange.\317\ This condition was designed to
help prevent investors, particularly retail investors, from confusing
ETFs with mutual funds. Given that ETFs have been available for over 26
years, and the market has developed a familiarity with the product, we
no longer believe this condition is necessary. We believe that retail
investors generally understand that, unlike mutual funds, individual
ETF shares may be purchased and sold only on secondary markets. We
further believe that the website and registration statement disclosures
we are proposing provide retail investors more useful information
regarding the exchange-traded nature and costs of ETFs.\318\ Therefore,
we are not proposing to include such a marketing disclosure requirement
in rule 6c-11.
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    \317\ See 2008 ETF Proposing Release, supra footnote 3.
Commenters who addressed this aspect of the 2008 proposal generally
supported this condition. See ICI 2008 Comment Letter; Katten 2008
Comment Letter; Xshares 2008 Comment Letter.
    \318\ The proposed website disclosure requirements are described
in section II.C.6 and the proposed amendments to Form N-1A are
described in section II.H.
---------------------------------------------------------------------------

    We request comment on this aspect of our proposal.
     Are we correct that a condition requiring an ETF to
identify itself in any sales literature as an ETF that does not sell or
redeem individual shares and to explain that investors may purchase or
sell individual ETF shares through a broker via secondary markets is no
longer necessary? Do retail investors understand that individual ETF
shares can be bought and sold only on secondary markets? If not, should
proposed rule 6c-11 condition relief on the inclusion of statements in
an ETF's sales literature regarding the purchase and sale of ETF shares
on secondary markets? Alternatively, should we consider adding a
disclosure requirement only to Form N-1A?
     Should we consider other limitations regarding ETF sales
literature?
     If the rule includes such a condition, how should we
define sales literature? Should we define sales literature as we
proposed in 2008? \319\ Are there other definitions that we should
consider, including by reference to the definition in 17 CFR 230.156
(``rule 156'')? \320\
---------------------------------------------------------------------------

    \319\ The 2008 proposed rule, consistent with the use of the
term in section 24(b) of the Act and the existing definition in rule
34b-1 under the Act, would have defined the term ``sales
literature'' as ``any advertisement, pamphlet, circular, form
letter, or other sales material addressed to or intended for
distribution to prospective investors other than a registration
statement filed with the Commission under section 8 of the Act.''
See 2008 ETF Proposing Release, supra footnote 3.
    \320\ Rule 156 under the Securities Act defines the term ``sales
literature'' to include ``any communication (whether in writing, by
radio, or by television) used by any person to offer to sell or
induce the sale of securities of any investment company.'' It also
states that communications between issuers, underwriters and dealers
are included in the definition of sales literature if such
communications, or the information contained therein, can be
reasonably expected to be communicated to prospective investors in
the offer or sale of securities or are designed to be employed in
either written or oral form in the offer or sale of securities. See
17 CFR 230.156(c).

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

     If the rule included a condition regarding sales
literature, should it also include an exception to permit an ETF to
disclose to investors that it will issue or redeem individual shares in
order to consummate a reorganization, merger, conversion or
liquidation?
     To further prevent investors from confusing ETFs with
mutual funds, should the rule require an ETF to include the identifier
``ETF'' in its name?
     To further prevent investors from confusing ETFs with
mutual funds, should the rule require an ETF to explicitly disclose in
its sales literature that shareholders may pay more than NAV when
buying shares and may receive less than NAV when selling ETF shares?
     Should the rule impose any additional conditions or
require any additional disclosures to help investors distinguish ETFs
from other ETPs, such as exchange-traded notes or commodity pools that
are not subject to the Investment Company Act? Should the Commission
consider proposing naming conventions based on these or other
distinctions in a future rulemaking? Are naming conventions useful to
investors? Should ETFs be required to use a different identifier (e.g.,
``IC'' for ETFs that are registered under the Investment Company Act)
before or after ``ETF'' to distinguish them from other ETPs? Should all
ETPs be required to have identifiers (e.g., ETF-N (for exchange-traded
notes), ETF-IC (for ETFs that are not leveraged ETFs), ETF-C (for
exchange-traded commodity pools), ETF-L (for leveraged ETFs))?
     Alternatively, are there ways we could address investor
confusion by restricting certain sales practices? For example, should
we consider proposing restrictions in a future rulemaking on how
intermediaries communicate with retail investors about ETPs unless they
disclose certain information designed to clearly differentiate ETPs
that are not registered under the Act from ETFs that are registered
investment companies?

D. Recordkeeping

    For the reasons discussed above, authorized participants play a
central role in the proper functioning of the ETF marketplace.\321\ One
of the defining characteristics of authorized participants under the
proposed rule is that they have a written agreement with an ETF or one
of the ETF's service providers whereby the authorized participant is
allowed to purchase or redeem creation units directly from the ETF
(``authorized participant agreement'').\322\ Thus, these agreements are
critical to understanding the relationship between the authorized
participant and the ETF. While we believe that most ETFs are currently
preserving copies of their written authorized participant agreements
pursuant to our current recordkeeping rules, for avoidance of doubt, we
are proposing to expressly require that ETFs relying on rule 6c-11
preserve and maintain copies of all such agreements.\323\
---------------------------------------------------------------------------

    \321\ See supra section I.
    \322\ Proposed rule 6c-11(a) (defining ``authorized
participant'').
    \323\ See proposed rule 6c-11(d)(1).
---------------------------------------------------------------------------

    This requirement is designed to provide our examination staff with
a basis to determine whether the relationship between the ETF and the
authorized participant is in compliance with the requirements of
proposed rule 6c-11 and other provisions of the Act and rules
thereunder, based on the specific terms of their written agreement,
including, but not limited to, terms related to postponement of
redemptions and transaction fees. We did not include a specific
preservation requirement for authorized participant agreements in the
2008 proposal.\324\ However, Commission staff's experience with the ETF
industry since 2008, including our examination staff's experience, has
reinforced our belief that authorized participant agreements must be
preserved.
---------------------------------------------------------------------------

    \324\ See 2008 ETF Proposing Release, supra footnote 3. Our
orders also do not include a specific preservation requirement. See,
e.g., Salt Financial, supra footnote 270.
---------------------------------------------------------------------------

    We are also proposing to require ETFs to maintain information
regarding the baskets exchanged with authorized participants. In
particular, the proposed rule would require an ETF 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.\325\ These records
would provide our examination staff with a basis to understand how
baskets are being used by ETFs, as well as to evaluate compliance with
the rule and other provisions of the Act and rules thereunder. In
particular, we believe these records would allow our examination staff
to evaluate whether the use of custom baskets is appropriate.
---------------------------------------------------------------------------

    \325\ See proposed rule 6c-11(d)(2).
---------------------------------------------------------------------------

    ETFs would be required to maintain these records for at least five
years, the first two years in an easily accessible place. The retention
period is consistent with the period provided in rules 22e-4 and 38a-
1(d) under the Act. Funds currently have compliance program-related
recordkeeping procedures in place that incorporates this type of
retention period, and we preliminarily believe consistency with that
period would minimize any compliance burden to funds.
    We request comment on these proposed recordkeeping requirements.
     Are these requirements necessary in light of the benefits
that would result from Commission examination? Are there other records
that we should require ETFs to preserve or other feasible alternatives
that would minimize recordkeeping burdens? What are the costs
associated with maintaining the proposed recordkeeping requirements
under the rule and what effects would the proposed recordkeeping
requirements have on an ETF's compliance policies and procedures?
     Do ETFs already preserve their agreements with authorized
participants under our current recordkeeping requirements?
     Should we require an ETF to maintain a record stating that
the custom basket complies with the ETF's custom basket policies and
procedures? Is there any additional information that we should require
ETFs to maintain in connection with their baskets? Should we require
ETFs to record information regarding any transaction fees assessed in
connection with each basket? Are there alternatives to this proposed
recordkeeping requirement that would enable the Commission to examine
the composition of ETFs' baskets, while minimizing the recordkeeping
burdens imposed on ETFs?
     Are there other records we should consider requiring ETFs
to maintain regarding transaction fees? \326\ Should we consider
requiring ETFs to disclose information regarding transaction fees

in their registration statement or on Form N-CEN? For example, should
ETFs be required to describe transaction fees and the amount of such
fees that are charged in connection with effecting purchases and
redemptions of creation units? Should there be disclosure about the
aggregate dollar amount or percentage of transaction fees paid over
particular periods? Should we require ETFs to disclose the dollar
amount (or percentage) of transaction fees waived over a particular
periods? If so, how should this information be presented? Should we
require ETFs to include narrative disclosure regarding waivers, noting
for example, that the waiver of transaction fees may result in
additional costs borne by the ETF?
---------------------------------------------------------------------------

    \326\ We understand transaction fees are imposed by ETFs to
defray the transaction expenses associated with the creation or
redemption, as applicable, and prevent possible dilution resulting
from the purchase or redemption of creation units. For cash baskets,
the ETF may assess transaction fees to offset certain operational,
brokerage and spread costs relating to the ETF's purchasing or
selling of securities. Transaction fees can impact secondary market
investors in ETF shares because an authorized participant or other
market maker can cause the spread to widen on ETF shares to recoup
or offset some of the costs from paying the transaction fees.
---------------------------------------------------------------------------

     Should we require ETFs to maintain these records for five
years, the first two years in an easily accessible place, as proposed?
Should we use a different retention period, such as the six-year
retention period under 17 CFR 270.31a-2 (rule 31a-2 under the Act)?
     Would compliance with these proposed requirements have any
effect on ETFs' internal compliance policies and procedures?
     Should we instead, or additionally, require that ETFs file
their authorized participant agreements as exhibits to their
registration statements? Why or why not?
     Are there any additional alternative recordkeeping
requirements we should consider?

E. Share Class ETFs

    The proposed rule does not provide any relief from sections
18(f)(1) or 18(i) of the Act or expand the scope of 17 CFR 270.18f-3
(``rule 18f-3'' under the Act) (the multiple class rule).\327\ Sections
18(f) and (i) of the Act were intended, in large part, to protect
investors from certain abuses associated with complex investment
company capital structures, including conflicts of interest among a
fund's share classes.\328\ These provisions also were designed to
address certain inequitable and discriminatory shareholder voting
provisions that were associated with many investment company securities
before the enactment of the Act.\329\
---------------------------------------------------------------------------

    \327\ See 15 U.S.C. 80a-18(f)(1) and (i); 17 CFR 270.18f-3.
Section 18(f)(1) of the Act generally prohibits a fund from issuing
a class of ``senior security,'' which is defined in section 18(g) to
include any stock of a class having priority over any other class as
to distribution of assets or payment of dividends. See 15 U.S.C.
80a-18(g). Section 18(i) of the Act provides that all shares of
stock issued by a fund must have equal voting rights.
    \328\ See Exemption for Open-End Management Investment Companies
Issuing Multiple Classes of Shares, Investment Company Act Release
No.19955 (Dec. 15, 1993) [58 FR 68074 (Dec. 23, 1993)] (proposing
release), at nn.20 and 21 and accompanying text.
    \329\ See id.
---------------------------------------------------------------------------

    In 1995, the Commission adopted rule 18f-3 under the Act to create
a limited exemption from sections 18(f)(1) and 18(i) for funds that
issue multiple classes of shares with varying arrangements for the
distribution of securities and provision of services to
shareholders.\330\ That rule generally provides that, notwithstanding
sections 18(f)(1) and 18(i) of the Act, a registered open-end
management investment company or series or class thereof may issue more
than one class of voting stock, provided that each class, among other
requirements, has in all other respects the same rights and obligations
as each other class.\331\
---------------------------------------------------------------------------

    \330\ See Exemption for Open-End Management Investment Companies
Issuing Multiple Classes of Shares, Investment Company Act Release
No. 20915 (Feb. 23, 1995) [60 FR 11876 (Mar. 2, 1995)] (adopting
release) (``Multiple Class Adopting Release''), at n.8 and
accompanying text.
    \331\ See 17 CFR 270.18f-3(a)(4).
---------------------------------------------------------------------------

    An ETF cannot rely on rule 18f-3 to operate as a share class within
a fund because the rights and obligations of the ETF shareholders would
differ from those of investors in the fund's mutual fund share classes.
For example, ETF shares would be redeemable only in creation units,
while the investors in the fund's mutual fund share classes would be
individually redeemable. Similarly, ETF shares are tradeable on the
secondary market, whereas mutual fund shares classes would not be
traded.
    An ETF structured as a share class of a fund that issues multiple
classes of shares representing interests in the same portfolio would
not be permitted to rely on proposed rule 6c-11. We recognize that the
Commission has granted ETFs exemptive relief from the aforementioned
provisions of section 18 of the Act in the past, subject to various
conditions.\332\ However, relief from section 18 raises policy
considerations that are different from those we seek to address in this
rule, which is intended to address broadly the common type of relief
that most ETFs have sought.
---------------------------------------------------------------------------

    \332\ See Vanguard Index Funds, et al., Investment Company Act
Release Nos. 24680 (Oct. 6, 2000) [65 FR 61005 (Oct. 13, 2000)]
(notice) and 24789 (Dec. 12, 2000) (order) and related application;
Vanguard Index Funds, et al., Investment Company Act Release Nos.
26282 (Dec. 2, 2003) [68 FR 68430 (Dec. 8, 2003)] (notice) and 26317
(Dec. 29, 2003) (order) and related application; Vanguard
International Equity Index Funds, et al., Investment Company Act
Release Nos. 26246 (Nov. 3, 2003) [68 FR 63135 (Nov. 7, 2003)]
(notice) and 26281 (Dec. 1, 2003) (order) and related application;
Vanguard Bond Index Funds, et. al., Investment Company Act Release
Nos. 27750 (Mar. 9, 2007) [72 FR 12227 (Mar. 15, 2007)] (notice) and
27773 (Apr. 25, 2007) (order) and related application (collectively,
the ``Vanguard orders'').
---------------------------------------------------------------------------

    For example, an ETF share class that transacts with authorized
participants on an in-kind basis and a mutual fund share class that
transacts with shareholders on a cash basis may give rise to differing
costs to the portfolio. As a result, while certain of these costs may
result from the features of one share class or another, all
shareholders would generally bear these portfolio costs.\333\ At the
same time, the share class structure also can provide benefits to each
share class, including economies of scale. Given these additional
policy considerations, we believe it is appropriate for ETFs to
continue to request relief from sections 18(f)(1) and 18(i) of the Act
through our exemptive application process, and for the Commission to
continue to weigh these policy considerations in the context of the
facts and circumstances of each particular applicant.
---------------------------------------------------------------------------

    \333\ These costs can include brokerage and other costs
associated with buying and selling portfolio securities in response
to mutual fund share class cash inflows and outflows, cash drag
associated with holding the cash necessary to satisfy mutual fund
share class redemptions, and distributable capital gains associated
with portfolio transactions.
---------------------------------------------------------------------------

    We request comment on this aspect of the proposal.
     Should proposed rule 6c-11 include exemptions from
sections 18(f)(1) or 18(i) of the Act, or should we expand the scope of
rule 18f-3 under the Act? Why or why not?
     If commenters believe that such exemptions should be
included in the proposed rule, should the rule include conditions
designed to take into account the potential costs and benefits of a
fund with both mutual fund and ETF share classes? If so, what
conditions? Are we correct in our preliminary belief that combining an
ETF share class with traditional share classes of a mutual fund may, in
certain circumstances, result in the costs and benefits described
above?

F. Master-Feeder ETFs

    Many of our recent ETF orders contain relief allowing ETFs to
operate as feeder funds in a master-feeder structure.\334\ In general,
an ETF that operates as a feeder fund in a master-feeder structure
functions like any other ETF. An authorized participant deposits a
basket with the ETF and receives a

creation unit of ETF shares in return for those assets. Conversely, an
authorized participant that redeems a creation unit of ETF shares
receives a basket from the ETF. In a master-feeder arrangement,
however, the feeder ETF then also enters into a corresponding
transaction with its master fund. The ETF may use the basket assets it
receives from an authorized participant to purchase additional shares
of the master fund, or it may redeem shares of the master fund in order
to obtain basket assets and satisfy a redemption request.
---------------------------------------------------------------------------

    \334\ See, e.g., T. Rowe Price Associates, Inc., et al.,
Investment Company Act Release Nos. 30299 (Dec. 7, 2012) [77 FR
74237 (Dec. 13, 2012)] (notice) and 30336 (Jan. 2, 2013) (order) and
related application; SSgA Funds Management, Inc., et al., Investment
Company Act Release Nos. 29499 (Nov. 17, 2010) [75 FR 71753 (Nov.
24, 2010)] (notice) and 29524 (Dec. 13, 2010) (order) and related
application (``SSgA'').
---------------------------------------------------------------------------

    Because the feeder ETF may, in the course of these transactions,
temporarily hold the basket assets, it would not be able to rely on
section 12(d)(1)(E) of the Act, which requires that a feeder fund hold
no investment securities other than securities of the master fund.\335\
To accommodate these unique operational characteristics of ETFs, our
recent exemptive orders have allowed a feeder ETF to rely on section
12(d)(1)(E) without complying with section 12(d)(1)(E)(ii) of the Act
to the extent that the ETF temporarily holds investment securities
other than the master fund's shares for use as basket assets. These
orders also provided the feeder ETF and its master fund with relief
from sections 17(a)(1) and 17(a)(2) of the Act, with regard to the
deposit by the feeder ETF with the master fund and the receipt by the
feeder ETF from the master fund of basket assets in connection with the
issuance or redemption of creation units,\336\ and section 22(e) of the
Act if the feeder ETF includes a foreign security in its basket assets
and a foreign holiday (or a series of consecutive holidays) prevents
timely delivery of the foreign security.\337\
---------------------------------------------------------------------------

    \335\ Section 12(d)(1) of the Act limits the ability of a fund
to invest substantially in shares of another fund. See sections
12(d)(1)(A)-(C) of the Act; see also infra footnote 344. Section
12(d)(1)(E) of the Act allows an investment company to invest all of
its assets in one other fund so that the acquiring fund is, in
effect, a conduit through which investors may access the acquired
fund. See section 12(d)(1)(E)(ii) of the Act.
    \336\ Relief from the affiliated transaction prohibitions in
sections 17(a)(1) and 17(a)(2) of the Act is necessary because these
sections would otherwise prohibit the feeder ETF and its master fund
from selling to or buying from each other the basket assets in
exchange for securities of the master fund. See 15 U.S.C. 80a-
17(a)(1)-(2).
    \337\ See 15 U.S.C. 80a-22(e) (generally requiring the
satisfaction of redemptions within seven days). See also supra
section III.B.4.
---------------------------------------------------------------------------

    The exemptive orders we have granted to master-feeder ETFs,
however, do not include relief from section 18 under the Act inasmuch
as investment by several feeder funds or by mutual fund and ETF feeder
funds in the same class of securities issued by a master fund generally
do not involve a senior security subject to section 18. We are
concerned, as discussed above, that if an ETF feeder fund transacts
with a master fund on an in-kind basis, but non-ETF feeder funds
transact with the master fund on a cash basis, all feeder fund
shareholders would bear costs associated with the cash
transactions.\338\
---------------------------------------------------------------------------

    \338\ See supra footnote 333 and accompanying text.
---------------------------------------------------------------------------

    We understand that while many orders contain this relief, only one
fund complex has established master-feeder arrangements involving ETF
feeder funds, and each arrangement involves an ETF as the sole feeder
fund.\339\ Given the lack of interest in this structure and our
concerns noted above, we are proposing to rescind the master-feeder
relief granted to ETFs that do not rely on the relief as of the date of
this proposal (June 28, 2018).\340\ However, we also propose to
grandfather existing master-feeder arrangements involving ETF feeder
funds, but prevent the formation of new ones, by amending relevant
exemptive orders.\341\ Because these existing master-feeder ETFs
involve only one feeder fund for each master fund, we do not believe
they would raise the policy concerns discussed above so long as they do
not add feeders, and therefore do not believe it is necessary to
require these structures to change their existing investment
practices.\342\
---------------------------------------------------------------------------

    \339\ See, e.g., SSGA Active Trust Prospectus (Oct. 31, 2017),
available at https://us.spdrs.com/public/SPDR_ACTIVE%20ETF%20TRUST_PROSPECTUS.pdf.
    \340\ See infra section II.G.
    \341\ Based on staff analysis, we preliminarily believe that the
fund complex currently utilizing this relief operates nine master-
fund arrangements, each involving only one ETF as the sole feeder
fund. See SSgA, supra footnote 334.
    \342\ Rescinding the relief for existing master-feeder ETFs
would require them to change the manner in which they invest. For
example, transactions between each of the affected master funds and
its corresponding feeder fund could be transacted in cash, rather
than in-kind, obviating any need for exemptive relief for the feeder
fund to hold securities other than those issued by the master fund.
Alternatively, the feeder funds could opt to pursue their investment
objectives through direct investments in securities and/or other
financial instruments, rather than through investments in master
funds.
---------------------------------------------------------------------------

    We request comment on the lack of master-feeder relief in proposed
rule 6c-11.
     Are we correct that the market interest for ETFs using
master-feeder structures, as discussed above, is limited?
     Should the proposed rule include master-feeder relief for
ETFs, as provided in certain of our exemptive orders and discussed
above? Why or why not?
     Should we amend the exemptive relief relied upon by
existing master-feeder arrangements? Alternatively, should we also
rescind the master-feeder relief relied upon by existing arrangements?
If so, how would these ETFs be impacted if we also rescinded their
relief?
     If the proposed rule provided master-feeder relief for
master-feeder structures that include ETF and mutual fund feeder funds,
should the rule include conditions designed to take into account the
potential costs and benefits of such structures? If so, what
conditions? For example, should the proposed rule require a
determination that the investment in a master fund is in the best
interest of the ETF and its shareholders? If so, who should be required
to make such a determination? How frequently should such a
determination be made? Alternatively, should the proposed rule provide
master-feeder relief for master-feeder structures but allow only ETF
feeder funds? If so, what conditions should apply?

G. Effect of Proposed Rule 6c-11 on Prior Orders

    The Commission has authority under the Act to amend or rescind our
orders when necessary or appropriate to the exercise of the powers
conferred elsewhere in the Act. Pursuant to this authority, we are
proposing to amend and rescind the exemptive relief we have issued to
ETFs that would be permitted to rely on the proposed rule.\343\ Our
proposed rescission of orders would specifically be limited to the
portions of an ETF's exemptive order that grant relief related to the
formation and operation of an ETF and, with the exception of certain
master-feeder relief discussed above in section II.F, would not rescind
the relief from section 12(d)(1) \344\ and sections 17(a)(1) and (a)(2)
\345\ under the Act related to

fund of funds arrangements involving ETFs.\346\
---------------------------------------------------------------------------

    \343\ See section 38(a) of the Act, 15 U.S.C. 80a-37(a).
    \344\ Section 12(d)(1) generally limits the ability of
registered investment companies (including ETFs) to acquire
securities issued by other investment companies in excess of certain
thresholds, and the ability of registered open-end investment
companies (including ETFs) from knowingly selling securities to
other investment companies in excess of certain thresholds. The
conditions set forth in ETF exemptive applications for relief
necessary to create a fund of funds structure is generally designed
to prevent the abuses that led Congress to enact section 12(d)(1),
including abuses associated with undue influence and control by
acquiring fund shareholders, the payment of duplicative or excessive
fees, and the creation of complex structures. See Salt Financial,
supra footnote 270. We also note that certain standalone exemptive
orders, unrelated to ETF operations, are often granted to applicants
to permit investments in ETFs beyond the limits in section 12(d)(1)
of the Act; we are not proposing to rescind such exemptive orders.
    \345\ See supra section II.B.3.
    \346\ ETF exemptive relief typically segregates exemptive relief
from section 17(a) under the Act necessary to create a fund of funds
structure from section 17(a) exemptive relief necessary for the
operation of the ETFs. This segregation of ``Fund of Funds Relief''
and ``ETF Relief'' appears in numerous representations and
enumerated conditions set forth in applications for exemptive
relief. See, e.g., Salt Financial, supra footnote 270.
---------------------------------------------------------------------------

    The terms of the exemptive relief granted to ETFs have evolved over
time and have resulted in an uneven playing field among ETF complexes,
subjecting ETFs that pursue the same or similar investment strategies
to different operational requirements. Moreover, many ETF complexes
have multiple exemptive orders permitting them to operate ETFs. Some of
those orders contain different conditions for relief and different
representations by the applicants regarding how the ETFs formed
pursuant to the order would operate. Many of those orders also provide
relief for future ETFs created pursuant to the terms of a particular
exemptive order.\347\ As a result, ETF complexes with multiple orders
can effectively choose the exemptive relief that would be applicable to
a new ETF by selecting what legal entity should form the new ETF
series. Moreover, differences in the terms of our various orders have
had varying impact on the structure and costs of an ETF. For example,
shares of an ETF with a less flexible basket condition in its order
could have wider spreads than a similarly situated ETF with more
flexible basket compositions. However, investors may not be able to
discern the difference between these two ETFs' orders. As we have
stated elsewhere in this release, among our goals in proposing rule 6c-
11 is to create a consistent, transparent and efficient regulatory
framework for many ETFs. We do not believe this goal would be furthered
if ETFs that could rely on the rule continue to rely on those orders.
---------------------------------------------------------------------------

    \347\ See supra footnote 12.
---------------------------------------------------------------------------

    In addition, we began including a condition in our ETF exemptive
orders in 2008 stating that the relief permitting the operation of ETFs
would expire on the effective date of any Commission rule that provides
relief permitting the operation of ETFs.\348\ The purpose of this
automatic expiration condition was to better establish equal footing
between ETFs that have received exemptive relief and ETFs that may rely
solely on a Commission rule, and to reduce competitive advantages that
could potentially arise out of the conditions for relief set forth in
our earlier exemptive orders.\349\ Of the approximately 300 orders we
have issued that provide ETF exemptive relief, approximately 200
include this automatic expiration condition, and thus the ETF relief
would terminate if and when proposed rule 6c-11 is adopted and goes
into effect. To provide time for ETFs to transition to rule 6c-11,
however, we propose to amend these existing orders to provide that the
ETF relief contained in those orders will terminate one year following
the effective date of any final rule. Absent this modification or our
determining to delay the effectiveness of any final rule 6c-11, the ETF
relief included in orders with the automatic expiration provision could
expire before ETFs were able to make any adjustments necessary to rely
on rule 6c-11.
---------------------------------------------------------------------------

    \348\ See e.g., PowerShares, supra footnote 188; Javelin
Exchange-Traded Trust, Investment Company Act Release Nos. 28350
(July 31, 2008) [73 FR 46066 Aug. 7, 2008)] (notice) and 28637 (Aug.
26, 2008) (order) and related application. In some cases, the
automatic expiration condition applies to the ETF-related relief
only, and expressly does not apply to certain other exemptive relief
requested, such as master-feeder and ``fund of funds'' relief under
section 12 of the Act. See, e.g., Fidelity Merrimack Street Trust,
et al., Investment Company Act Release Nos. 30464 (Apr. 16, 2013)
[78 FR 23793 (Apr. 22, 2013)] (notice) and 30513 (May 10, 2013)
(order) and related application (``The requested relief, other than
the Fund of Funds Relief and the Section 17 relief related to a
master-feeder structure, will expire on the effective date of any
Commission rule under the Act that provides relief permitting the
operation of actively managed exchange traded funds.'').
    \349\ See 2008 ETF Proposing Release, supra footnote 3.
---------------------------------------------------------------------------

    We believe that rescinding ETF exemptive relief in connection with
the proposed rule (and amending those orders that require ETF exemptive
relief to automatically expire in order to allow a transitional period
to any final rule) would result in a more transparent framework for
covered ETFs, as those ETFs would no longer be subject to differing and
sometimes inconsistent provisions of their exemptive relief. The relief
and related conditions proposed under rule 6c-11, moreover, are largely
consistent with our recent orders, and in some cases, provide ETFs with
additional flexibility. For example, proposed rule 6c-11 would provide
many ETFs with additional basket flexibility beyond what is currently
permitted by their exemptive orders.\350\ We preliminarily believe,
therefore, that the operations of most existing ETFs would not be
significantly negatively affected by the need to comply with the
requirements of rule 6c-11 as opposed to their exemptive relief.
However, in order to limit any hardship that revocation of existing
exemptive relief would have on current ETFs with orders that do not
automatically expire, we are proposing a one-year period after the
effective date before we rescind that exemptive relief to give those
ETFs time to bring their operations into conformity with the
requirements of proposed rule 6c-11.
---------------------------------------------------------------------------

    \350\ See proposed rule 6c-11(c)(3); see also supra section
II.C.5. We note that a subset of the ETFs operating under exemptive
relief has basket flexibility that would not be broadened by the
proposed rule. Under the proposed rule, however, such ETFs would be
required to adopt and implement written policies and procedures
related to the construction of baskets and the process for the
acceptance of baskets by the ETF.
---------------------------------------------------------------------------

    We do not propose to rescind the exemptive relief of ETFs that
would not be permitted to rely on the proposed rule. Specifically, we
do not propose to rescind the exemptive relief for ETFs organized as
UITs,\351\ ETFs that are organized as a share class of a fund,\352\ or
leveraged ETFs.\353\ We believe it is appropriate for ETFs seeking to
utilize these structures to continue to request relief from the
Commission through our exemptive application process, and for the
Commission to continue to make facts-and-circumstances-based
determinations regarding whether such relief is appropriate for any
particular applicant.
---------------------------------------------------------------------------

    \351\ See discussion of ETFs organized as UITs, supra section
II.A.1.
    \352\ See Vanguard orders, supra footnote 332.
    \353\ See discussion of leveraged ETFs, supra section II.A.3.
---------------------------------------------------------------------------

    The Commission does not believe that it is necessary to give
individual hearings to the holders of the prior exemptive relief or to
any other person. Proposed rule 6c-11 would be prospective in effect
and is intended to set forth for covered ETFs the Commission's
exemptive standards for ETFs organized as open-end funds. Recipients of
existing exemptive relief may make their views known in the context of
the comment process that accompanies this rulemaking, and those views
will be given due consideration. Finally, investment companies would be
able to request Commission approval to operate as an ETF under
conditions that differ from those in proposed rule 6c-11.
    We request comment on our proposal to revoke existing ETF and
certain existing master-feeder exemptive relief.
     Should we revoke some or all of the existing ETF exemptive
relief? If not, why not? Would allowing existing exemptive relief to
continue create an unequal playing field for ETF market participants?
If not, why not?
     As discussed above, we are proposing a one year period
before rescinding existing ETF exemptive relief. Is the one year period
appropriate for ETFs with existing ETF exemptive

relief to bring their funds into compliance with rule 6c-11? If not,
how long should this period last? Why? We are proposing to implement
this one year period, in part, by amending existing orders with an
automatic expiration condition to provide that the ETF exemptive relief
contained in these orders would terminate one year following the
effective date of any final rule. Should we, instead, delay the
effectiveness of rule 6c-11 for one year? Are there different
approaches we should consider?
     Should we consider rescinding the exemptive relief for
ETFs organized as UITs or ETFs organized as a share class of a fund and
instead allow such ETFs to be covered by rule 6c-11? If so, how would
such ETFs comply with the requirements of the rule? For example, would
they have to restructure or liquidate?
     Should we, as proposed, rescind the exemptive relief that
we have previously granted that allows ETFs to operate as feeder funds
in a master-feeder structure if they do not rely on the relief as of
the date of this proposal? Do funds plan to use this relief in the
future? If so, what kind of ETF master-feeder structures do funds
envision creating? For what purpose?
     We understand that the existing structures are organized
with an ETF as the sole feeder fund. Is this understanding correct?
Should we amend the exemptive relief applicable to these funds as
proposed?
     Would our proposal to rescind certain of our previously
issued ETF exemptive relief, and allow the ETF exemptive relief
contained in the orders with automatic expiration provisions to expire
one year following the effective date of rule 6c-11, eliminate any
competitive advantages arising from the relief we have granted via
exemptive order?
     Would existing ETFs face significant challenges in
complying with the conditions of rule 6c-11 rather than exemptive
relief?
     Should we consider other approaches? For example, should
we consider rescinding only ETF exemptive relief previously granted to
ETF complexes that have multiple exemptive orders permitting them to
operate ETFs?
     Should we consider not rescinding any of the approximately
100 pre-2008 orders that do not include the automatic expiration
provision? Should we consider amending the orders that contain the
automatic expiration provision of the ETF exemptive relief to remove
that provision? Under these approaches, in which certain ETF exemptive
orders would be left in place, ETFs would continue operating under
different sets of conditions. Would permitting ETFs to operate under
different sets of conditions have an adverse effect on competition and
capital formation?
     Are there other approaches to the existing ETF exemptive
relief that we should consider in view of proposed rule 6c-11?
     Exemptive relief granted prior to 2009 generally includes
relief from section 24(d) of the Act to exempt broker-dealers selling
ETF shares from the obligation to deliver prospectuses in most
secondary market transactions, and the rescission of the ETF exemptive
relief from those orders would eliminate this relief. We understand,
however, that broker-dealers have not relied upon this relief and,
subsequent to the adoption of amendments to rule 498 under the
Securities Act permitting the delivery of an ETF's summary prospectus,
most market participants use the summary prospectus to satisfy
prospectus delivery obligations.\354\ Are we correct in our
understanding? Should we provide relief from section 24(d) for ETFs
that have this relief in their exemptive orders if we were to rescind
those orders? If so, why?
---------------------------------------------------------------------------

    \354\ See rule 498 under the Securities Act [17 CFR 230.498].
---------------------------------------------------------------------------

H. Amendments to Form N-1A

    As discussed above in section II.C.6, because of the exchange-
traded nature of ETFs, ETF investors may be subject to different costs
than mutual fund investors. For example, while an ETF may, in some
cases, have a lower expense ratio than a comparable mutual fund, an ETF
investor will be subject to certain unique costs associated
specifically with ETFs, such as the bid-ask spread and premiums and
discounts from the ETF's NAV. As a result of these differences, ETF
investors may not be fully aware of the full costs associated with
their investment in an ETF.
    We therefore are proposing several amendments to Form N-1A, the
registration form used by open-end funds to register under the Act and
to offer their securities under the Securities Act. The proposed
amendments are designed to provide investors who purchase ETF shares in
secondary market transactions with additional information regarding
ETFs, including information regarding costs associated with an
investment in ETFs. The proposal also would eliminate certain
disclosures that would be duplicative of the proposed amendments to
Item 3 of Form N-1A regarding the exchange-traded nature of ETFs.
Finally, we are requesting comment on whether we should create a new
ETF-specific registration form.
1. Definitions
    We are proposing several amendments to Form N-1A to reflect the
adoption of proposed rule 6c-11.\355\ First, we are proposing to amend
the definition of ``Exchange-Traded Fund'' in Form N-1A to add a
specific reference to proposed rule 6c-11.\356\ Currently, Form N-1A
defines ``Exchange-Traded Fund'' to include a fund or class that has
formed and operates in reliance on an exemptive rule adopted by the
Commission.\357\ We believe that Form N-1A should make specific
reference to proposed rule 6c-11, rather than a generic exemptive rule,
and that this change would be consistent with Form N-1A's general
approach of referring specifically to exemptive rules in other defined
terms.
---------------------------------------------------------------------------

    \355\ All of the definitions discussed in this section would
appear in Proposed General Instruction A of Form N-1A.
    \356\ Specifically, the proposed definition of ``exchange-traded
fund'' would be 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 under the Act.
    \357\ General Instruction A to Form N-1A.
---------------------------------------------------------------------------

    Second, we propose to remove the defined term ``Market Price'' from
the Definitions section of Form N-1A in light of our other proposed
changes to Form N-1A. Market Price, as presently defined in Form N-1A,
is used in several items that we are proposing to eliminate from the
Form.\358\ The remaining instances in which ``Market Price'' is used do
not require the use of a defined term, as they contemplate a more
general use of the term, such as the requirement in Item 11 of Form N-
1A that an ETF explain in its prospectus that the price of its shares
is based on Market Price.\359\ Accordingly, given our proposed changes
to Form N-1A, we do not believe it is necessary to include ``Market
Price'' as a defined term, and propose to remove this definition from
the Form.
---------------------------------------------------------------------------

    \358\ See, e.g., proposed changes to Item 3 of Form N-1A.
    \359\ Item 11(a)(1) of Form N-1A. Also, in addition to the
defined term ``Market Price,'' Form N-1A currently uses the
undefined term ``market price'' in several instances where a more
general use of the term is appropriate. See, e.g., Instruction 3 to
Item 11(g) of Form N-1A. Our proposed amendments to the Form also
include the use of the undefined term ``market price.'' See, e.g.,
proposed changes to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    We request comment on the proposal to amend the definition section
of Form N-1A.
     Should we, as proposed, revise the definition of the term
``Exchange-Traded

Fund'' in Form N-1A to make specific reference to proposed rule 6c-11?
     Should we, as proposed, remove the defined term ``Market
Price'' from the Definitions section of the General Instruction to Form
N-1A? Alternatively, should we replace the current definition with a
reference to the defined term ``Market price,'' as defined in proposed
rule 6c-11?
2. Item 3 of Form N-1A
    Item 3 of Form N-1A requires funds to include a table describing
the fees and expenses investors may pay if they buy and hold shares of
the fund. Item 3 does not currently distinguish between ETFs and mutual
funds, and only requires disclosure of sales loads, exchange fees,
maximum account fees and redemption fees that funds charge directly to
shareholders.\360\ We therefore are proposing several amendments to
this Item to clarify that there are certain fees that are not reflected
in the fee table for both mutual funds and ETFs and to require new
disclosure requirements that capture ETF-specific trading information
and costs. 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.\361\
---------------------------------------------------------------------------

    \360\ Item 3 of Form N-1A.
    \361\ See General Instruction C.3.g.(i) to Form N-1A.
---------------------------------------------------------------------------

a. Changes That Affect Mutual Funds and ETFs
    First, we are proposing a narrative disclosure that would clarify
that, in addition to the current disclosures relating to investors who
buy or hold shares, the fees and expenses reflected in the Item 3
expense table may be higher for investors if they sell shares of the
fund.\362\ This amendment would be applicable to both mutual funds and
ETFs given that an investor may incur expenses other than redemption
fees when selling shares of either a mutual fund or ETF. For example,
although less common than they were in the past, an investor may incur
a back-end sales load when selling a mutual fund share. Likewise, an
investor may bear costs associated with bid-ask spreads when selling
ETF shares.
---------------------------------------------------------------------------

    \362\ Proposed amendments to Item 3 of Form N-1A. In order to
eliminate duplicative disclosures, we are proposing to amend
Instruction 1(e) of Item 3 to eliminate the requirement that ETFs
modify the narrative explanation for the fee table to state that
investors may pay brokerage commissions on their purchase and sale
of ETF shares, which are not reflected in the example. We are also
proposing to eliminate the instruction that funds may only exclude
fees charged for the purchase and redemption of the Fund's creation
units if the fund issues or redeems shares in creation units of net
less than 25,000 shares. Thus, as proposed, an ETF may exclude from
the fee table any fees charged for the purchase and redemption of
the Fund's creation units regardless of the number of shares. See
proposed Instruction 1(e)(ii) to Item 3; see also proposed
Instruction 1(e)(ii) to Item 27(d)(1) (proposing the same
modification for the expense example in an ETF's annual and semi-
annual reports); see also infra footnote 397 and accompanying and
following text.
---------------------------------------------------------------------------

    We are also proposing to require a statement that investors may be
subject to other fees not reflected in the table, such as brokerage
commissions and fees to financial intermediaries.\363\ We believe this
is appropriate disclosure for both ETFs and mutual funds because
brokerage commissions and fees to financial intermediaries could be
applicable to ETFs and mutual funds alike.
---------------------------------------------------------------------------

    \363\ Proposed amendments to Item 3 of Form N-1A.
---------------------------------------------------------------------------

b. Changes That Affect ETFs
    Because ETF shares are exchange-traded, secondary market investors
in ETF shares are subject to trading costs, such as bid-ask spreads,
that are not currently required to be disclosed under Item 3. Trading
costs, like all costs and expenses, affect investors' returns on their
investment.\364\ In addition, some investors use ETFs more heavily as
trading vehicles compared to mutual funds, and the extent of the
trading costs borne by an investor depends on how frequently the
investor trades ETF shares. We believe that investors could overlook
these costs and that additional disclosure would help them better
understand the total costs of investing in an ETF. Disclosure would
also facilitate comparisons between different investment options.\365\
---------------------------------------------------------------------------

    \364\ See SEC Office of Investor Education and Advocacy,
Investor Bulletin: How Fees and Expenses Affect Your Investment
Portfolio (Feb. 2014), available at https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf, at 2 (``As with any fee, transaction
fees will reduce the overall amount of your investment
portfolio.''); see also Andrea Coombes, Calculating the Costs of an
ETF, The Wall Street Journal (Oct. 23, 2012), available at https://www.wsj.com/articles/SB10000872396390444024204578044293008576204.
    \365\ Alex Bryan & Michael Rawson, The Cost of Owning ETFs and
Index Mutual Funds, Morningstar Manager Research (Dec. 1, 2014),
available at http://global.morningstar.com/us/documents/pr/Cost-Of-Owning-Index-ETF-MFS.pdf, at 15 (``While trading commissions are the
most conspicuous component of trading costs, indirect trading costs,
such as the bid-ask spread and market impact of trading can often be
more important.'').
---------------------------------------------------------------------------

    As a result, we are proposing a new section in Item 3 that would
require disclosure of certain ETF trading information and trading
costs.\366\ This proposed section is formatted as a series of question
and answers (``Q&As''). We believe this format would help facilitate an
investor's understanding of certain terminology and cost calculations.
The proposed Q&A disclosures would require information related to the
trading of ETFs on the secondary market and the costs associated with
such trading. The specific question and answer disclosures are shown in
Figure 1 below.
---------------------------------------------------------------------------

    \366\ Proposed amendments to Item 3 of Form N-1A.

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

[GRAPHIC] [TIFF OMITTED] TP31JY18.016

    Q&A 1. Currently, Item 6(c) of Form N-1A requires that ETFs
disclose that: (i) Shares may only be purchased and sold on a national
securities exchange through a broker-dealer; and (ii) the price of ETF
shares is based on market

price, and since ETFs trade at market prices rather than at net asset
value, shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).\367\ We are
proposing to move this description from Item 6 to Q&A 1 in Item 3. We
believe that moving this information to Item 3 would consolidate
relevant disclosures regarding ETF trading costs and provide the
investor with helpful background information relating to ETF
trading.\368\ We also propose to replace the reference to ``national
securities exchange'' with a reference to ``secondary markets'' to
reflect that ETFs can be bought and sold over the counter or on an
alternative trading system in addition to their primary listing
exchanges.
---------------------------------------------------------------------------

    \367\ Item 6(c) of Form N-1A.
    \368\ See proposed amendments to Item 3 of Form N-1A.
---------------------------------------------------------------------------

    Q&A 2. The second Q&A we are proposing identifies the specific
costs associated with trading shares of an ETF, such as brokerage
commissions, bid-ask spread costs, and potential costs attributable to
premiums and discounts. This question clarifies that the costs being
discussed in the questions that follow should be considered in addition
to the costs previously discussed in the fee table.
    Q&A 3. Proposed Q&A 3 would include ETF-specific disclosures
relating to the median bid-ask spread for the ETF's most recent fiscal
year.\369\ Costs attributable to the bid-ask spread may increase or
decrease when certain market conditions exist or certain factors are
present. We believe that this disclosure would inform investors
regarding the potential impact of spread costs, including for investors
who frequently trade ETF shares. We also believe that disclosure
regarding median bid-ask spreads would provide a helpful metric for ETF
investors to determine an ETF's historic liquidity, since a narrower
bid-ask spread typically signals higher liquidity and a wider bid-ask
spread generally signals lower liquidity.\370\ Investors can use the
bid-ask spread to assess the ETF's tradability in comparison to other
similar ETFs.\371\
---------------------------------------------------------------------------

    \369\ As discussed above, given the importance of this
information to understanding the total expenses an investor may bear
when investing in an ETF, we propose that bid-ask spread information
be included in both the ETF's prospectus and on the ETF's website.
Proposed Instruction 5(a) to Item 3 of Form N-1A. See also infra
section II.C.6.
    \370\ CFA Institute Research Foundation, Comprehensive Guide to
Exchange-Traded Funds (ETFS) (2015), available at https://www.cfapubs.org/doi/pdf/10.2470/rf.v2015.n3.1, at 67-8 (``CFA
Guide''). See also Allen B. Atkins & Edward A. Dyl, Transactions
Costs and Holding Periods for Common Stocks, 52 Journal of Finance
1, 309-325 (1997) (``Additional evidence of an association between
transactions costs and trading volume can be found in the literature
on bid-ask spreads.''). Literature also suggests that the bid-ask
spread could be affected by increased transaction costs. See Gerald
W. Buetow & Brian J. Henderson, Are Flows Costly to ETF Investors?,
40 Journal of Portfolio Management 3, 101 (Spring 2014), available
at http://www.bfjlaward.com/pdf/25949/100-112_Henderson_JPM_0417.pdf
(noting that authorized participants are likely to pass transaction
fees onto shareholders through the spread).
    \371\ See CFA Guide, supra footnote 370, at 69 (noting that
``for some ETFs, even though the underlying securities are liquid,
bid-ask spreads may be wide simply because the ETF trades so little
that the chances of an [authorized participant] rolling up enough
volume to use the creation/redemption process are low'').
---------------------------------------------------------------------------

    The proposed Q&A would describe the bid-ask spread as the
difference between the highest price a buyer is willing to pay to
purchase shares of the ETF (bid) and the lowest price a seller is
willing to accept for share of the ETF (ask). We are proposing to
require this description because some investors may not be familiar
with the term ``bid-ask spread,'' making it difficult for them to
meaningfully analyze the specific bid-ask spread number that we propose
to include in this Q&A. The proposed Q&A also would explain that the
bid-ask spread can change throughout the day due to the supply of or
demand for ETF shares, the quantity of shares traded, and the time of
day the trade is executed, among other factors.
    In addition, we are proposing that an ETF calculate and disclose
its median bid-ask spread over the most recently completed fiscal
year.\372\ We propose that the median bid-ask spread be calculated by
using trading data from each trading day of the ETF's prior fiscal
year.\373\ Each daily bid-ask spread would be calculated by taking the
average of the intraday bid-ask spreads, which are measured by using
the best bid and best ask, respectively, at ten-second intervals
throughout the trading day. We understand that this is a widely
accepted method for calculating the bid-ask spread and believe that
using the best bid and ask would be administratively easier and less
burdensome than other methods of calculating the bid and ask price,
such as weighting or averaging bid and ask prices throughout the
trading day. We propose that the bid-ask spread be calculated by taking
the difference between the bid and the ask and dividing that difference
by the midpoint between the bid and the ask. The median would be
expressed as a percentage, rounded to the nearest hundredth percent.
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    \372\ Proposed Instruction 5(a) to Item 3 of Form N-1A.
    \373\ Proposed Instruction 5(b) to Item 3 of Form N-1A.
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    As proposed, an ETF would be required to use data from the full
trading day without excluding certain time periods, because we believe
the spread metric should represent the costs that an actual investor
could face at any time during the day. We note, however, that costs
related to the bid-ask spread can fluctuate throughout the day. For
example, the bid-ask spread tends to be higher at the beginning of the
trading day and towards the end of the trading day.\374\ At market
open, wide spreads may persist until all underlying stocks open and
start trading. At market close, market makers may be less willing to
purchase ETF shares because they do not want to hold the ETF shares
overnight.
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    \374\ Ogden H. Hammond & Michael Lieder, J.P. Morgan Asset
Management, Debunking myths about ETF liquidity (May 2015),
available at https://am.jpmorgan.com/blob-gim/1383272223898/83456/1323416812894_Debunking-myths-about-ETF-liquidity.pdf, at 6 (noting
that certain ETF liquidity patterns tend to repeat and are well
known to veteran traders, such as limited trading of ETFs
immediately prior to the close). See also Sunil Wahal, Entry, Exit,
Market Makers, and the Bid-Ask Spread, 10 Rev. Financial Stud 871
(1997), available at http://www.acsu.buffalo.edu/~keechung/MGF743/
Readings/H1.pdf (``Large-scale entry (exit) is associated with
substantial declines (increases) in quoted end-of-day inside
spreads, even after controlling for the effects of changes in volume
and volatility. The spread changes are larger in magnitude for
issues with few market makers; however, even for issues with a large
number of market makers, substantial changes in quoted spreads take
place.'').
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    We propose to require ETFs to use one full fiscal year of data
because we believe a full year would capture spreads during varying
market events throughout the year. Although we considered requiring
ETFs to use a full calendar year of data for this disclosure
requirement in order to promote greater comparability among ETFs, we
are concerned that using calendar year data would necessarily mean that
information in certain ETF prospectuses would be over a full year
old.\375\ We preliminarily believe that, to the extent there are any
concerns that using fiscal year data instead of calendar year data may
undermine comparability of the spreads of different ETFs when there are
significant market events in a particular calendar year, such concerns
are mitigated by the relatively low impact of a single market event to
a full year's

median bid-ask spread. Using one full fiscal year of data also is
consistent with all other requirements for Item 3 of Form N-1A.\376\
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    \375\ For example, if the ETF's fiscal year end was August 31,
the annual update would be required to be filed no later than
December 29, which would include spread cost information from the
prior calendar year for up to one year thereafter, meaning that the
spread cost information could be almost two years old. By using
fiscal year end data, the information would never be more than 16
months old.
    \376\ See Item 3 of Form N-1A.
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    Under our proposal, an ETF would be required to disclose median
bid-ask spread instead of average bid-ask spread because we believe the
median spread better represents the spread that the average investor
would experience, whereas the average spread better represents the
spread of an average ETF share in a given transaction. We believe
sorting the spreads across the entire fiscal year to determine the
median--rather than taking the median spread of each trading day
throughout the fiscal year first, sorting each day's median, and taking
the median spread across all trading days--provides a better
representation of the true median across the entire fiscal year.
Requiring disclosure of the median bid-ask spread also avoids the
problem of an outlier skewing the bid-ask spread figure. For example,
if the spread is .05 in nine instances but 1.00 in one instance, then
the average spread will be 0.145 which we believe is a less accurate
reflection of the bid-ask spread for that fund.
    Q&A 4 and 5. We also propose to require ETFs to include questions
on how the bid-ask spread impacts the return on a hypothetical $10,000
investment for both buy-and-hold and frequent traders.\377\ These
examples are designed to allow secondary market investors to see the
impact that bid-ask spreads can have on the investor's trading expenses
and ultimately the return on investment. For example, a hypothetical
example of spread costs can highlight that these costs can be a drag on
returns for someone who trades frequently in certain types of ETFs. On
a percentage basis, spread costs for a single trade can equal, if not
exceed, the ETF's annual operating expenses in some cases. If an
investor trades in and out of an ETF several times within a relatively
short period of time, the costs attributable to the bid-ask spread can
increase rapidly. Transparency into trading costs also may promote
greater comparability among ETFs and other investment products, such as
mutual funds. For example, two ETFs may have very similar expense
ratios, but one ETF consistently has higher bid-ask spreads, which
could make the cost of that ETF significantly higher than the one with
a low bid-ask spread.
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    \377\ The proposal uses $10,000 in order to maintain consistency
with the cost example in Item 3 of Form N-1A.
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    The proposed example in Q&A 4 would require disclosure of
hypothetical trading costs attributable solely to the median bid-ask
spread based on data from the ETF's prior fiscal year.\378\
Specifically, the spread costs example would demonstrate the
hypothetical impact of the ETF's bid-ask spread for one $10,000
``round-trip'' trade (i.e., one buy and sell transaction). The proposed
example reflects costs that are in addition to the annual fund
operating expenses, which are currently disclosed in Item 3 of N-
1A.\379\ Thus, to assist investors with comparing the costs of
investing in various ETFs, we believe that it is appropriate to use the
same hypothetical investment amount, $10,000, which is used for the
current expense example in Item 3 of Form N-1A.
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    \378\ Proposed Instruction 5(b) to Item 3 of Form N-1A.
    \379\ Item 3 of Form N-1A. Item 3 only requires 1- and 3-year
expense examples for annual fund operating expenses for ``New
Funds.''
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    To illustrate that more frequent trading can significantly increase
costs, the proposed example in Q&A 5 demonstrates the costs associated
with 25 $10,000 round-trip trades (50 total trades). This figure
represents approximately two round-trip trades each month. While the
number of trades that an investor makes during the course of a year can
vary depending on the type of investor and the type of investment
strategy the ETF pursues, we believe that an example showing the spread
costs of 50 total trades could provide useful information for those
that trade frequently.\380\ As discussed in more detail below, our
proposal also would allow investors to obtain more tailored information
regarding their costs on the ETF's website.\381\
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    \380\ We acknowledge the inherent difficulty of setting a number
of trades that reflects an ``average investor.'' Based on staff
experience, however, we preliminarily believe that 50 total trades,
which represents approximately 2 round-trip transactions per month,
is a reasonable figure to utilize for the purposes of demonstrating
the costs of trading for a frequent trader in Q&A 5.
    \381\ See proposed Instruction 5(e) to Item 3 of Form N-1A.
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    Pursuant to this requirement, an ETF would be required to disclose
``mid-range spread costs'' and ``high-end spread costs.'' The mid-range
spread costs would be calculated by using the median spread, divided by
two, and then multiplying the resulting number by a $10,000 trade size
and the number of transactions. The high-end spread costs would be
calculated by using the same calculated spread data from the ETF's
prior fiscal year, except instead of choosing the median spread, the
disclosure would represent the 95th percentile spread, after sorting
that year's data.\382\ We preliminarily believe that utilizing the 95th
percentile spread (i.e., the spread representing the threshold for the
highest 5% of spreads) is appropriate for the purposes of representing
high-end spread costs.
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    \382\ We are proposing to divide the bid-ask spread by two on
the assumption that the value of an ETF share is the midpoint
between the bid price and the ask price. Therefore, the ``cost''
attributable to the bid-ask spread of executing one trade would be,
in the case of purchasing a share of an ETF, the difference between
the ask price and the midpoint between the bid and the ask prices--
in other words, this difference would represent the cost above which
the share was valued for this purpose and not the full ``round-
trip'' cost. Likewise, in the case of selling an ETF share, the
``cost'' attributable to the bid-ask spread of executing one trade
would be the difference between the bid and the midpoint between the
bid and the ask prices. To calculate the cost of multiple trades,
the single trade cost would be multiplied by the number of
transactions.
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    We considered whether to also include ``low-end spread costs'' but
determined that the combination of presenting ``mid-range spread
costs'' and ``high-end spread costs'' would provide the most meaningful
disclosure to investors. Many ``low-end spread costs'' for ETFs with
significant volume have a penny spread and would therefore not provide
as useful of a comparison across funds. Furthermore, some ``mid-range
spread costs'' and ``high-end spread costs'' could account for more
than 50% of the cost of an initial investment in an ETF, whereas a
``low-end spread cost'' might only account for a small fraction of an
investor's overall costs. We request comment on this point below.
    An investor could use both the median bid-ask spread figure from
proposed Q&A 4 and the costs information in Q&A 5 to better assess the
overall cost impact of the bid-ask spread. Proposed Q&As 1-5 also would
provide investors with a better understanding of the basic terminology
needed to understand some frequently overlooked costs associated with
investing in ETFs, and then provide the data needed to understand how
those costs materialize for the particular fund and how those costs
compare to other ETFs.
    Q&A 6. Cross-reference to ETF's website and Interactive Calculator
Requirement. As discussed above, proposed rule 6c-11 would require
daily website disclosure of several items, including the NAV per share,
market price, and premium or discount. As the disclosures on an ETF's
website would be updated daily, we believe a cross-reference in Form N-
1A to the website disclosures would enable investors to receive timely
and granular information that could assist with making an investment
decision.

Accordingly, we propose to require a statement in Q&A 6 that would
refer investors to the ETF's website for more information.\383\ Item
11(g) currently requires an ETF to provide a website address in its
prospectus if the ETF omits the historical premium/discount information
from the prospectus and includes this information on its website
instead. As a result, many ETFs already include a website address in
their prospectus.\384\
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    \383\ Proposed amendments to Item 3 of Form N-1A would require
an ETF to include the following statement in its prospectus: ``The
ETF's website at [www.[Series-SpecificLandingPage.com]] includes
recent information on the Fund's net asset value, market price,
premiums and discounts, as well as an interactive calculator you can
use to determine how the bid-ask spread would impact your specific
investment.'' The Commission explained in a 2000 release that filers
submitting HTML documents on EDGAR should take reasonable steps when
they create the document in order to prevent URLs from being
converted into hyperlinks. See Rulemaking for Edgar System,
Securities Act Release No. 33-7855 (Apr. 24, 2000).
    \384\ As discussed above, we propose to replace the historical
premium/discount information in Item 11(g) with line graph
disclosure regarding premiums and discounts that would be required
by proposed rule 6c-11(c)(1)(iv). See supra section II.C.6.
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    In addition, proposed Instruction 5(e) to Item 3 would require an
ETF to provide an interactive calculator in a clear and prominent
format on the ETF's website. The purpose of the interactive calculator
is to provide investors with the ability to customize the hypothetical
calculations in Item 3 to their specific investing situation. For
example an investor with an investment of $2,500 opposed to $10,000 or
wishing to trade 10 times opposed to the 25 times presented in Item 3
could use the calculator to find more tailored cost-related
information. We are sensitive to the fact that creating a web-based
interactive calculator is not without cost, especially for smaller fund
complexes. We have tried to mitigate these costs by limiting the
proposed investor-input to two data points: Investment amount and
number of trades. We also tried to limit the complexity of the tool by
proposing to require the interactive calculator to use the calculations
detailed in Instructions 5(a)--(d) to Item 3 to provide the information
required by Q&As 3-5, which relates to the bid-ask spread.
c. Exception for ETFs With Limited Trading History
    Trading information and related costs may not be useful to
secondary market investors in an ETF that has only a limited amount of
trading history since inception. Therefore, we are proposing that an
ETF that had its initial listing on a national securities exchange
after the beginning of its most recently completed fiscal year would
not be required to include the ETF's median bid-ask spread or the
spread cost example in its Item 3 disclosure, nor would the ETF be
required to provide an interactive calculator on its website.\385\ We
preliminarily believe this information is most useful when there is at
least one full fiscal year of data underlying the metrics. Without a
minimum amount of trading data to calculate this information, the
resulting calculations could be skewed for any number of reasons. For
example, it is possible that the time of year during which the ETF was
trading or the fact that an ETF was relatively new to the market and
had not had significant marketing to gain interest for shares of the
ETF resulted in low trading volume and higher bid-ask spreads. We
propose to require a newly launched ETF to provide a brief statement to
the effect that the ETF does not have sufficient trading history to
report trading information and related costs.\386\ The proposed
amendment would prohibit a new ETF from disclosing data based on very
short trading histories, which we preliminarily believe could be
misleading. This approach would also be consistent with our treatment
of other disclosure items such as portfolio turnover data and annual
returns.\387\
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    \385\ Proposed Instruction 5(a) to Item 3 of Form N-1A.
    \386\ Id.
    \387\ See Items 3 and 4 of Form N-1A.
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    We seek comment on our proposed amendments to Item 3:
     Should we require ETFs and mutual funds to include a
statement that investors may be subject to other costs not reflected in
the fee table, such as brokerage commissions and other fees to
financial intermediaries? Would this disclosure be confusing to
individual investors, particularly those investing in mutual funds?
     In addition to the statement regarding brokerage
commissions, should we require quantitative disclosure of the range of
brokerage commissions for transactions? Should this disclosure be
required of both mutual funds and ETFs? Where in the registration
statement should such disclosure be included? Or, would disclosure of
brokerage commissions raise challenges too great to require disclosure?
For example, would variations in methods used to collect and set
commissions make such disclosure too complex? How costly or difficult
would it be to obtain information about brokerage commissions?
     Should other costs be disclosed in Item 3? If so, which
costs and why? How and where should those other costs be disclosed?
Should Item 3 include market price range or NAV range? What other
trading information, if any, should be included in Item 3 and why? For
example, should we require ETFs to disclose information regarding the
number of days the ETF's shares traded on a national securities
exchange, the ETF's average daily volume, and/or the ETF's total number
of shares outstanding? If so, how should we require these metrics to be
calculated and disclosed?
     Should we include the specific ETF disclosures in Item 3?
Should we require that those disclosures be made in a Q&A format? Would
investors understand and find the proposed Q&A format useful? Are there
other formats we should consider? Should we permit ETFs to use any
format that is designed to effectively convey the information to
investors?
     Should we replace the reference to ``national securities
exchange'' with ``secondary markets'' in Q&A 1 as proposed?
     Should we require ETFs to explain bid-ask spreads and the
factors that could affect bid-ask spreads in Item 3? Are there other
explanations (or means to calculate bid-ask spreads) that we should
consider? Are there other factors that could impact bid-ask spreads
that we should include in this explanation?
     Should the median bid-ask spread information be included
in the prospectus? Should this information be included in Item 3 or in
a different section of the registration statement? If so, where?
Alternatively, should we require disclosure of this information on an
ETF's website?
     To what extent is historical spread data predictive of
future spread data? Should we require language indicating that
historical spread data may not be predictive of future spread data?
     Should the spread calculation exclude data from the
beginning and end of the trading day? If so, what time periods should
it exclude and why? For example, should we exclude the first and last
15 minutes of each trading day?
     Should the spread calculation be based on data from an
ETF's fiscal-year end or calendar-year end and why? Would the use of
fiscal-year make comparability among funds more difficult since funds
have different fiscal-year ends? Should the spread calculation be based