on data from more than one year? If so, how many years and why? Should
the spread calculation be based on data that, in addition to the fiscal
or calendar year, also includes

data from the most recently completed fiscal or calendar quarter,
respectively? Should the calculation be done on a daily basis first and
then again across the entire fiscal year?
     Should the calculation for the bid-ask spread throughout
the trading day be done more or less frequently than every ten seconds?
If so, how frequently and why?
     Should the bid and ask be calculated using a different
method, such as weighting the prices throughout the book? If so,
explain the method and why it should be used.
     Should a metric other than median be used for the spread
calculation? For example, should we use average spread or effective
spread? \388\ If so, why is it preferable and how should it be
calculated? Would the use of a different spread calculation provide
more comprehensive information about extreme market events? For
example, should we also require disclosure of additional percentiles
towards the extreme of the distribution, such as the 95th percentile?
---------------------------------------------------------------------------

    \388\ See supra footnote 314.
---------------------------------------------------------------------------

     Instead of using the bid-ask spread as an indicator of
trading costs, is there another method that would better reflect an
ETF's overall trading costs? If so, what is that metric, why is it
better than disclosing the bid-ask spread, and how should it be
calculated and disclosed?
     How difficult or costly would it be for ETFs to obtain the
data necessary to calculate median bid-ask spread as proposed? Are
there any negative consequences of disclosing the bid-ask spread? If
so, what are they?
     When calculating the spread costs example, should the bid-
ask spread be divided by two for each transaction listed or should each
transaction reflect the full round-trip spread cost?
     Should we require disclosure of costs associated with
``mid-range spread costs'' and ``high-end spread costs'', as proposed?
Should we additionally include a requirement to disclose ``low-end
spread costs''? Why or why not? Would the disclosure of this data
result in retail investor confusion?
     Is the $10,000 trade amount used in the spread costs
example reasonable? Should we consider a lower trade amount?
Alternatively, should the spread costs example show varying trade sizes
calculated using varying book depths? If so, what trade sizes and why
should they be used?
     Should the spread example include a different number of
transactions? If so, how many transactions should be used for each
column and why? Should the number of transactions vary based on the
type of investment strategy the ETF pursues? If so, how should we
determine the number of transactions and corresponding ETF types?
     Are there any negative consequences of disclosing the
spread costs example? If so, what are they?
     Should each ETF be required to disclose a website address
in Item 3 as proposed? Should we permit an ETF to comply with this
requirement by including a general web address to an investment company
complex's website or should we require a series-specific landing page
for the ETF? Would a cross-reference to the ETF's series-specific page
be useful?
     Should we require ETFs to disclose information regarding
premiums and discounts in Item 3 of Form N-1A, either in addition to,
or in lieu of, the disclosures proposed in rule 6c-11? If so, should
the information be based on data over the entire fiscal year or
calendar year? Do commenters believe that the reference to the ETF's
website, where such information may be found, provides investors with
useful information regarding these potential costs?
     Would investors find the information in our proposed
amendments to Item 3 helpful in comparing between different investment
options?
     Should we require funds, as proposed, to provide investors
with an interactive calculator on their website? Would investors find
an interactive calculator helpful to better understand the costs of
investing in ETFs? Are there data points that we have not discussed
that the interactive calculator should include? Should the interactive
calculator be required for both mutual funds and ETFs? For example,
should the interactive calculator be expanded to include fee table
information for both ETFs and mutual funds? Are there any challenges to
posting an interactive calculator that we are not considering? What
costs would be associated with developing this type of calculator?
     Should we require funds to provide an interactive
calculator on their website for other costs, such as any costs
attributable to premiums or discounts? If so, what would be the user
inputs and outputs for the calculator? How would the calculator
calculate such a cost?
     Should there be an exception to the requirement to
disclose trading information and related costs for newly launched ETFs
as proposed? If not, why not? Should a newly launched ETF nevertheless
be required to provide an interactive calculator on its website? Should
the threshold for the exemption to include trading information and
related costs disclosure instead be based on Form N-1A's definition of
``New Fund'' \389\ or a different period of time? If so, why? Should
there be an exception to disclosing trading information and related
costs for any other reason (e.g., limited trading book depth, low
volume, or trading only on a percentage of the days throughout the
year)? If so, what should the threshold be and why?
---------------------------------------------------------------------------

    \389\ Instruction 6 to Item 3 of Form N-1A defines a ``New
Fund'' as ``a Fund that does not include in Form N-1A financial
statements reporting operating results or that includes financial
statements for the Fund's initial fiscal year reporting operating
results for a period of 6 months or less.'' The instruction permits
New Funds to estimate ``Other Expenses'' and to complete only 1- and
3-year portions of the expense example. Id.
---------------------------------------------------------------------------

     In lieu of providing an exception from the requirement to
disclose trading information and related costs for newly launched ETFs,
should we instead adopt a requirement for ETFs to disclose this
information once the ETF reaches or exceeds a specified threshold of
trading volume for a specified period of time, regardless of how long
it has been in operation? Put differently, should we base this
exception on level of trading volume rather than the length of an ETF's
operation? If so, what should such thresholds be? If not, why not?
3. Item 6 of Form N-1A
    Currently, Item 6(c)(i) of Form N-1A requires an ETF to: (i)
Specify the number of shares it will issue or redeem in exchange for
the deposit or delivery of baskets; (ii) explain that the individual
shares of the ETF may only be purchased and sold on a national
securities exchange through a broker or dealer; and (iii) disclose that
the price of ETF shares is based on the market price and as a result,
shares may trade at a price greater than NAV (premium) or less than NAV
(discount).\390\ The number of shares the ETF issues or redeems in
exchange for the deposit or delivery of baskets is largely duplicative
of reports required in Form N-CEN.\391\ We therefore propose to remove
this requirement from Item 6.\392\ The remainder of the information
required by Item 6(c)(i) is proposed to be moved to the Item 3
disclosure.\393\ In order to eliminate duplicative disclosure, we
propose to remove these requirements

from Item 6.\394\ As noted above, moving this information to Item 3
would consolidate relevant disclosures regarding the fees and trading
costs that may be borne by an ETF investor in one place.
---------------------------------------------------------------------------

    \390\ Item 6(c)(i) of Form N-1A.
    \391\ See Item E.3.a of Form N-CEN; see also Reporting
Modernization Adopting Release, supra footnote 147, at n.1100 and
accompanying text (requiring ETFs ``to report the number of ETF
shares required to form a creation unit as of the last business day
of the reporting period.'').
    \392\ See proposed amendments to Item 6 of Form N-1A.
    \393\ See proposed amendments to Item 3 of Form N-1A.
    \394\ See proposed amendments to Item 6 of Form N-1A.
---------------------------------------------------------------------------

    Additionally, Item 6(c)(ii) currently requires ETFs issuing shares
in creation units of less than 25,000 to disclose the information
required by Items 6(a) and (b).\395\ Current Items 6(a) and (b) require
funds to: (i) Disclose their minimum initial or subsequent investment
requirements; (ii) disclose that the shares are redeemable; and (iii)
describe the procedures for redeeming shares. We are proposing to
eliminate these disclosures.\396\ When we adopted these requirements,
we reasoned that individual investors may be more likely to indirectly
transact in creation units through authorized participants if the
creation unit size was less than 25,000 shares.\397\ Based on staff
experience, we understand that retail investors do not engage in
primary transactions through authorized participants. Furthermore, to
the extent that authorized participants act as agents for market makers
in primary transactions with the ETF, we believe that the flow of
information on how to purchase and redeem shares is robust given the
market maker's relationship with an authorized participant. Therefore,
we do not believe that this disclosure would be beneficial.
---------------------------------------------------------------------------

    \395\ Item 6(c)(ii) of Form N-1A.
    \396\ See proposed amendments to Item 6 of Form N-1A.
    \397\ See Enhanced Disclosure and New Prospectus Delivery Option
for Registered Open-End Management Investment Companies, Investment
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26,
2009)] (``Summary Prospectus Adopting Release''), at nn.170-72.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to Item 6.
     Should we remove the disclosure regarding creation unit
sizes from Form N-1A, as proposed? Are we correct in our understanding
that this disclosure is largely duplicative of disclosure required in
Form N-CEN? Are we correct in our belief that investors do not find
this information useful in the context of a prospectus? Instead of
removing this disclosure from Form N-1A entirely, should we move it to
the Statement of Additional Information? Do retail investors typically
use the information on creation unit size and if so, for what purpose?
Is our belief correct that this information is more useful for
authorized participants and market makers and less useful to investors
purchasing individual shares on an exchange?
     Alternatively, should we require ETFs to disclose
information regarding their creation unit sizes or transaction fees, or
both, on their websites?
     Should ETFs continue to disclose in Item 6 (or any other
Item included within the summary prospectus disclosure) information
currently required by Items 6(a) and (b)? If so, why? Should this
disclosure be based on a numerical threshold, and if so, what would the
appropriate threshold be and why?
     Should we require ETFs to provide disclosure regarding
transaction fees associated with the purchase and redemption of
creation units? If so, where should such disclosure be provided?
     Are we correct in our understanding that that the flow of
information on how to purchase and redeem ETF shares is robust due to
the relationship between market makers and authorized participants?
4. Item 11 of Form N-1A
    Item 11(g)(1) currently specifies that an ETF may omit information
required by Items 11(a)(2), (b), and (c) if the ETF issues or redeems
shares in creation units of not less than 25,000 shares each.\398\
Similar to the reasoning discussed above regarding amendments to Item
6,\399\ we propose to amend Item 11(g)(1) to permit all ETFs, not just
ones with creation unit sizes of not less than 25,000 shares, to omit
the information required by Items 11(a)(2), (b), and (c).\400\
---------------------------------------------------------------------------

    \398\ Item 11(g)(1) of Form N-1A.
    \399\ See supra section I.H.3.
    \400\ Proposed Item 11(g)(1) of Form N-1A.
---------------------------------------------------------------------------

    Item 11(a)(2) requires a fund to disclose when calculations of NAV
are made and that the price at which a purchase or redemption is
effected is based on the next calculation of NAV after the order is
placed.\401\ Item 11(b) and (c) require a fund to describe the
procedures used for purchasing and redeeming the fund's shares.\402\ In
our view, eliminating these disclosure requirements for all ETFs would
not detract from an understanding of how authorized participants
transact directly with the ETF in the primary market. As discussed
above, the proposed rule would define an authorized participant as a
member or participant of a clearing agency registered with the
Commission, which has a contractual arrangement with the ETF or one of
the ETF's service providers.\403\ Thus, we believe the parties who
purchase or redeem shares from the ETF directly would either have the
knowledge necessary to do so without additional procedural disclosure
or the ability to request such information.
---------------------------------------------------------------------------

    \401\ Item 11(a)(2) of Form N-1A. Item 11(a)(1) already requires
that ETFs include an explanation that the price of fund shares is
based on market price. Item 11(a)(1) of Form N-1A.
    \402\ Item 11(b) and (c) of Form N-1A.
    \403\ See proposed rule 6c-11(a).
---------------------------------------------------------------------------

    Item 11(g)(2) currently includes a requirement for an ETF to
provide a table showing the number of days the market price of the
ETF's shares was greater than the ETF's NAV per share for certain time
periods.\404\ As discussed above, we propose to require information
about the premium and discount of the ETF's shares to their NAV per
share to be included on the ETF's website. Thus, we are proposing to
remove the information currently required by Item 11(g)(2), as more
timely information would be available on the ETF's website. For the
same reasons, we are also proposing to eliminate Item 27(b)(7)(iv) of
Form N-1A, which requires ETFs to include a table with premium/discount
information in their annual reports for the five most-recently
completed fiscal years.\405\
---------------------------------------------------------------------------

    \404\ Item 11(g)(2) of Form N-1A. The item provides that an ETF
may omit the table if it provides a website address that investors
can use to obtain the premium/discount information required by the
item.
    \405\ Although the time period required by this disclosure is
different than the requirement in Item 11(g)(2), 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).
---------------------------------------------------------------------------

    We request comment on the proposal to remove the requirement to
disclose information required by Items 11(a)(2), (b), and (c) as well
as the proposal to remove the requirement to disclose the premium/
discount information in the prospectus and annual report.
     Should we keep this disclosure in the prospectus? If we
were to keep this disclosure requirement, should we require ETFs to
disclose different information about the procedures to purchase and
redeem shares directly with the ETF?
     Do most ETFs provide the premium/discount information
required by this information on their websites? If we were to keep the
requirement to disclose the premium/discount information in the
prospectus, should it mirror the information proposed to be required on
the ETF's website?
5. Potential Alternatives to Current ETF Registration Forms
    As discussed above, open-end funds, including ETFs organized as
open-end funds, are required to file Form N-1A to

register under the Act and to offer their securities under the
Securities Act. UITs, including ETFs organized as UITs, initially
register under the Investment Company Act on Form N-8B-2 and register
their offerings of securities under the Securities Act on Form S-
6.\406\ However, ETFs, regardless of structure, operate differently
than the other investment companies that register on Forms N-1A and N-
8B-2. For example, unlike traditional open-end funds and UITs, ETFs are
exchange-traded and investors rely on the arbitrage mechanism to ensure
that the ETF's shares trade at or close to its NAV.\407\ As a result of
these differences, in addition to our proposed amendments to Form N-1A
and Form N-8B-2, we are seeking comment on whether we should create a
new registration form that is specifically designed for ETFs or
consider other disclosure formats as part of a future rulemaking.
---------------------------------------------------------------------------

    \406\ See infra section II.0.
    \407\ See generally Hu and Morley, supra footnote 291 (proposing
a new ETP disclosure regime that ``responds to the significance of
the arbitrage mechanism, model-related complexities and evolving
understandings and conditions'').
---------------------------------------------------------------------------

     Should we create a new registration form for ETFs? What
types of ETFs should be required to file reports on such a form? For
example, should we limit the form to ETFs that would be subject to
proposed rule 6c-11? Or should all ETFs, including UIT ETFs, file
reports on such a form?
     What type of ETF-specific information should such a form
include? Should the form require more disclosure on the effectiveness
of the arbitrage mechanism? \408\ Should the disclosures require
qualitative disclosures that relate specifically to ETFs, including the
performance of the ETF's arbitrage mechanism? Should this disclosure be
required as part of an annual report? \409\ Should we require a
discussion of the ETF's bid-ask spread or premiums and discounts
throughout the year? Should the form include a discussion of ETF-
specific risk factors? If so, what risk factors should be included?
---------------------------------------------------------------------------

    \408\ See generally id.
    \409\ Id.; see also Item 27(b)(7) of Form N-1A.
---------------------------------------------------------------------------

     Should we require ETFs to provide investors with a short
summary document that provides key information about the ETF? What type
of information should the document include? For example, should it
include information related to the ETF's strategy, portfolio
investments, costs, risks, or performance? Should we require it to be
in a standardized format? \410\
---------------------------------------------------------------------------

    \410\ For example, in 2017, the Canadian Securities
Administrators began requiring ETFs traded on Canadian exchanges to
provide investors with a document, not to exceed four pages in
length, called ``ETF Facts.'' The ETF Facts document is required to
include certain information about the ETF, including, among other
things, information related to the ETF's investments, risks, and
performance, as well as background information about ETFs generally.
See Canadian Securities Administrators, Mandating a Summary
Disclosure Document for Exchange-Traded Mutual Funds and Its
Delivery--CSA Notice of Amendments to National Instrument 41-101
(Dec. 8, 2016), available at http://www.osc.gov.on.ca/documents/en/Securities-Category4/ni_20161208_41-101_traded-mutual-funds.pdf.
---------------------------------------------------------------------------

     As an alternative to a new ETF form, or in addition to
such a form, should we consider a summary prospectus targeted
specifically at ETFs and their unique features?
     Should we require ETFs to file periodic reports, such as
on Form 8-K? Under what circumstances should we require periodic
reports? For example, should we require ETFs to file periodic reports
after a market event that adversely affects the arbitrage mechanism
during the trading day?

I. Amendments to Form N-8B-2

    Form N-8B-2 is the registration form under the Investment Company
Act for UITs which are currently issuing securities and is used for
registration of ETFs organized as UITs.\411\ For the reasons discussed
above in section II.A.1, we believe that UIT ETFs should be regulated
pursuant to their exemptive orders, rather than a rule of general
applicability and are not proposing to include them within the scope of
proposed rule 6c-11. However, we believe that it is important for
investors to receive consistent disclosures for ETF investments,
regardless of the ETF's form of organization.\412\ We are therefore
proposing to amend Form N-8B-2 \413\ to require UIT ETFs to provide
disclosures that mirror certain of our proposed disclosure changes in
Form N-1A.\414\ Below are the proposed Form N-8B-2 amendments and the
corresponding sections in Form N-1A.
---------------------------------------------------------------------------

    \411\ While open-end funds register with the Commission with
Form N-1A, UITs must register with two forms: Form S-6 which is used
for registering the offering of the UITs' units under the Securities
Act, and Form N-8B-2, which is used for registration under the
Investment Company Act. Form S-6, which must be filed with the
Commission every 16 months, provides certain content requirements,
mainly by referencing to the disclosure requirements in Form N-8B-2.
    \412\ See 2008 ETF Proposing Release, supra footnote 3, at
section III.D.1. for a general discussion of ETF prospectus delivery
requirements. Since UITs issue securities, and not subject to any of
the applicable exemptions, both sponsors and dealers are required to
deliver a current prospectus to unit holders. See section 5(b) of
the Securities Act (requiring prospectus delivery with the sale of
securities, including units of UITs); see also section 24(d) of the
Act (eliminating the ``dealer exception'' in section 4(3) of the
Securities Act for transactions in redeemable securities by UITs);
see also supra footnote 27.
    \413\ Because Form S-6 requires UIT prospectuses to include
disclosure required by specified provisions of Form N-8B-2, the
proposed disclosure amendments to Form N-8B-2 would also apply to
prospectuses on Form S-6.
    \414\ See section II.H.
    \415\ The proposed definition of the term ``exchange-traded
fund'' in Form N-1A covers ETFs organized as open-end funds and
includes ETFs relying on either exemptive orders or rule 6c-11 to
operate. Form N-8B-2, on the other hand, is for UITs, which would
not be able to rely on rule 6c-11 to operate. Accordingly, the
proposed definition of ``exchange-traded fund'' in Form N-8B-2 omits
the reference to rule 6c-11.

------------------------------------------------------------------------
                                                          Corresponding
                                Proposed Form N-1A ETF     Form N-8B-2
       Disclosure topic               disclosure            proposed
                                                           disclosure
------------------------------------------------------------------------
Definitions for Exchange-       General Instructions    General
 Traded Fund.                    Part A.                 Instructions
                                                         Definitions.\41
                                                         5\
Information Concerning Fees     Item 3. Risk/Return     Item I.13(h).
 and Costs.                      Summary: Fee Table.
Information Concerning Fees     Item 3. Exchange-       Item I.13(i).
 and Costs.                      Traded Fund Trading
                                 Information and
                                 Related Costs.
------------------------------------------------------------------------

    UIT ETFs, like other ETFs, are exchange-traded. As a result,
secondary market investors in UIT ETFs, like other ETFs, are subject to
costs, such as: bid-ask spreads; brokerage commissions for buying and
selling shares of a UIT ETF through a broker-dealer; and potential
costs related to purchasing UIT ETF shares at a premium or discount to
NAV per share. As with investors in ETFs organized as open-end funds,
we believe that unit holders could overlook these costs for UIT ETFs.
We believe that additional disclosure would help investors better
understand the total costs of investing in a UIT ETF. Accordingly, we
are proposing disclosure requirements in Form N-8B-

2 that mirror those of Item 3 of Form N-1A, thus requiring prospectuses
on Form S-6 for UIT ETFs to disclose that an ETF investor may pay
additional fees, such as brokerage commissions and other fees to
financial intermediaries, and to provide certain ETF trading
information and related costs.\416\
---------------------------------------------------------------------------

    \416\ See proposed Items 13(h) and (i) of Form N-8B-2. See also
supra section II.H.2 describing the ETF trading information and
related costs disclosure requirements.
---------------------------------------------------------------------------

    As discussed above, the proposed instructions to Item 3 would
require median bid-ask spread to be disclosed on an ETF's website. UIT
ETFs would be subject to this requirement as well. We note in this
regard that UIT ETFs currently are not subject to website disclosure
requirements regarding trading costs or other information. However, as
a matter of practice, UIT ETFs generally disclose information regarding
market price, NAV per share, premium and discounts, and spreads on
their websites today.\417\
---------------------------------------------------------------------------

    \417\ UIT ETFs also would be required to provide certain ETF
specific information in reports on Form N-CEN. See Part E of Form N-
CEN. Additionally, a UIT ETF would be required to provide certain
information relating to the index that it tracks, including the
return difference and whether the index is constructed by an
affiliated person or is exclusive to the UIT. See Item E.4 of Form
N-CEN.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to Form N-8B-2.
     Should we require ETFs organized as UITs to provide
disclosures that are consistent with Form N-1A in the manner proposed?
     Do the proposed amendments to Form N-8B-2 ensure
consistency between ETFs organized as open-end funds and UIT ETFs? Why
or why not?
     Are there additional amendments to Form N-8B-2 the
Commission should consider? Are there any amendments to Form S-6 that
the Commission should consider? For example, should we consider
requiring UIT ETFs to provide disclosure regarding market price, NAV
per share, and premiums and discounts? Should we consider requiring UIT
ETFs to provide graphic disclosure regarding the ETF's historical
premiums and discounts? Should we permit UIT ETFs to omit such premium/
discount in their registration statement if they include those
disclosures on the ETF's website?
     Would the proposed trading cost requirements in Form N-8B-
2 Items I.13(h)-(i) result in UIT ETFs having to disclose information
not currently disclosed on their websites? If so, what information
would be disclosed that is not currently disclosed?

J. Amendments to Form N-CEN

    Form N-CEN is a structured form that requires registered funds to
provide census-type information to the Commission on an annual
basis.\418\ Item C.7. of Form N-CEN requires management companies to
report whether they relied on certain rules under the Investment
Company Act during the reporting period.\419\
---------------------------------------------------------------------------

    \418\ See Reporting Modernization Adopting Release, supra
footnote 147.
    \419\ Item C.7. of Form N-CEN.
---------------------------------------------------------------------------

    We are proposing to add to Form N-CEN a requirement that ETFs
report if they are relying on rule 6c-11.\420\ While Form N-CEN already
requires funds to report if they are an ETF,\421\ we are proposing to
collect specific information on which funds are relying on rule 6c-11
in order to better monitor reliance on rule 6c-11 and to assist us with
our accounting, auditing and oversight functions, including compliance
with the Paperwork Reduction Act.
---------------------------------------------------------------------------

    \420\ Proposed Item C.7.k. of Form N-CEN.
    \421\ See Item C.3.a.i. of Form N-CEN.
---------------------------------------------------------------------------

    As discussed above in section II.C.1, we are also changing the
definition of ``authorized participant'' in Form N-CEN to exclude the
specific reference to an authorized participant's participation in DTC
in order to obviate the need for future amendments if additional
clearing agencies become registered with the Commission. Revised Form
N-CEN would define the term as ``a member or participant of a clearing
agency registered with the Commission, which has a written agreement
with the Exchange-Traded Fund or Exchange-Traded Managed Fund or one of
its service providers that allows the authorized participant to place
orders for the purchase and redemption of creation units.'' \422\
---------------------------------------------------------------------------

    \422\ See proposed amendment to Instruction to Item E.2 of Form
N-CEN.
---------------------------------------------------------------------------

    We request comment on our proposed amendments to Form N-CEN.
     Should we require any additional information concerning
proposed rule 6c-11? If so, what information and where? For example,
should we require ETFs to provide information to the Commission on a
monthly basis on Form N-PORT? If so, what information?
     Should we amend the definition of ``authorized
participant'' in Form N-CEN as proposed or should we retain its
existing definition?

III. Economic Analysis

A. Introduction

    ETF sponsors seeking to operate an ETF currently need to obtain an
order from the Commission that exempts them from certain provisions of
the Act that otherwise would prohibit several features essential to the
ETF structure. Obtaining such exemptive relief typically has resulted
in expenses and delays in forming new ETFs. In addition, the conditions
in the exemptive orders issued by the Commission have evolved over
time. As a result, some ETF sponsors may have a competitive advantage
over other sponsors because some existing exemptive orders allow the
sponsors to launch new funds under the terms and conditions of those
orders, and because the terms in some of the existing exemptive orders
may be more flexible than others.
    Proposed rule 6c-11 would allow ETFs that satisfy certain
conditions to operate without obtaining an exemptive order from the
Commission. As discussed above, the Commission also proposes to rescind
the exemptive relief we have issued to ETFs that could rely on the
proposed rule. However, we anticipate that ETFs whose exemptive relief
would be rescinded under the proposed rule generally would be able to
rely on the proposed rule without substantially changing their current
operations, as the conditions for relying on the proposed rule would be
similar to those contained in existing exemptive relief, consistent
with existing market practice, or generally more flexible than those
contained within existing exemptive relief.\423\ ETFs that wish to
operate in a manner not covered by the proposed exemptive rule could
seek individual exemptive relief from the Commission.
---------------------------------------------------------------------------

    \423\ As discussed in more detail below, some conditions in the
proposed rule and the scope of the relief provided are less flexible
than those included in certain exemptive orders (e.g., the absence
in the proposed rule of master-feeder relief) and others represent
requirements that were not included in exemptive orders (e.g.,
basket policies and procedures and the recordkeeping requirements).
---------------------------------------------------------------------------

    We believe that proposed rule 6c-11 would establish a regulatory
framework that: (1) Reduces the expense and delay currently associated
with forming and operating certain ETFs unable to rely on existing
orders; and (2) creates a level playing field for ETFs that could rely
on the proposed rule. As such, the proposed rule would enable increased
product competition among certain ETF providers, which could lead to
lower fees for investors, encourage financial innovation, and increase
investor choice in the ETF market.
    Furthermore, the amendments to Forms N-1A and N-8B-2 as well as the
additional website disclosures required by the proposed rule are
intended to improve the information about ETFs available to the market
and to allow

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

B. Economic Baseline

1. ETF Industry Growth and Trends
    The ETF industry has experienced extensive growth since the first
US ETF began trading in 1993.\424\ From 1993 to 2002, an average of 10
new ETFs registered each year and ETF net assets increased by an
average of $10.7 billion annually. Industry growth accelerated from
2003 to 2006, when, on average, 62 new ETFs and $77 billion in net
assets were added to the industry annually. Since 2007, the industry
has seen an average of 141 new ETF entrants and an average growth of
$272.8 billion annually. Since 2007, ETF net assets have grown at an
average rate of 18.4% per year, which compares to 4.2% for closed-end
funds and 9.7% for open-end funds over the same period.\425\
---------------------------------------------------------------------------

    \424\ For the purpose of this release, we focus exclusively on
ETFs that trade on US exchanges.
    \425\ The number and net assets of ETFs are based on a staff
analysis of Bloomberg data. Growth rates for open- and closed-end
funds are based on a staff analysis of Morningstar data.
---------------------------------------------------------------------------

    At the end of December 2017, there were 1,900 registered ETFs that
had a total of $3.4 trillion in net assets, spanning six broad
investment style categories. ETFs are predominantly structured as open-
end funds; however, eight funds that together represented 10.9% of ETF
total net assets ($372.8 billion) were structured as UITs, and 70 ETFs
that together represented 25.1% of total net assets ($854.9 billion)
were structured as a share class of an open-end fund. The chart
illustrates growth in ETF net assets by investment strategy beginning
in 2000 (left-hand side axis). It also tracks the percentage of net
assets invested in actively managed ETFs (right-hand side axis).

[GRAPHIC] [TIFF OMITTED] TP31JY18.017

    Although indexing is still the most common ETF strategy, over time
ETFs have evolved to offer, among other things, active management,
leveraged and inverse investment strategies, and exposure to various
types of foreign securities. At the end of December 2017, 187 ETFs,
structured as open-end funds, employed leveraged or inverse investment
strategies.\426\ In total, leveraged ETFs had total net assets of
$35.26 billion or approximately 1% of all ETF net assets. None of the
eight registered ETFs structured as UITs employed leveraged or inverse
investment strategies. Of the remaining unleveraged ETFs, both index-
based and active, 1,705 funds had combined net assets of $3 trillion
operated as open-end funds, while eight funds had $372.8 billion in net
assets operated as UITs.\427\
---------------------------------------------------------------------------

    \426\ As of the end of December 2017, 1,635 ETFs were neither
organized as a UIT, nor as a share class of an open-end fund, and do
not pursue leveraged or inverse investment strategies. During 2017,
the number of such funds grew by 124. (In the last five years, the
increase in such funds ranged from 90 in 2013 to 181 in 2015.)
    \427\ Bloomberg defines actively managed or index-based managed
funds according to disclosure in the fund prospectus.
---------------------------------------------------------------------------

    There were 206 actively managed ETFs with total net assets of $45.8
billion. The remaining 1,694 funds with combined $3.36 trillion in net
assets were index-based funds. Of these, 1,686 with total net assets of
$2.987 trillion were structured as open-end funds and eight with total
net assets of $372.8 billion were structured as UITs.
    The majority of ETFs, in total 1,456, held some foreign exposure in
their portfolio according to Morningstar data. These ETFs had total net
assets of $2.976 trillion. Of these funds, seven were structured as
UITs and had $350.4 billion in net assets. The remaining 1,449 funds
and $2.63 trillion in net assets were organized as open-end funds. On
average, these ETFs reported foreign exposure of 37.75%. This number
was 57.13% for ETFs structured as UITs and 37.66% for ETFs structured
as open-end funds.\428\
---------------------------------------------------------------------------

    \428\ We estimate funds' foreign holdings on April 11, 2018 from
Morningstar data. For each ETF, foreign holdings of equity and debt
securities are combined to obtain the approximate percentage of
assets invested in foreign securities. Morningstar provided foreign
holding data for 1,724 ETFs. In this data, 268 funds, one of which
is structured as a UIT, reported holding no foreign securities and
176 funds from the original 1,900 are missing foreign holdings data.
---------------------------------------------------------------------------

2. Exemptive Order Process
    As discussed above, ETFs seeking to operate as investment companies
historically have needed exemptive relief from the Commission. Since
the first exemptive relief was granted in 1992, the Commission has
issued approximately 300 exemptive orders to

ETFs. The average number of approved exemptive orders between 1992 and
2006 was approximately 2.5 per year, which has increased to
approximately 25 per year since 2007.
    Based on our review of exemptive orders that granted relief for
unleveraged ETFs between January 2007 and mid-March 2018, the median
processing time from the filing of an initial application to the
issuance of an order was 221 days, although there was considerable
variation.\429\ Depending on the complexity of a fund's application,
some ETF sponsors received exemptive relief in a relatively short
period of time (the 10th percentile of the processing time was 83 days)
while others waited over one year for approval (the 90th percentile of
the processing time was 686 days).
---------------------------------------------------------------------------

    \429\ The earliest order in our sample was approved on 1/17/2007
and the latest order was approved on 4/10/2018.
---------------------------------------------------------------------------

    In addition to the processing time associated with applying for an
exemptive order, Commission staff estimates that the direct cost of a
typical fund's application for ETF relief (associated with, for
example, legal fees) is approximately $100,000, which may vary
considerably depending on the complexity of the prospective fund.
3. Market Participants
    As discussed above, several non-ETF market participants may be
affected by the proposed rule, including fund sponsors, authorized
participants, trading venues, and institutional and retail investors.
    Using data from Bloomberg, we find that there are 83 unique ETF
sponsors with approximately 1,900 ETFs as of December 31, 2017. The
median number of ETFs per sponsor is eight and the mean is 23,
suggesting that a small number of sponsors have a large share of the
ETF market (in terms of number of ETFs). Indeed, the top five sponsors
operate a combined 898 ETFs, whereas the bottom half of sponsors
operate only a combined 121 ETFs.
    An ETF (or one of its service providers) has contractual
arrangements with a set of authorized participants, who can place
orders for the purchase or redemption of creation units with the
ETF.\430\ While we currently lack data on authorized participants, a
2015 survey-based study of fifteen fund sponsors, which together offer
two-thirds of all existing ETFs (covering 90% of all ETF assets), finds
that the average ETF has 34 authorized participant agreements.\431\ The
study further reports that creation and redemption transactions
occurred only on between 10% to 20% of trading days and that only 10%
of the daily activity in all ETF shares (by volume) are creations or
redemptions.\432\
---------------------------------------------------------------------------

    \430\ Some market makers and other market participants engage in
creation and redemptions indirectly through authorized participants.
See supra section I.B. The Commission, however, lacks data on the
number of such market participants.
    \431\ See Antoniewicz, supra footnote 30. While we currently
lack data on authorized participants, we note that, starting July
30, 2018, Form N-CEN Item E.2 will require a fund to provide certain
information regarding its authorized participants, including the
authorized participant's name, the SEC file number, CRD number, and
other information. See Reporting Modernization Adopting Release,
supra footnote 147. This Item, however, will not provide data about
other market participants that may transact through authorized
participants.
    \432\ NSCC is the sole provider of clearing services for ETF
primary market transactions. Whether a creation or redemption order
is eligible to be processed through NSCC depends on the eligibility
for NSCC processing of the securities in the ETF's basket. See
Antoniewicz, supra footnote 30.
---------------------------------------------------------------------------

    ETF shares are mainly traded on securities exchanges.\433\ Table 1
lists the 10 exchanges with the largest average daily ETF trading
volume, measured over the 30 business days ending on February 12, 2018.
The data is from Bloomberg and shows that NYSE Arca handles the largest
portion of ETF trades ($23.8 billion), followed by Nasdaq InterMarket
($12.8 billion), and Cboe BZX Exchange ($11.0 billion).
---------------------------------------------------------------------------

    \433\ In the first quarter of 2018, 68% of ETF trading by dollar
volume was executed on exchanges, 23% over the counter, and 10%
using alternative trading systems (ATSs), based on Trade and Quote
(TAQ) data provided by the New York Stock Exchange, Trade Reporting
Facility (TRF) data provided by FINRA, and ATS information made
publicly available on the FINRA website.

   Table 1--ETFs Listed on National Exchanges and Their Trading Volume
------------------------------------------------------------------------
                                                          Trading volume
                Exchange                  Number of ETFs     (billion)
------------------------------------------------------------------------
NYSE Arca...............................           1,899           $23.8
NASDAQ InterMarket......................           1,537            12.2
Cboe BZX Exchange, Inc..................           1,840            11.0
Cboe EDGX Exchange, Inc.................           1,864             7.4
Cboe BYX Exchange, Inc..................           1,816             4.5
NASDAQ Global Market....................             339             3.2
Nasdaq BX, Inc..........................           1,801             2.7
Chicago Stock Exchange, Inc.............             169             2.5
Cboe EDGA Exchange, Inc.................           1,781             2.4
NASDAQ OMX PSX..........................           1,343             2.2
------------------------------------------------------------------------
The table reports the number of ETFs traded at each exchange and the
  average daily ETF trading volume, measured over the 30 business days
  ending on February 12, 2018. Trading volume is calculated as trade
  price multiplied by the number of shares relating to each price by
  exchange. The figures reflect an analysis by the Commission staff
  using data obtained through a subscription to Bloomberg.

    Both institutional and retail investors participate in the ETF
secondary market. Using combined data from WRDS SEC Analytics Suite,
Morningstar, and the Center for Research in Security Prices (CRSP) from
the first quarter of 2014 to the fourth quarter of 2016, we estimate
that institutions own, on average, 43% of ETF shares, when calculating
the average using equal weights for all ETFs, and 55%, when calculating
the average using total net assets (``TNA'')-based weights. The
difference between the equal-weighted and TNA-weighted average
institutional ownership numbers--43% vs. 55%--suggests that
institutional investors tend to hold larger shares of ETFs with larger
TNA. The table also shows that the median ownership by institutional
investors is 40%. Additionally, the table shows that there is
considerable variation in institutional investor holdings, ranging from
an average for the 5th percentile of 6% to an average for the 95th
percentile of 90%.\434\ However, we observe that the average
institutional holding did not change considerably over time during the
sample period.
---------------------------------------------------------------------------

    \434\ The data we use is from Form 13F filings, which does not
capture all institutional positions because Form 13F does not
require reporting of short positions (which would lead to an
overstatement of institutional ownership) and because not all
institutional investors are required to file the form, for example
because they exercise investment discretion in less than $100
million in Section 13(f) securities (which would lead to an
understatement of institutional ownership).

                                                        Table 2--Institutional Ownership of ETFs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Equal-        TNA-
                           Quarter                              weighted     weighted     SD (%)     P5 (%)    P25 (%)    P50 (%)    P75 (%)    P95 (%)
                                                              average (%)  average (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2014Q1......................................................           40           53         24          6         22         37         56         86
2014Q2......................................................           42           54         25          7         22         37         58         90
2014Q3......................................................           41           55         24          7         23         38         59         88
2014Q4......................................................           43           55         24          6         24         40         60         88
2015Q1......................................................           41           54         24          5         22         38         58         85
2015Q2......................................................           42           55         25          6         23         40         60         91
2015Q3......................................................           44           56         26          7         25         41         62         94
2015Q4......................................................           44           57         26          5         24         43         62         92
2016Q1......................................................           44           57         26          5         24         42         62         92
2016Q2......................................................           43           56         26          6         23         41         61         92
2016Q3......................................................           43           56         26          5         24         41         62         91
2016Q4......................................................           44           57         25          6         24         42         61         91
                                                             -------------------------------------------------------------------------------------------
Average.....................................................           43           55         25          6         23         40         60         90
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports the quarterly institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided
  by the total shares outstanding adjusted for share splits. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles.
  All descriptive stats are equal-weighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using data from 2014Q1
  to 2016Q4 obtained through a subscription to WRDS SEC Analytics Suite and the Center for Research in Security Prices (CRSP).

    Further analysis shows that the ownership structure varies
considerably by the type of ETF. Using Morningstar categories, for the
fourth quarter of 2016, Table 3 below shows that ETFs' equal-weighted
average institutional ownership ranges from 23% for alternative ETFs to
56% for taxable bond ETFs. We also find that TNA-weighted average
institutional ownership is higher than equal-weighted average
institutional ownership for international equity, municipal bond,
sector equity, taxable bond, and U.S. ETFs, suggesting that
institutional investors tend to hold ETFs with larger TNA within these
categories. The converse is true for allocation, alternative and
commodity ETFs. The table also shows that there is large variation
within categories.\435\
---------------------------------------------------------------------------

    \435\ Morningstar category is assigned based on the underlying
securities in each portfolio. Per Morningstar, funds in allocation
categories seek to provide both income and capital appreciation by
investing in multiple asset classes, including stocks, bonds, and
cash. Funds in alternative strategies employ investment approaches
(similar to those used by hedge funds) designed to offer returns
different than those of the long-only investments in the stock,
bond, or commodity markets. International equity portfolios expand
their focus to include stocks domiciled in diverse countries outside
the United States though most invest primarily in developed markets.
Municipal bond strategies are generally defined by state or national
focus and duration exposure. A fund is considered state-specific if
at least 70% of its assets are invested in municipal securities
issued by the various government entities of a single state. Sector-
specific equity funds are usually equity funds, in that they
maintain at least 85% exposure to equity. Fixed Income Taxable bond
portfolios invest at least 80% of assets in securities that provide
bond or cash exposure. U.S. equity portfolios are defined as
maintaining at least 85% exposure to equity and investing at least
70% of assets in U.S.-domiciled securities.

                                      Table 3--Institutional Ownership of ETFs by Morningstar Category for 2016: Q4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Equal         TNA
                           Quarter                              weighted     weighted     SD (%)     P5 (%)    P25 (%)    P50 (%)    P75 (%)    P95 (%)
                                                              average (%)  average (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation..................................................           43           38         26          8         23         36         58         95
Alternative.................................................           23           16         22          2          6         17         33         68
Commodities.................................................           41           38         20         10         29         39         59         71
International Equity........................................           48           63         23         12         31         46         64         91
Municipal Bond..............................................           48           55         16         15         39         50         59         74
Sector Equity...............................................           42           57         22         10         26         40         58         83
Taxable Bond................................................           56           63         21         20         41         57         72         91
U.S. Equity.................................................           45           60         23         11         29         43         59         93
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports the institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided by the
  total shares outstanding adjusted for share splits, by Morningstar Category. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to
  95th percentiles. All descriptive stats are equal-weighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using
  data for 2016Q4 obtained a through subscription to WRDS SEC Analytics Suite and the Center for Research in Security Prices (CRSP).

4. Secondary Market Trading, Arbitrage, and ETF Liquidity
    Unlike shares of open-end funds, ETF shares are traded in the
secondary market at prices that may deviate from the ETF's NAV. As a
result, ETF investors may trade shares at prices that do not
necessarily reflect the intrinsic value of the underlying ETF
assets.\436\ To reduce the frequency and size of ETF premiums and
discounts, our exemptive orders have contained several conditions
designed to facilitate an efficient arbitrage mechanism, help ensure
the proper functioning of the ETF market, and ultimately protect
investors.
---------------------------------------------------------------------------

    \436\ It is possible for both the ETF's NAV per share and its
share price to deviate from the intrinsic value of the ETF's
underlying portfolio. In addition, there may be cases in which the
ETF's share price is closer to the intrinsic value of the ETF's
portfolio than its NAV per share. See, e.g., Madhavan, Ananth, &
Aleksander Sobczyk, Price Discovery and Liquidity of Exchange-Traded
Funds, 14 Journal of Investment Management 2 (2016).
---------------------------------------------------------------------------

    One set of conditions has required that ETFs be listed on a
national stock exchange and that exchanges publish the fund's IIV every
15 seconds for domestic ETFs and every 60 seconds for international
ETFs. Another condition, which was designed to support the effective
functioning of the arbitrage mechanism, is portfolio transparency. All
ETFs in operation today have a provision in their exemptive order that
requires them to provide some degree of transparency regarding their
portfolio

holdings. As discussed above, actively managed ETFs and some ETFs that
track an index from an affiliated index provider have been required to
disclose their holdings prior to the commencement of trading each
business day (i.e., full portfolio transparency). Other index-based
ETFs are permitted to disclose their portfolio holdings indirectly, by
specifying which index they seek to track, as long as the index
provider lists the constituent securities on its website (i.e., index
transparency) or by disclosing the components of their baskets. Based
on a staff review of 100 index-based ETFs, randomly selected from all
index-based ETFs, and 50 actively-managed ETFs, randomly selected from
all actively-managed ETFs, all 150 ETFs maintain a website and provide
the ETF's complete daily portfolio holdings. Therefore, we believe that
all index-based and actively-managed ETFs that could rely on the
proposed rule now, including those that are not subject to a full
transparency condition in their exemptive order, currently provide full
portfolio transparency.\437\
---------------------------------------------------------------------------

    \437\ The samples were randomly drawn from all index-based ETFs
and all actively managed ETFs currently trading according to
Bloomberg. We recognize that the selection of ETFs examined by Staff
overweights the sample of actively managed ETFs relative to the
entire population of actively managed ETFs. Our sampling procedure
was done to avoid small sample bias as equally proportioned sampling
would call for a survey of approximately 2 actively managed funds.
---------------------------------------------------------------------------

    The degree to which ETFs have flexibility in choosing the
composition of creation and redemption baskets plays an important role
for the effective functioning of the arbitrage mechanism. A more
flexible basket composition may, among other considerations discussed
in more detail below, allow authorized participants to exchange baskets
for ETF shares at a lower cost, thus increasing arbitrage activity and
efficient functioning of markets.\438\ The extent to which our
exemptive orders have allowed ETFs to use creation and redemption
baskets that deviate from a pro rata representation of the ETF's
portfolio holdings (i.e., basket flexibility) has evolved over time.
ETFs that received their exemptive orders in the early period from
1992-1995 were mostly structured as UITs and, as a result, the creation
and redemption baskets were mostly a strict pro rata representation of
the index, plus some cash balancing amount. From 1996 to 2006,
exemptive orders for ETFs, which then were mostly structured as open-
end funds, did not expressly limit baskets to a pro rata representation
of the ETF's portfolio holdings. From 2006 to 2010, the Commission
limited basket flexibility in exemptive orders for ETFs organized as
open-end funds by requiring baskets to generally represent a pro rata
slice of the fund's portfolio holdings and including conditions
limiting the circumstances under which substitutions would be
permitted. Starting around 2011, the exemptive orders required baskets
to be a strict pro rata slice of the portfolio holdings and, in
addition, to be the same for all authorized participants, with minor
exceptions.\439\
---------------------------------------------------------------------------

    \438\ A more flexible basket composition may create potential
risks such as dumping and cherry-picking, as discussed in more
detail below.
    \439\ Our exemptive orders have generally included future funds
relief to allow sponsors to form and operate new ETFs without having
to obtain additional exemptive orders. See supra footnote 5. As a
result, the Commission does not have records that would allow us to
determine the specific exemptive order under which any particular
fund is operating. We thus do not quantify the number of funds
operating under each of the different basket flexibility conditions
included in our orders.
---------------------------------------------------------------------------

    For ETFs that hold foreign investments in their portfolio, the
redemption process for these securities may take more than the seven
days specified under section 22(e) of the Act. The Commission has
granted exemptive relief to certain ETFs who hold foreign investments,
in many instances up to 15 days, to satisfy redemption of a foreign
investment.
    Many exemptive orders have required ETFs to disclose on their
website, free of charge, the previous day's NAV and the price of the
ETF shares, as well as the premium or discount associated with the
ETF's share price at the market close.\440\ Based on a staff review of
the websites of 150 randomly selected ETFs, all of which provided the
previous day's NAV, price of the ETF shares (one active ETF provided a
price based on the midpoint between the bid and ask prices while the
remainder of the active and all index-based ETFs provided closing
prices), as well as the premium or discount associated with the ETF
share price at the market close, we believe that all ETFs that could
rely on the proposed rule currently disclose this information on their
website.\441\
---------------------------------------------------------------------------

    \440\ In addition, some funds disclose some historical
information on premiums and discounts on their website pursuant to
the flexibility provided on Form N-1A. See supra section II.C.6.c.
    \441\ See supra footnote 437.
---------------------------------------------------------------------------

    ETFs have also been required to have contractual agreements with
authorized participants to purchase or redeem ETF shares in creation
unit aggregations in exchange for a basket of securities and other
assets. Having an accurate estimate of the current ETF share value and
an opportunity to efficiently create or redeem ETF shares in creation
unit sizes allows authorized participants to engage in arbitrage
activity that brings the market price of ETF shares and the value of
the ETF's portfolio closer together. As noted earlier, market
participants can also engage in arbitrage activity in the secondary
market by taking a long and short position on the ETF shares and the
underlying basket assets. For example, if the ETF is trading at a
premium relative to the NAV per share of the ETF's portfolio, a market
participant can short the ETF and buy the underlying basket assets in
proportion to the ETF shares. Alternatively, if the ETF is trading at a
discount relative to NAV per share, a market participant may buy the
ETF and short the underlying basket assets in proportion to the ETF
shares. Then the market participant could realize a profit by closing
the position when the gap between the ETF's share price and NAV per
share gets closer to zero. This trading activity could help close the
gap even further.
    However, authorized participants, other market participants, and
arbitrageurs acting in secondary markets may incur costs and be exposed
to risk when engaging in arbitrage. The costs include bid-ask spreads
and transaction fees associated with the arbitrage trades. In addition,
during the time it takes arbitrageurs to execute these trades, they are
exposed to the risk that the prices of the basket assets and the ETF
shares change. As a consequence, arbitrageurs may decide to wait for
any mispricing between the market price of ETF shares and NAV per share
to widen until the expected profit from arbitrage is large enough to
compensate for any additional costs and risks associated with engaging
in the transaction.
    Using data from Bloomberg, we find that ETFs, on average, trade at
a price slightly higher than the NAV per share (i.e., at a premium), as
shown in Table 4 below. The equal-weighted and TNA-weighted average
premium/discount over the last 15 years for all ETFs in the dataset
are, respectively, 0.074% and 0.065%, and the median is 0.024%,
indicating that the prices of ETF shares are, on average, higher than
the NAV per share. One study finds similar results and concludes that,
on average, ETF market prices tend to reflect NAV per share closely.
However, consistent with the study, we find that ETF premiums/discounts
vary significantly.\442\ For example, we find

that the average premiums/discounts ranges from 0.03% in 2003 to 0.14%
in 2009, and the average standard deviation of premiums/discounts
ranges from 0.16% in 2017 to 0.60% in 2008. Moreover, not all ETF
shares trade at a premium. For example, the table shows, in a given
year, at least 25% of ETF shares trade at a discount, at an average
discount of -0.044% between all years (see the column P25).
---------------------------------------------------------------------------

    \442\ Commenters to our 2015 ETP Request for Comment, supra
footnote 9, report qualitatively similar results. See, e.g., Comment
Letter of Eaton Vance Corp. to Request for Comment on Exchange-
Traded Products (File No. S7-11-15) (Aug. 17, 2015).

                    Table 4--Time-Series Averages of Cross-Sectional Descriptive Statistics of Premium/Discount (%) Using Daily Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Equal         TNA
                            Year                                weighted     weighted       SD         P5        P25        P50        P75        P95
                                                                average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
2003........................................................        0.134        0.030      0.235     -0.215     -0.061      0.015      0.091      0.343
2004........................................................        0.095        0.039      0.262     -0.259     -0.060      0.023      0.095      0.549
2005........................................................        0.058        0.078      0.276     -0.221     -0.038      0.036      0.111      0.617
2006........................................................        0.074        0.082      0.338     -0.344     -0.042      0.029      0.141      0.671
2007........................................................        0.140        0.079      0.386     -0.389     -0.060      0.034      0.198      0.639
2008........................................................        0.087        0.100      0.603     -0.785     -0.142      0.055      0.343      1.054
2009........................................................        0.126        0.143      0.537     -0.557     -0.079      0.020      0.342      1.027
2010........................................................        0.072        0.066      0.353     -0.436     -0.046      0.022      0.164      0.635
2011........................................................        0.035        0.068      0.412     -0.550     -0.040      0.021      0.170      0.766
2012........................................................        0.058        0.072      0.286     -0.309     -0.019      0.022      0.141      0.582
2013........................................................        0.060        0.035      0.278     -0.352     -0.025      0.017      0.091      0.432
2014........................................................        0.046        0.038      0.216     -0.245     -0.013      0.016      0.082      0.351
2015........................................................        0.036        0.042      0.235      -0.25     -0.015      0.015      0.079      0.401
2016........................................................        0.026        0.044      0.228     -0.222     -0.015      0.013      0.091      0.389
2017........................................................        0.069        0.058      0.159     -0.085     -0.008      0.015      0.094      0.332
                                                             -------------------------------------------------------------------------------------------
Average.....................................................        0.074        0.065      0.320     -0.348     -0.044      0.024      0.149      0.586
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The TNA-Weighted Average is weighted based
  on an ETF's previous month's total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Fund premiums
  or discounts are from daily Bloomberg data covering 1,838 funds for a total of 2,732,620 daily observations. Per Bloomberg, premium/discount (%) is
  the difference between the fund's closing price on the day of the most recent Net Asset Value (NAV) and the NAV of the fund on that day. The data
  covers the period from 01/03/2003 to 08/31/2017.

    Premiums and discounts to NAV per share also vary considerably by
the type of assets that make up the ETF.\443\ We use Morningstar
investment categories to divide ETFs into groups of similar assets and,
in Table 5, report the time-series averages of cross-sectional
descriptive statistics for premiums/discounts in the different
Morningstar Investment Categories. We find that the TNA-weighted
average premium/discount ranges from as low as 0.003% for alternative
to 0.197% for taxable bond ETFs. The results are qualitatively similar
for equal-weighted average premium/discounts.
---------------------------------------------------------------------------

    \443\ See Engle Article, supra footnote 95.

           Table 5--Time-Series Averages of Cross-Sectional Descriptive Statistics of Premium/Discount (%) by Morningstar Investment Category
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Equal         TNA
                          Category                              weighted     weighted       SD         P5        P25        P50        P75        P95
                                                                average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation..................................................        0.072        0.083      0.233     -0.119     -0.039      0.047      0.237      0.295
Alternative.................................................        0.007        0.003      0.345     -0.404     -0.126     -0.004      0.116      0.468
Commodities.................................................        0.211        0.112      0.481     -0.545      0.011      0.084      0.158      1.007
International Equity........................................        0.185        0.193      0.440     -0.482     -0.068      0.204      0.458      0.833
Municipal Bond..............................................        0.086        0.076      0.314     -0.358     -0.090      0.061      0.273      0.532
Sector Equity...............................................        0.031        0.013      0.189     -0.243     -0.074      0.005      0.085      0.304
Taxable Bond................................................        0.207        0.197      0.206     -0.068      0.088      0.188      0.273      0.539
U.S. Equity.................................................       -0.001        0.005      0.079     -0.104     -0.036      0.008      0.048      0.113
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The funds are first divided into groups
  based on Morningstar categories. The TNA-Weighted Average is weighted based on an ETF's previous month's total net assets. SD refers to standard
  deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Fund premiums or discounts are from daily Bloomberg data covering 1,838 funds for a
  total of 2,732,620 daily observations. Per Bloomberg, premium/discount (%) is the difference between the fund's closing price on the day of the most
  recent Net Asset Value (NAV) and the NAV of the fund on that day. The data covers the period from 01/03/2003 to 08/31/2017.

    When the ETF arbitrage mechanism functions effectively, ETFs also
should trade at smaller bid-ask spreads.\444\ As shown in Table 6, the
TNA-weighted average bid-ask spread, as a percentage of the mid-price,
has declined from 0.062% in 2012 to 0.030% in 2017.\445\ The table
shows a qualitatively similar decreasing pattern when using equal-
weighted average bid-ask spreads. The percentiles of the bid-ask
spreads also follow a decreasing trend. For example, we observe that
the median bid-ask spread drops from 0.024% in 2012 to 0.016% in 2017
(see column P50). The table also shows that the bid-ask spread varies
considerably. For example, the average standard deviation of the bid-
ask spread (0.081%) is almost twice as large as its average (0.043%).
---------------------------------------------------------------------------

    \444\ See, e.g., CFA Guide, supra footnote 370.
    \445\ This analysis starts in 2012 because the available data
begins in that year.

                         Table 6--Time-Series Averages of Cross-Sectional Descriptive Statistics of Relative Bid-Ask Spread (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Equal         TNA
                            Year                                weighted     weighted       SD         P5        P25        P50        P75        P95
                                                                average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012........................................................        0.370        0.062      0.125      0.007      0.016      0.024      0.049      0.275
2013........................................................        0.330        0.053      0.106      0.006      0.014      0.022      0.048      0.212
2014........................................................        0.273        0.038      0.061      0.005      0.012      0.020      0.045      0.114
2015........................................................        0.324        0.039      0.067      0.005      0.012      0.019      0.045      0.122
2016........................................................        0.372        0.037      0.066      0.005      0.011      0.019      0.038      0.111
2017........................................................        0.349        0.030      0.063      0.004      0.009      0.016      0.030      0.086
                                                             -------------------------------------------------------------------------------------------
Average.....................................................        0.336        0.043      0.081      0.005      0.012      0.020      0.043      0.153
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The TNA-Weighted Average is weighted
  based on an ETF's previous month's total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask
  spreads are from daily Bloomberg data covering 1,838 funds for a total of 1,843,729 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is
  the average of all bid/ask spreads taken as a percentage of the mid-price. The data covers the period from 01/03/2003 to 08/31/2017.

    Table 7 reports bid-ask spreads for ETF shares by Morningstar
category. US Equity ETFs have the smallest average bid-ask spread of
0.027%, whereas allocation ETFs--funds that seek to provide both income
and capital appreciation by investing in multiple asset classes,
including stocks, bonds, and cash strategy--have the largest average
bid-ask spread of 0.223%.

            Table 7--Time-Series Averages of Cross-Sectional Descriptive Statistics of Relative Bid-Ask Spread (%) by Morningstar Investment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Equal         TNA
                          Category                              weighted     weighted       SD         P5        P25        P50        P75        P95
                                                                average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation..................................................        0.590        0.223      0.307      0.073      0.084      0.147      0.227      0.642
Alternative.................................................        0.391        0.094      0.162      0.017       0.03      0.047      0.089      0.315
Commodities.................................................        0.353        0.041      0.060      0.009      0.009      0.009      0.061      0.118
 International Equity.......................................        0.450        0.072      0.110      0.017      0.024      0.030      0.086      0.212
Municipal Bond..............................................        0.281        0.100      0.111      0.038      0.045      0.064      0.107      0.306
Sector Equity...............................................        0.285        0.061      0.092      0.015      0.018      0.036      0.062      0.198
Taxable Bond................................................        0.306        0.043      0.080      0.011      0.014      0.016      0.041      0.159
U.S. Equity.................................................        0.207        0.027      0.041      0.006      0.012      0.014      0.029      0.081
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The funds are first divided into
  groups based on Morningstar categories. The mean is weighted based on an ETF's previous month TNA and the data covers the period from 01/03/2012 to 08/
  31/2017. SD, Min and Max refer to standard deviation, minimum and maximum. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask spreads are
  from daily Bloomberg data covering 1,838 funds for a total of 1,843,729 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is the average of
  all bid/ask spreads taken as a percentage of the mid-price.

    The summary statistics presented thus far in this section suggest
that the arbitrage mechanism generally functions effectively during
normal market conditions. However, as described above in section III.B,
the Commission has observed periods of market stress during which the
arbitrage mechanism has functioned less effectively and during which
there were significant deviations for some ETFs between market price
and NAV per share and when bid-ask spreads widened considerably. We
note, however, that these conditions only persisted for very short
periods of time for the periods of market stress we have observed,
suggesting that the arbitrage mechanism recovered quickly.\446\
---------------------------------------------------------------------------

    \446\ See, e.g. Madhavan Article, supra footnote 130.
---------------------------------------------------------------------------

C. Benefits and Costs of Proposed Rule 6c-11 and Amendments to Forms N-
1A and N-8B-2

    The Commission is sensitive to the economic effects that could
result from proposed rule 6c-11 and amendments to Forms N-1A and N-8B-
2, including benefits and costs. However, as discussed in further
detail below, the Commission is unable to quantify many of the economic
effects, either because they are inherently difficult to quantify or
because we lack the information necessary to provide a reasonable
estimate.
1. Proposed Rule 6c-11
    Proposed rule 6c-11 would allow new ETFs to operate in reliance on
a rule rather than individual exemptive orders if they meet the
requirements and conditions of the rule. In addition, we propose to
rescind all existing ETF exemptive orders, with the exception of: (i)
The section 12(d)(1) relief included in those orders; \447\ and (ii)
orders relating to ETFs structured as UITs, leveraged ETFs, and those
that are organized as a share class of a mutual fund.\448\ This section
first evaluates the general considerations associated with the proposed
rulemaking and then discusses the effects of the specific requirements
and conditions of the proposed rule.
---------------------------------------------------------------------------

    \447\ The proposal would however rescind relief that has been
provided to allow master-feeder arrangements for those ETFs that do
not currently rely on the relief. In addition, we propose to
grandfather existing master-feeder arrangements involving ETF feeder
funds, but prevent the formation of new ones, by amending relevant
exemptive orders.
    \448\ ETFs relying on exemptive orders that we propose to
rescind could no longer rely on their orders to launch additional
ETFs.
---------------------------------------------------------------------------

a. General Considerations
    Proposed rule 6c-11 would grant exemptive relief from the
provisions of the Act that would otherwise prohibit several features
essential to the ETF structure. This section evaluates the overall
effect of reducing the expense and delay of operating certain new ETFs
by granting this exemptive relief as part of a rule rather than through
the individual exemptive order process.
    As the requirements and conditions of the proposed rule are either
similar to those contained in existing exemptive orders, consistent
with market practice, or generally provide more flexibility, we
anticipate that the proposed rule and the related rescission of ETF
exemptive

relief would not require any existing ETFs whose exemptive relief would
be rescinded to significantly change the way they operate. Conversely,
some funds whose exemptive orders contain conditions that are more
restrictive than those contained in the proposed rule may decide to
change the way they operate in order to make use of such increased
flexibility.
    Relative to the baseline, proposed rule 6c-11 would eliminate the
costs associated with applying to the Commission for an exemptive order
to form and operate as an ETF for funds relying on the rule.
Specifically, the process of forming new ETFs in reliance on the
proposed rule would be quicker, more predictable, less complex, and
therefore less costly than obtaining an exemptive order as new ETFs are
currently required to do. ETFs that could not rely on the rule, which
includes those structured as UITs, leveraged ETFs, and those that are
organized as a share class of a mutual fund, would continue to be
required to apply for an exemptive order to form and operate.\449\
---------------------------------------------------------------------------

    \449\ As discussed below, some ETFs would incur additional costs
as a result of the rule's requirement to adopt and implement written
policies and procedures that govern the construction of basket
assets and the process that will be used for the acceptance of
basket assets, the rule's additional website disclosure
requirements, and the proposed amendments to Forms N-1A and N-8B-2.
The operation of such ETFs may therefore become more costly, on
balance, to the extent that these costs are not offset by the
benefits from the other parts of the proposed rule, such as the
increased basket flexibility and, for new funds, the reduced costs
of forming the fund.
---------------------------------------------------------------------------

    As described above in section IV.B.2, we estimate that the cost for
a typical ETF of filing for exemptive relief is $100,000. In addition,
based on our review of exemptive orders that granted relief for
unleveraged ETFs between January 2007 and mid-March 2018, the median
processing time from the filing of an initial application to the
issuance of an order was 221 days, although there was considerable
variation. Thus, any new ETF planning to operate within the parameters
set forth by the proposed rule would save this expected cost and avoid
this delay. In addition, such ETFs would avoid the uncertainty about
the length of the delay associated with the exemptive order process,
allowing sponsors to better control the timetable for launching a new
ETF product in a way that maximizes benefits to its business.
Conversely, funds that are not able to comply with the conditions of
the rule would continue to need to apply for an exemptive order.
Assuming that the number of new ETFs seeking to form and operate under
the proposed rule that would otherwise have needed to apply for
exemptive relief is equal to the average number of ETFs that have
applied for exemptive relief since 2007, these cost and time savings
would accrue to approximately 25 ETFs per year.\450\ Using this
assumption, the annual costs savings to this group of ETF sponsors
would equal $2.5 million.\451\ We are unable to quantify the benefit a
new ETF would derive from avoiding the delay and the uncertainty about
the length of the delay associated with the exemptive order process as
the cost of a delayed registration for a new ETF is inherently
difficult to measure.
---------------------------------------------------------------------------

    \450\ Compared to the baseline, these cost and time savings
would only accrue to such new ETFs whose sponsors have not received
exemptive relief that would allow such ETFs to operate.
    \451\ This estimate is based on the following calculation: 25 x
$100,000 = $2,500,000.
---------------------------------------------------------------------------

    By eliminating the need for ETFs that can rely on the proposed rule
to seek an exemptive order from the Commission, the proposed rule would
also eliminate certain indirect costs associated with the exemptive
application process. Specifically, ETFs that apply for an order forgo
potential market opportunities until they receive the order, while
others forgo the market opportunity entirely rather than seek an
exemptive order because they have concluded that the cost of seeking an
exemptive order would exceed the anticipated benefit of the market
opportunity.
    In addition, we believe that the proposed rule would make it easier
for some fund complexes to ensure that each ETF in the complex is in
compliance with regulations. Specifically, we anticipate that it would
be easier, and thus less costly, for ETF complexes that today operate
funds under multiple exemptive orders to ensure compliance with a
single set of requirements and conditions contained in the proposed
rule rather than with multiple exemptive orders to the extent that the
orders vary in the requirements and conditions they contain.
    We acknowledge that fund complexes may initially incur costs
associated with assessing the requirements of the proposed rule.
However, we believe that these costs would be relatively small.\452\ In
addition, we anticipate that it would be easier for third-party
providers, such as lawyers and compliance consultants, to offer
services that help ETFs ensure compliance with the proposed rules,
which will have broad applicability, than is currently the case with
ETFs relying on exemptive orders with varying conditions. As a result,
third party service providers may be able to reduce the price of their
services, compared to the baseline, for ETFs that could rely on the
proposed rule, which may partially or fully offset the initial costs of
studying the requirements of the proposed rulemaking that ETFs may
incur.
---------------------------------------------------------------------------

    \452\ We estimate that assessing the requirements of the
proposed rule would require 5 hours of a compliance manager ($298
per hour) and 5 hours of a compliance attorney ($352 per hour),
resulting in a cost of $6,500 (10 x $298 + 10 x $352) per fund. The
total cost for all 1,635 ETFs that could rely on the proposed rule
would thus be $10,627,500 (1,635 x $6,500). The Commission's
estimates of the relevant wage rates are based on salary information
for the securities industry compiled by the Securities Industry and
Financial Markets Association's Office Salaries in the Securities
Industry 2013. The estimated wage figures are modified by Commission
staff to account for an 1,800-hour work-year and multiplied by 2.93
to account for bonuses, firm size, employee benefits, overhead, and
adjusted to account for the effects of inflation. See Securities
Industry and Financial Markets Association, Report on Management &
Professional Earnings in the Securities Industry 2013 (``SIFMA
Report'').
---------------------------------------------------------------------------

    We expect that the proposed rule also would benefit ETF investors
to the extent it would remove a possible disincentive for ETF sponsors
to form and operate new ETFs that provide investors with additional
investment choices for which these sponsors currently do not have
relief. As noted above, the direct and indirect costs of the exemptive
application process may discourage potential sponsors, particularly
sponsors interested in offering smaller, more narrowly focused ETFs
that may serve the particular investment needs of certain investors. By
eliminating the need for individual exemptive relief we anticipate that
the proposed rule would accelerate the rate at which the ETF industry
would otherwise grow. In those circumstances, the proposed rule would
provide ETF investors with greater investment choices.
    As we discuss below in section IV.D, we believe that the proposed
rule could increase competition in the ETF market as a whole, which
could also lead to lower fees. Any effect of increased competition on
fees would likely be larger for segments of the ETF market that
currently may be less competitive (e.g., active ETFs) and smaller for
segments of the market that currently may be more competitive (e.g.,
index-based ETFs tracking major stock indices).
    Additionally, some types of funds could experience reductions in
trading costs associated with bid-ask spreads or premiums and discounts
to NAV per share. Specifically, as discussed below in section IV.C.1.c,
the proposed rule's increased basket flexibility could reduce

the cost of arbitrage for authorized participants of fixed-income,
international and actively managed ETFs more than for authorized
participants and other market participants of other types of ETFs. This
could potentially lead to a reduction in costs for investors associated
with bid-ask spreads and premiums and discounts to NAV per share for
fixed-income and international ETFs that could be significantly smaller
or immaterial for other types of ETFs.
    As discussed above, by eliminating the need for individual
exemptive relief, we anticipate that the proposed rule would, over
time, lead to an increase in ETFs that can meet the requirements and
conditions of the rule and thus reinforce the current growth trend in
the ETF industry. In addition, the proposed rule would increase demand
for such ETFs, to the extent that such ETFs lower their fees to
investors and investors are sensitive to fees.\453\ To the extent that
some ETFs would experience larger reductions in trading costs (e.g.,
fixed-income, international, and active) or larger increases in
competition (e.g., actively managed), demand for these types of ETFs
would likely increase more than for other types of ETFs. The increased
demand would likely be due in part to investors substituting away from
comparable types of funds, such as mutual funds, and possibly due to
investors increasing the rate at which they save.\454\ Consequently,
the proposed rule could increase total assets of ETFs and could
decrease total assets of other funds, such as mutual funds. The size of
these effects would depend on the degree to which ETFs would lower
their fees or experience reduced trading costs, as well as on the
sensitivity of investor demand for ETFs and other funds to changes in
ETF fees and trading costs. We are unable to quantify these effects on
investor demand for various types of funds, in part, because we cannot
estimate the extent to which funds would lower their fees or experience
reduced trading costs and how lower fees and trading costs could change
investor demand.
---------------------------------------------------------------------------

    \453\ There is research to support that fund investors are
sensitive to fees. For instance, one paper (Erik R. Sirri & Peter
Tufano, Costly Search and Mutual Fund Flows, 53 The Journal of
Finance 5 (1998)) finds that ``lower-fee funds and funds that reduce
their fees grow faster''. However, we acknowledge that there are
studies that suggest that investors' sensitivity to fees may be
limited. For instance, one experimental study (James J. Choi, David
Laibson, & Brigitte C. Madrian, Why does the law of one price fail?
An experiment on index mutual funds, 23 The Review of Financial
Studies 4 (2010)) finds that investors may not always pick the
lowest-fee fund when presented with a menu of otherwise identical
funds to choose from. In addition, other studies (e.g., Michael J.
Cooper, Michael Halling, & Wenhao Yang, The Mutual Fund Fee Puzzle,
Working Paper (2016)) find evidence of significant fee dispersion
among mutual funds, even after controlling for other observable
differences between funds. While these studies investigate the
sensitivity of investors to fees of mutual funds rather than ETFs,
we believe that these results are likely hold for ETFs as well. We
are not aware of any studies that specifically study the sensitivity
of ETF investors to fees.
    \454\ Investments in ETFs are one of many ways for investors to
save. If investors choose to increase their investment in ETFs,
there can be two sources for this additional investment: (1) An
increase in overall savings and (2) a decrease in savings allocated
to other investments, such as mutual funds. These two sources are
not mutually exclusive, so that an increase in ETF investments can
be accompanied by both an increase in overall savings and a decrease
in savings invested elsewhere, for example in mutual funds.
---------------------------------------------------------------------------

    Since ETFs are traded in the secondary market, an increase in total
assets of ETFs would likely coincide with larger trade volumes for the
exchanges where ETFs are traded, as well as the clearing agencies and
broker-dealers involved in these trades. To the extent that these
market participants are compensated by volume, the proposed rule would
thus benefit them by leading to an increase in revenues.
    In addition, we expect the proposed rule to remove applications for
more standard forms of exemptive relief from consideration, leaving for
staff review only applications for more complex or novel exemptive
relief that falls outside the parameters of the proposed rule. To the
extent that this speeds up the processing time for these remaining
applications, the proposal may reduce the indirect costs of forming and
operating for funds that seek to operate outside its parameters.
b. Conditions for Reliance on Proposed Rule
    Proposed rule 6c-11 contains several conditions that are designed
to facilitate an effective arbitrage mechanism, reduce costs, and
inform and protect investors. Beyond the general impact of reducing the
expense and delay of new ETFs discussed above, much of the codification
of conditions in proposed rule 6c-11 does not offer any additional
benefits or costs when measured against the baseline, as they are
generally codifications of the current regulatory practice. However,
some conditions are departures from current exemptive orders or current
market practice and we discuss the effects of these departures in more
detail below.
i. Conditions We Believe May Facilitate an Effective Arbitrage
Mechanism
    Arbitrage is the practice of buying and selling equivalent or
similar assets (or portfolios of assets) in different markets to take
advantage of a price difference.\455\ As a consequence, arbitrageurs
generate price pressure that works to equalize the prices of these
assets across different markets. Arbitrage is thus important for
investors as it helps ensure that asset prices reflect market
fundamentals (i.e., are efficient) irrespective of the market in which
they are traded.
---------------------------------------------------------------------------

    \455\ See, e.g., Jonathan B. Berk & Peter DeMarzo, Corporate
Finance, 3rd Ed (2013).
---------------------------------------------------------------------------

    The ETF structure makes use of such an arbitrage mechanism with the
goal of establishing a close link between the price of an ETF's shares
and the NAV per share of the ETF portfolio. Specifically, as discussed
above, the combination of the creation and redemption process with the
secondary market trading in ETF shares provides arbitrage opportunities
that, if effective, help keep the market price of ETF shares at or
close to the NAV per share of the ETF and also help reduce bid-ask
spreads of ETF shares. Smaller deviations of ETF prices from the NAV
per share of the ETF benefit investors as they allow investors to
transact in ETF shares at prices closer to the value of the ETF's
underlying portfolio of securities. Similarly, small bid-ask spreads
for ETF shares benefit investors as they reduce the cost to trading ETF
shares.\456\
---------------------------------------------------------------------------

    \456\ For a detailed discussion of the ETF arbitrage mechanism,
see, e.g., CFA Guide, supra footnote 370.
---------------------------------------------------------------------------

    There are several factors that are important for arbitrageurs to
determine the existence of arbitrage opportunities and execute an
arbitrage strategy effectively. First, when the assets involved in the
arbitrage are similar but not the same, as is the case for ETFs,
arbitrage will be more effective the more closely the prices of the two
assets track each other and the more transparency arbitrageurs have
into any factors that may cause price differences between the two
assets. In addition, arbitrage requires that arbitrageurs have the
ability to enter into the trades necessary to execute the arbitrage
strategy, and arbitrage is more effective the smaller and more
predictable the associated trading costs are. The proposed rule
contains several provisions (many codifying current exemptive orders)
that take these considerations into account and are designed to promote
the effective functioning of the arbitrage mechanism for ETFs.
    First, the proposed rule would require ETFs relying on the rule to
adopt and implement written policies and procedures that govern the
construction of basket assets and the process that will be used for the
acceptance of basket assets, including policies and

procedures specific to the creation of custom baskets.
    As discussed in section II.C.5.a, the proposed additional policies
and procedures requirements for custom baskets are designed to reduce
the potential for cherry-picking, dumping, and other potential abuses
by authorized participants. We acknowledge that this principles-based
approach may not be effective at preventing all such abuses by
authorized participants. However, as proposed, ETFs would be required
to maintain records related to the custom baskets used, which would
allow the Commission to examine for potential abuses.
    As outlined above, current exemptive orders contain varying
provisions for basket flexibility. However, based on a staff review of
existing orders, we believe that the existing ETFs that would operate
under the proposed rule and have their exemptive orders rescinded would
not be required to change how they construct their baskets, because the
proposed rule would give ETFs the ability to implement policies and
procedures for basket flexibility, subject to certain enumerated
requirements for the custom basket policies and procedures. In
addition, we expect that some existing ETFs that would operate under
the proposed rule would be able to implement policies and procedures
with respect to basket flexibility that would give them more
flexibility than what is allowed by their existing exemptive orders.
    We believe that fixed-income, international, and actively managed
ETFs would particularly benefit from the increased basket flexibility
the rule would afford compared to existing exemptive orders.
Specifically, the increased basket flexibility should allow fixed-
income ETFs to avoid losing hard-to-find bonds when meeting redemptions
or to use sampling techniques to construct baskets that are composed of
fewer individual bonds and thus reduce trading costs for authorized
participants. Similarly, international ETFs would be able to tailor
their creation and redemption baskets to accommodate difficulties in
transacting in certain international securities. In addition, actively
managed ETFs would, in certain instances, be able to use the increased
basket flexibility to acquire or dispose of securities by adjusting the
composition of the creation or redemption basket rather than by
directly purchasing or selling the securities. In these instances,
actively managed funds would be able to reduce certain transaction
costs, such as those associated with bid-ask spreads.
    For these reasons we believe the proposed rule would benefit ETFs
that make use of the increased basket flexibility the rule affords as
well as their investors to the extent that ETFs are able to implement
procedures that facilitate the arbitrage mechanism or reduce costs for
the ETFs. Due to a lack of data, however, we are unable to quantify the
number of ETFs that would choose to implement policies and procedures
to increase basket flexibility, and thus the potential benefits arising
to ETFs and their investors.
    To the extent that existing ETFs do not already have policies and
procedures governing basket assets in place, ETFs would incur a cost
associated with developing and implementing such policies and
procedures.\457\ However, such costs may be partially or totally offset
by the basket flexibility discussed above. As discussed in section
IV.B, we estimate that an average ETF would incur an initial cost of
$10,268 \458\ associated with setting up the process for documenting
the construction and acceptance of baskets and with documenting and
adopting the custom basket policies and procedures. In addition, we
estimate that an average ETF would incur an ongoing cost of $3,985
\459\ each year to review and update its custom basket policies and
procedures as well as its process for documenting the construction and
acceptance of baskets. We thus estimate that the total industry cost
associated with the policies and procedures requirement in the proposed
rule for ETFs that could rely on the rule in the first year would equal
$23,303,655.\460\
---------------------------------------------------------------------------

    \457\ While exemptive orders do not require ETFs to have
policies and procedures for basket assets in place, we believe that
some ETFs may currently have methodologies or compliance policies
for basket assets in place.
    \458\ See infra footnote 553.
    \459\ See infra footnote 554.
    \460\ This estimate is based on the following calculation:
($10,268 + $3,985) x 1,635 ETFs = $23,303,655. This estimate may be
an over-estimate in that it assumes that all ETFs, regardless of
their actual use of custom baskets, would implement policies and
procedures for custom basket assets.
---------------------------------------------------------------------------

    Second, the proposed rule would require an ETF to disclose
prominently on its website the portfolio holdings that will form the
basis for the next calculation of NAV per share. We believe that this
requirement supports the effective functioning of the arbitrage
mechanism as it allows authorized participants to identify arbitrage
opportunities and chose an appropriate hedging strategy.
    As discussed above in section III.B.4, the requirements for
portfolio transparency in existing exemptive orders have varied.\461\
As also discussed in section III.B.4, based on a staff review of ETFs'
websites, we understand that all ETFs that could rely on the proposed
rule currently provide daily full portfolio transparency, including all
actively managed ETFs, and thus already bear ongoing costs associated
with maintaining such disclosures.\462\ However, we believe that the
ETFs that could rely on the proposed rule would incur a one-time cost
associated with reviewing whether their current portfolio disclosure is
compliant with the requirements of proposed rule 6c-11 and, if
necessary, make changes to the information that is presented on their
website.\463\ We estimate this one-time cost to be $1,939.50 for the
average ETF, resulting in an aggregate one-time cost of $3,171,082.50
for all ETFs that could rely on the proposed rule.\464\
---------------------------------------------------------------------------

    \461\ Actively managed ETFs and some ETFs that track an index
from an affiliated index provider have been required to disclose
their holdings prior to the commencement of trading each business
day (i.e., full portfolio transparency). Other index-based ETFs are
permitted to disclose their portfolio holdings indirectly, by
specifying which index they seek to track, as long as the index
provider lists the constituent securities on its website (i.e.,
index transparency) or by disclosing the components of their
baskets. Some index-based ETFs have been required to provide full
portfolio transparency. See discussion of portfolio transparency,
supra section II.C.4.a; see also supra footnote 207 and accompanying
text.
    \462\ From a staff review of ETF websites, the sampled index and
actively-managed ETFs already provide daily portfolio holdings.
Extrapolating the sampled results to the entire universe of ETFs,
ETFs in general should bear no additional costs above the baseline
to collect and maintain on their websites these holdings. If some
ETFs that were not sampled, however, do not currently maintain on
their websites their daily portfolio holdings, Commission staff
estimates that an ETF each year would spend approximately 5 hours of
professional time to update the relevant web page daily with this
information at a cost of $1,405.50. See supra note 537. We
preliminarily believe that the number of ETFs that would have to
bear these additional costs would be small due to our experience
with the sampled ETFs.
    \463\ The proposed rule would require that portfolio holdings
information be presented and contain information regarding
description, amount, value and/or unrealized gain/loss (if
applicable) in the manner prescribed within Article 12 of Regulation
S-X.
    \464\ This estimate is based on the following calculations: 3
hours (for website development) x $296.50 per hour (blended rate for
a senior systems analyst ($274) and senior programmer ($319) + 2
hours (for review of current portfolio disclosures) x $325 (blended
rate for a compliance manager ($298) and a compliance attorney
($352)) + $400 for external website development = $1,939.50. The
industry cost is 1,635 x $1,939.50 = $3,171,082.50.
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    Finally, the proposed rule also would require additional disclosure
by the ETF of the median daily bid-ask spread over the most recent
fiscal year on its website. We believe that this

requirement would further inform investors about the expected cost of
trading an ETF and facilitate comparison of transaction costs across
ETFs. As such, the disclosure of median bid-ask spreads could reduce
investors' uncertainty about the trading environment and facilitate the
selection of ETF investments that fit individual investors' needs.
Currently, disclosure of median bid-ask spreads by ETFs are not
required by exemptive orders, although some funds may voluntarily
provide this information on their websites. For those funds that do not
already disclose this information, they would have to implement
processes and systems to compute the median bid-ask spreads and would
have to accommodate a new data point on their web page to report this
information. We preliminarily do not believe the incremental cost of
such disclosure will be substantial. The estimated costs for computing
and establishing processes and systems to update the median bid-ask
spread are $296.50 per fund, while aggregate costs for computing and
updating the web pages of ETFs to include the median bid-ask spread
would be $484,777.50.\465\ We preliminarily believe that funds will
incorporate the processes of updating the median bid-ask spread with
other daily processes associated with updating the web page, such as
reporting the daily portfolio holdings, and therefore, there will be no
additional daily costs associated with updating the median bid-ask
spread on the webpage. We also believe that funds currently maintain a
record of historical prices as a matter of current business practices
which could be used to satisfy the requirement at a nominal cost, as
discussed above. If a fund does not maintain a record of historical
prices, it may incur a one-time estimated cost of $296.50 to satisfy
the requirement, or an upper bound of $484,777.50 in aggregate,
assuming that no ETFs currently maintain historical price records.\466\
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    \465\ Commission staff estimate a one-time cost of computing and
implementing processes and systems for daily updating of the median
bid-ask spread of one burden hour at a per hour cost of $296.50
(blended rate for a senior systems analyst ($274) and senior
programmer ($319)). The one-time cost of updating the web page to
include the median bid-ask spread would be incorporated as part of
the web page development discussed in section IV.B.1 (see also infra
footnote 535). As median bid-ask spreads are not currently required
to be reported or computed by ETFs, we estimate that the aggregate
costs would be $296.50 x 1,635 ETFs = $484,777.50.
    \466\ Commission staff estimate a one-time cost of computing and
implementing processes and systems for daily updating of historical
prices of one burden hour at a per hour cost of $296.50 (blended
rate for a senior systems analyst ($274) and senior programmer
($319)). Although we preliminarily estimate that funds already
maintain a record of historical prices, an upper bound on aggregate
costs would be estimated at $296.50 x 1,635 ETFs = $484,777.50.
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ii. Omission of Conditions We Believe May Save Costs for Funds
    First, the proposed rule would not contain a requirement that an
ETF's IIV be disseminated at least every 15 seconds during regular
trading hours (60 seconds for international ETFs), as is currently
required under all exemptive orders. We believe that many sophisticated
institutional market participants do not rely on the IIV to value an
ETF's assets, as discussed above in section II.C.3.
    In some cases, the IIV may not reflect the actual value of an ETF's
assets (e.g., for funds that invest in foreign securities whose markets
are closed during the ETF's trading day or funds whose assets trade
infrequently, as is the case for certain bond funds). In those cases,
we believe that both institutional and retail market participants would
benefit from the omission of the IIV as a requirement of the proposed
rule by avoiding the possibility that investors base their investment
decisions on this potentially misleading information. However, the IIV
may, for certain funds, provide a reasonably accurate estimate of the
value of an ETF's assets, including for those funds whose underlying
assets are very frequently traded during the ETF's trading day. Less
sophisticated institutional investors as well as retail investors
relying on the IIV for those ETFs may thus find the IIV useful and
could see their ability to evaluate ETFs reduced without this
metric.\467\
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    \467\ While the IIV may be very accurate for ETFs whose
underlying assets trade frequently (and thus are liquid as well),
such ETFs also tend to have small premiums/discounts to NAV per
share, reducing the incremental usefulness of the IIV for investors
in these ETFs compared to observing only the ETF's share price.
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    Exchange listing standards currently require the IIV to be
disseminated. As long as exchange listing standards continue to include
this requirement, the proposed rule's omission of such a requirement
would not represent a change from the baseline and would not result in
any costs or benefits to market participants. Nonetheless, if the
listing standards change, ETFs would not be subject to the cost of
dissemination of IIV information under the proposed rule.
    Second, under the terms of the exemptive orders, ETFs are required
to disclose in their registration statement that redemptions may be
postponed for foreign holidays. The proposed amendments to Forms N-1A
and N-8B-2 do not contain such a requirement and would thus eliminate
the cost of preparing and updating this disclosure for existing ETFs.
As discussed above in section III.B.4, we believe that such a
requirement is not necessary, since this information is already covered
by the agreement between the ETF and the authorized participant.\468\
As discussed in section III.C.1, we further believe that such a
disclosure would not be relevant for retail investors, who purchase ETF
shares on the secondary market.
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    \468\ As discussed above, we believe that authorized
participants would share this information with other market
participants as necessary, for example when a market participant
uses an authorized participant as agent for transacting with an ETF
and this information is a necessary part of the creation or
redemption process.
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    Third, the proposed rule would not require an ETF to identify
itself in any sales literature as an ETF that does not sell or redeem
individual shares and explain that investors may purchase or sell
individual ETF shares through a broker via a national securities
exchange. Although this condition has been included in our exemptive
orders, we no longer believe that it is necessary given that markets
have become familiar with ETFs in the multiple decades they have been
available. The omission of such a requirement could lead to cost
savings for existing and future ETFs associated with preparing and
reviewing this disclosure for sales literature.\469\
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    \469\ We estimate that the omission of this requirement would
save 0.25 hours of a compliance attorney ($352 per hour), resulting
in a cost savings of $88 (0.25 x $352) per fund each year. The total
cost savings for all 1,635 ETFs that could rely on the proposed rule
would thus be $143,880 (1,635 x $88).
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iii. Website Disclosure Provisions
    Proposed rule 6c-11 would require an ETF to disclose certain
information prominently on its website, which is publicly accessible
and free of charge.\470\ The goal of these disclosure requirements is
to provide investors with key metrics to evaluate their trading and
investment decisions in a location that is easily accessible and
frequently updated.\471\ Based on a staff

review of ETFs' websites, we believe that all ETFs that could rely on
the proposed rule currently have a website.\472\ As a consequence,
existing ETFs would generally not incur any additional cost associated
with the creation and technical maintenance of a website.
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    \470\ See supra footnote 208.
    \471\ According to the most recent U.S. census data,
approximately 77.2% of U.S. households had some form of internet
access in their home in 2015 and 86.8% have a computer (e.g.,
desktop, laptop, tablet or smartphone). See Camille Ryan & Jamie M.
Lewis, Computer and internet Usage in the United States: 2015, ACS-
37 (Sept. 2017), available at https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf; see also Sarah
Holden, Daniel Schrass & Michael Bogdan, Ownership of Mutual Funds,
Shareholder Sentiment, and Use of the internet, 2017 (Oct. 2017),
available at https://www.ici.org/pdf/per23-07.pdf (``[i]n mid-2017,
95 percent of households owning mutual funds had internet access, up
from about two-thirds in 2000'' and ``86 percent of mutual fund-
owning households with a household head aged 65 or older had
internet access in mid-2017''); Andrew Perrin & Maeve Duggan,
Americans' Internet Access: 2000-2015, Pew Research Center (June
2015), available at http://assets.pewresearch.org/wp-content/uploads/sites/14/2015/06/2015-06-26_internet-usage-across-demographics-discover_FINAL.pdf (finding in 2015, 84% of all U.S.
adults use the internet). Retail investors that do not have internet
access in their homes may have access outside their homes, such as
at public libraries.
    \472\ See supra footnote 437.
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    As discussed above, a requirement for daily website disclosures of
NAV, closing price, and premiums and discounts--each as of the end of
the prior business day has been included in substantially all exemptive
relief orders starting from 2008. As discussed in section III.B.4,
based on a staff review of ETFs' websites, we believe that all ETFs
that could rely on the proposed rule currently provide daily website
disclosures of NAV, closing price, and premiums or discounts.\473\ As a
consequence, existing ETFs would generally not incur any additional
cost associated with these website disclosure requirements.
---------------------------------------------------------------------------

    \473\ See supra footnote 437.
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    Our exemptive orders have not included requirements for line graph
and tabular historical information regarding premiums and discounts.
However, Form N-1A contains tabular website disclosures relating
historical premium/discount in Items 11(g)(2) and 27(b)(7)(iv), which
we are proposing to eliminate.\474\ Nonetheless, we anticipate that all
existing ETFs that fall within the scope of the proposed rule would
incur some additional costs associated with these disclosures. We
believe that substantially all ETFs already have the required data
available to them as part of their regular operations (as it is
required by Form N-1A and also allows ETFs to monitor the trading
behavior of their shares), as well as have systems (such as computer
equipment, an internet connection, and a website) in place that can be
used for processing this data and uploading it to their websites.
However, these ETFs would still incur the costs associated with
establishing and following (potentially automated) processes for
processing and uploading this data to their websites. We estimate that
an average ETF would incur a one-time cost of $1,939.5 \475\ for
implementing this website disclosure and an ongoing cost of $473.25
\476\ per year for updating the relevant web page with this
information. We thus estimate the total industry cost, in the first
year, to ETFs that could rely on the proposed rule for providing this
website disclosure, of $3,944,846.35.
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    \474\ See infra section II.H.4.
    \475\ This estimate is based on the following calculations: 3
hours (for website development) x $296.50 per hour (blended rate for
a senior systems analyst ($274) and senior programmer ($319)) + (2
hours (for review of website disclosures) x $325 (blended rate for a
compliance manager ($298) and a compliance attorney ($352)) + $400
for an external website developer to develop the web page =
$1,939.50.
    \476\ This estimate is based on the following calculations: 0.5
hours (for website updates) x $296.50 per hour (blended rate for a
senior systems analyst ($274) and senior programmer ($319)) + (1
hour (for review of website disclosures) x $325 (blended rate for a
compliance manager ($298) and a compliance attorney ($352) =
$473.25.
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    Our exemptive orders have not included a requirement for ETFs to
provide disclosure of the factors that materially contributed to a
premium or discount, if known, if an ETF's premium or discount is
greater than 2% for more than seven consecutive trading days. As a
result, under the proposed rule those ETFs that experience such a
premium or discount would incur additional costs associated with
determining what factors contributed to the premiums or discounts and
drafting and uploading a discussion to their website. Based on a staff
analysis of historical data on ETF premiums and discounts from 2008 to
2017 using Bloomberg data, we believe that this disclosure requirement
would be triggered for, on average, 4.7% of those ETFs that could rely
on the proposed rule per year.\477\ We estimate that a fund required to
make such a disclosure in a given year would incur an average cost of
$1,438.50, yielding a total annual industry cost of $110,541.53.\478\
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    \477\ This estimate represents the average of the percentage of
ETFs for which the reporting requirement was triggered at least once
in a given year, for those ETFs that could rely on the proposed
rule. During the sample period from 2008 to 2017, the percentage of
ETFs for which the reporting requirement was triggered at least once
varied from 1.5% in 2010 to 10% in 2008.
    \478\ We believe that such disclosure would require 4 internal
hours (2.5 hours for the compliance attorney to determine if this
requirement has been triggered and produce a draft of the required
disclosures + 1.5 hours for the webmaster to include the information
on the website), at a time cost of (2.5 hours x $352 compliance
attorney hourly rate) + (1.5 hours x $239 webmaster hourly rate) in
addition to $200 for external website development = $1,738.50. The