[Federal Register Volume 77, Number 143 (Wednesday, July 25, 2012)]
[Notices]
[Pages 43620-43629]
[FR Doc No: 2012-18107]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67470; File No. SR-NYSEArca-2012-28]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings to Determine Whether To Approve or Disapprove a Proposed
Rule Change to List and Trade Shares of the JPM XF Physical Copper
Trust Pursuant to NYSE Arca Equities Rule 8.201

July 19, 2012.

I. Introduction

    On April 2, 2012, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares (``Shares'') of JPM XF Physical Copper Trust
(``Trust'') pursuant to NYSE Arca Equities Rule 8.201. The proposed
rule change was published for comment in the Federal Register on April
20, 2012.\3\ The Commission initially received one comment letter on
the proposed rule change.\4\ On May 30, 2012, the

Commission extended the time period for Commission action to July 19,
2012.\5\ On June 19, 2012, NYSE Arca submitted a response to the V&F
Letter.\6\ On July 13, 2012, V&F submitted a second comment letter.\7\
Additionally, on July 16, 2012, United States Senator Carl Levin
submitted a comment letter on the proposed rule change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 66816 (April 16, 2012),
77 FR 23772 (``Notice'').
    \4\ See letter from Vandenberg & Feliu, LLP (``V&F''), received
May 9, 2012 (``V&F Letter''). The V&F Letter is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml. In a
second comment letter, V&F identified itself as a U.S. law firm that
represents RK Capital LLC, an international copper merchant, and
four end-users of copper: Southwire Company, Encore Wire
Corporation, Luvata, and AmRod. V&F states that these companies
collectively comprise about 50% of the copper fabricating capacity
of the United States. See V&F Letter II, infra note 7, at 1.
    \5\ See Securities Exchange Act Release No. 67075, 77 FR 33258
(June 5, 2012).
    \6\ See letter from Janet McGinness, General Counsel, NYSE
Markets, to Elizabeth Murphy, Secretary, Commission, dated June 19,
2012 (``Arca's Response''). Arca's Response is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228.shtml.
    \7\ See letter from Robert B. Bernstein, V&F, to Elizabeth M.
Murphy, Secretary, Commission, dated July 13, 2012 (``V&F Letter
II''). This letter is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-5.pdf.
    \8\ See letter from U.S. Senator Carl Levin to Elizabeth M.
Murphy, Secretary, Commission, dated July 16, 2012 (``Sen. Levin
Letter''). The Sen. Levin Letter is available at http://www.sec.gov/comments/sr-nysearca-2012-28/nysearca201228-6.pdf.
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    This order institutes proceedings under Section 19(b)(2)(B) of the
Act to determine whether to approve or disapprove the proposed rule
change. The institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved, nor does it mean that the Commission will ultimately
disapprove the proposed rule change. Rather, as described in greater
detail below, the Commission seeks and encourages interested persons to
provide additional comment on the proposed rule change to inform the
Commission's analysis of whether to approve or disapprove the proposed
rule change.

II. Description of the Proposal

    The Exchange proposes to list and trade the Shares under NYSE Arca
Equities Rule 8.201, which governs the listing and trading of
commodity-based trust shares. J.P. Morgan Commodity ETF Services LLC is
the sponsor of the Trust (``Sponsor'').\9\ J.P. Morgan Treasury
Securities Services, a division of JPMorgan Chase Bank, National
Association, is the administrative agent of the Trust (``Administrative
Agent''). Wilmington Trust Company is the trustee of the Trust
(``Trustee''). The Henry Bath Group is the warehouse-keeper of the
Trust (``Warehouse-keeper'').\10\ Metal Bulletin Ltd., an independent,
third-party valuation agent that is not affiliated with the Sponsor, is
the valuation agent of the Trust (``Valuation Agent'').
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    \9\ Additional details regarding the Trust are set forth in the
Registration Statement for the Trust on Amendment No. 5 to Form S-1,
filed with the Commission on July 12, 2011 (No. 333-170085)
(``Registration Statement'').
    \10\ Each of Henry Bath & Son Limited, Henry Bath LLC, Henry
Bath Singapore Pte Limited, Henry Bath Italia Sr1, and Henry Bath BV
is a member of the Henry Bath Group of companies and a wholly owned
subsidiary of J.P. Morgan Ventures Energy Corporation, and is an
affiliate of the Sponsor. See Notice, supra note 3, 77 FR at 23773
n.10
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    The Trust's investment objective is for the value of the Shares to
reflect, at any given time, the value of the copper owned by the Trust
at that time, less the Trust's expenses and liabilities at that time.
The Trust would not be actively managed and would not engage in any
activities designed to obtain a profit from, or to prevent losses
caused by, changes in the price of copper.
    The Trust would invest in Grade A copper \11\ in physical form from
a source refinery that has had its brand registered with the London
Metal Exchange (``LME'') (an ``Acceptable Delivery Brand'').\12\ The
Trust would hold only copper and would not trade in copper futures.
While the Trust would store its copper in both LME-approved warehouses
and non-LME-approved warehouses that are maintained by the Warehouse-
keeper, none of the copper held by the Trust would be on LME warrant,
and therefore would not be subject to regulation by the LME.\13\
Initially, the permitted warehouse locations would be in the
Netherlands (Rotterdam), Singapore (Singapore), South Korea (Busan and
Gwangyang), China (Shanghai), and the United States (Baltimore,
Chicago, and New Orleans). Although the Trust may hold copper in
warehouses in any of these locations (or other locations that may be
determined by the Sponsor from time to time), the locations at which
copper actually is held would depend on (i) the warehouse locations at
which authorized participants have actually delivered copper to the
Trust and (ii) the warehouse locations from which copper is or has been
delivered pursuant to the Trust's redemption procedures.\14\
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    \11\ According to the Exchange, the LME trades, promotes, and
maintains the standards of quality, shape, and weight of Grade A
Copper, a commonly accepted standardized form of copper cathode.
Grade A Copper currently must conform to the standard BS EN
1978:1998 (Cu-CATH-1), which specifies the allowed source, shape,
and chemical composition of the cathode. Most copper cathodes are
99.95% to 99.99% pure copper. The chemical composition, and
impurities, in the cathode depend largely on the source of the
copper and whether the metal has been processed from copper sulfide
ore or copper oxide ore. Copper oxide ore has a smaller number of
residual chemical elements in the cathode. See Notice, supra note 3,
77 FR at 23777.
    \12\ Currently, there are 79 brands that are Acceptable Delivery
Brands. Some refineries have more than one smelting and refining
process, so a refinery may register more than one brand, reflecting,
among other factors, the different chemical composition, size,
origins, and bundling of the copper cathodes. The LME has the
authority to deregister brands from the LME from time to time.
Generally, copper that is not of an Acceptable Delivery Brand is
worth less than copper that is of an Acceptable Delivery Brand
because of the perceived lower liquidity associated with that brand
of metal. See Notice, supra note 3, 77 FR at 23777-78.
    \13\ See Notice, supra note 3, 77 FR at 23778.
    \14\ Similar to other exchange traded products that hold
physical metals, the Sponsor, the Trust, and persons or entities
engaging in transactions in Shares would need to seek exemptions
from, or interpretative or no-action advice, regarding Rules 101 and
102 of Regulation M under the Securities Exchange Act of 1934 in
order to create or redeem Shares. See, e.g., letters from James A.
Brigagliano, Assistant Director, Division of Market Regulation, (i)
to Kathleen Moriarty, Esq., Carter Ledyard & Milburn, dated November
17, 2004, with respect to the trading of StreetTRACKS Gold Trust,
(ii) to David Yeres, dated January 27, 2005, with respect to the
trading of the iShares COMEX Gold Trust, and (iii) to David Yeres,
dated April 27, 2006, with respect to the trading of iShares Silver
Trust.
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    The Administrative Agent will calculate the net asset value
(``NAV'') of the Trust as promptly as practicable after 4:00 p.m. EST
on each Business Day.\15\ As part of this calculation, the
Administrative Agent will determine the value of the trust's copper
using the LME Settlement Price \16\ and information provided by the
Valuation Agent.\17\
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    \15\ A Business Day is a day that the Exchange is open for
regular trading and that is not a holiday in London, England. See
Notice, supra note 3, 77 FR at 23775, n.18.
    \16\ The ``LME Settlement Price'' is, with respect to any
Business Day, the official cash sellers price per metric ton of
Grade A Copper on the LME, stated in U.S. dollars, as determined by
the LME at the end of the morning's second ring session (12:35 p.m.
London time) for copper on each day that the LME is open for
trading. The LME Settlement Price is made publicly available in
real-time through third-party vendors such as Bloomberg and Reuters
(on Bloomberg, it is currently displayed on Bloomberg page ``LOCADY
''). It is also made publicly available on a delayed basis
on the LME's Web site at approximately 10:00 p.m. London time. See
Notice, supra note 3, 77 FR at 23775 n.17.
    \17\ The value of copper depends in part on its location, i.e.,
copper stored in a location that is low in supply and high in demand
carries a higher premium than copper that is stored in a location
where supply is high and demand is low. To assist in valuing the
Trust's copper, by 9:00 a.m. EST, the Valuation Agent will provide
the Administrative Agent the locational premia for the locations at
which the trust is permitted to hold copper. The locational premium
for a warehouse location for a Business Day will be calculated as an
amount expressed in U.S. dollars that is equal to the average value
of copper per metric ton in such location minus the LME Settlement
Price of copper on such Business Day. See Notice, supra note 3, 77
FR at 23779.
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    NYSE Arca anticipates requiring that a minimum of 100,000 Shares be
outstanding at the start of trading,\18\ which represents 1,000 metric
tons of copper. The Trust seeks to register

6,180,000 Shares,\19\ which represents 61,800 metric tons of copper.
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    \18\ See Notice, supra note 3, 77 FR at 23786.
    \19\ See Registration Statement, supra note 9.
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    The Exchange states that it intends to utilize its existing
surveillance procedures applicable to derivative products (including
commodity-based trust shares) to monitor trading in the Shares, and
represents that such procedures are adequate to properly monitor
Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities
laws.\20\ In discussing its ability to obtain information relevant to
trading of the Shares on its facilities, the Exchange states that it is
able to obtain information: (1) regarding trading in physical copper,
the Shares, and other copper derivatives by ETP Holders registered as
Exchange market makers, pursuant to NYSE Arca Equities Rule 8.201(g);
(2) from the LME, with which the Exchange has a comprehensive
surveillance sharing agreement; and (3) via the Intermarket
Surveillance Group (``ISG'') from other exchanges who are members of
the ISG, such as Commodity Exchange, Inc. (``COMEX'').
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    \20\ See Notice, supra note 3, 77 FR at 23787.
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    The Notice and in the Registration Statement include additional
information about: the Trust; the Shares; the Trust's investment
objectives, strategies, policies, and restrictions; fees and expenses;
creation and redemption of Shares; the physical copper market;
availability of information; trading rules and halts; and surveillance
procedures.\21\
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    \21\ See Notice and the Registration Statement, supra notes 3
and 9, respectively.
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III. Summary of the Comments Received and the Exchange's Response

    The two commenters on the proposal (collectively, ``Commenters'')
oppose the proposed rule change.\22\ According to the Commenters, the
issuance by the Trust of all of the Shares covered by the Registration
Statement within a short period of time would result in a material
reduction in the immediately available supply of global copper.\23\
They also assert that this reduction in short-term supply would
increase both volatility in the copper market and the price of copper,
which would in turn significantly harm the U.S. economy.\24\ The
Commenters further state that the decrease in copper available for
immediate delivery would make the physical copper market more
susceptible to manipulation.\25\
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    \22\ See supra notes 4, 7, and 8. One of the Commenters, V&F,
identified itself as a U.S. law firm that represents an
international copper merchant and four U.S. copper fabricators. See
supra note 4.
    \23\ See V&F Letter, supra note 4, at 3, 6 and Sen. Levin
Letter, supra note 8, at 1, 4.
    \24\ See V&F Letter, supra note 4, at 5-7 and Sen. Levin Letter,
supra note 8, at 1, 7.
    \25\ See V&F Letter, supra note 4, at 1, 10 and Sen. Levin
Letter, supra note 8, at 7.
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    In its response letter, NYSE Arca states that V&F's arguments
either are based on incorrect information or are unsubstantiated.\26\
The Exchange's response, as discussed in further detail below,
addresses in particular V&F's conclusions about the impact of the Trust
on the price of physical copper.\27\ In its second letter, V&F responds
to the Exchange's arguments by reiterating some of its positions and
providing additional information.
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    \26\ See Arca's Response, supra note 6, at 1.
    \27\ See id. at 4-5.
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A. Adverse Copper Market Impact

1. Impact on Supply of Copper Available for Immediate Delivery
    V&F states that almost all of the copper produced worldwide is
delivered pursuant to long-term contracts to copper fabricators, and
that at any given time, there is only a limited supply of copper
available for immediately delivery.\28\ V&F further states that this
copper, which generally is stored in LME warehouses, usually is
deposited by producers with excess supply or by copper merchants
looking for purchasers and is sold to traders seeking to close out
short positions or to fabricators in sudden need of additional
supply.\29\
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    \28\ See V&F Letter, supra note 4, at 3.
    \29\ See id.
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    V&F states that the only ``visible'' copper available to satisfy
the Trust's requirements for copper to be delivered to the Trust to
create shares is copper stored in LME warehouses.\30\ V&F estimates
that, if the Trust sells all of the 6,180,000 Shares it seeks to
register, creation of the Trust could result in as much as 61,800
metric tons of copper being removed from LME warehouses, which is more
than 30% of the 200,000 metric tons currently available for immediate
delivery.\31\
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    \30\ See id.
    \31\ See id. at 1, 3.
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    V&F believes the Trust is likely to acquire copper from locations
with the lowest premiums.\32\ According to V&F, based on the present
level of demand, locational premiums for copper in the U.S. are at
least ten times lower than they are in Europe and Asia.\33\
Accordingly, V&F predicts that much of the copper used to fund the
Trust will come from the immediately available supply in the U.S.\34\
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    \32\ See id. at 4.
    \33\ See id.
    \34\ V&F states that the total amount of copper available in New
Orleans and Chicago (two of the three U.S. warehouses proposed to be
used by the Trust) is 45,000 and 25,000 metric tons respectively
and, as mentioned above, the Trust may acquire as much as 61,800
tons of copper in connection with the initial offering of Shares.
V&F predicts that the removal of large quantities of copper from LME
warehouses in the U.S. also will result in the emptying out of
substantial quantities of copper from COMEX warehouses. V&F believes
that this copper either would be delivered to LME warehouses, where
the demand is greatest, or it would be shipped to fabricators in
other parts of the U.S. that are no longer able to get copper for
immediate delivery from the LME. See id.
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    In response to these concerns raised by V&F, the Exchange points
out that the Trust will hold only copper that is not under LME
warrant.\35\ NYSE Arca states that the Sponsor of the Trust does not
believe that ``huge quantities'' of LME warranted copper will be
removed from the LME system, as V&F predicts, because of: (1) The cost
and time that would be required to take copper off warrant; and (2) the
availability of large supplies of non-warranted physical copper to
create Shares.\36\ NYSE Arca provides data from the Sponsor of the
Trust indicating that the amount of non-warranted copper is
approximately ten times larger than the amount of LME warranted
copper.\37\
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    \35\ See Arca's Response, supra note 6, at 1-2.
    \36\ See id. at 3. The Exchange states that the Sponsor expects
that the initial Shares will be created using 10,185 metric tons of
copper, none of which will be taken off LME warrant for the
creation. See id. at 4.
    \37\ See id. at 3.
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    NYSE Arca further states that the Trust will not immediately remove
from the market as much as 61,800 metric tons of copper.\38\ According
to the Exchange, the Trust seeks to register 6,180,000 Shares but, like
the other physical metal exchange-traded products, the Trust seeks to
register significantly more Shares than it intends to sell
initially.\39\ NYSE Arca notes that the number of Shares that will be
issued will depend on investor demand for the Shares and the extent to
which authorized participants seek to fulfill such demand by ordering
additional creation units from the Trust.\40\
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    \38\ See id. at 4.
    \39\ The Exchange states that currently the Sponsor expects that
the value of the initial creation units will not exceed $75 million,
which corresponds to approximately 10,185 metric tons, or
approximately 407 lots of copper in the current cheapest-to-deliver
location for the Trust as of June 6, 2012. See id.
    \40\ See id.
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    In its second letter, V&F reiterates its view that ``the only
substantial source of copper available to meet the Trust's requirements
* * * is warranted copper in LME warehouses.'' \41\ V&F states that

the fact that the Trust will hold only copper that is not warranted
does not mean, as NYSE Arca concludes, that copper will not be taken
off LME warrant and held by the Trust.\42\ V&F also challenges the
Exchange's assertion about the availability of a large supply of off-
warrant copper that may be used to create Shares, and argues that the
copper not on LME warrant actually is largely unavailable for Share
creation.\43\ For example, V&F states that the overall physical copper
stocks include copper that is subject to long-term contracts, and is
generally held in the normal course by producers and consumers as
buffer stocks to ensure smooth running of their logistics and to meet
contingencies.\44\ V&F further states that there is no evidence that
any of the non-registered copper stocks would be available for the
Trust to purchase, and concludes that the only copper available to
create Shares would be the copper in the LME and COMEX warehouses.\45\
In addition, V&F states its view that the potential size of the Trust
is large relative to the size of market for copper available for
immediate delivery.\46\ Specifically, V&F asserts that the Trust could
remove as much as 21.3% of copper available for immediate delivery on
the LME and COMEX markets combined.\47\ Senator Levin also comments
that there is ample evidence that the proposed commodity-based exchange
traded product (``CB-ETP'') will disrupt the supply of copper by
removing from the market a substantial percentage of the copper
available for immediate delivery.\48\
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    \41\ See V&F Letter II, supra note 7, at 1.
    \42\ See id. at 2. V&F further states that the Trust would have
to take the copper off-warrant because otherwise the holding of such
warranted copper in an LME warehouse would subject the Trust to the
LME's lending obligations and the draft registration statement makes
clear that, consistent with its intent to take the Trust's copper
off-market, the Trust does not intend to be subject to any of the
LME's rules, including rules that would require the Trust to lend
any of its copper. See id.
    \43\ See id. at 2-4.
    \44\ See id. at 3. V&F further states that ``[o]ther such stocks
consist of stock [sic] in bonded warehouses outside China* * *which
are destined for the Chinese market,'' none of which is available
for purchase by authorized participants to create Shares. See id.
V&F also states that they have heard it is usual for both producers
and consumers to have a considerable holding of copper stock, but at
present this is not the case because consumers, in particular, have
drawn down inventories to the bare minimum in order to reduce
working capital requirements at a time of high copper prices. See
id. at 4.
    \45\ See id. at 2-4. V&F states that the Exchange compounds
misinformation about the availability of copper stocks by including
a table it obtained from the Sponsor of the Trust purporting to
break down registered and non-registered market stocks as of May
2012. See id. at 3. V&F states that the use of the term ``market''
by the Exchange in reference to total non-registered stocks suggests
that such tonnage is actually available for purchase at market, but
V&F believes that there is no evidence that any of the non-
registered stocks would be available for the Trust to purchase. See
id. To support its statements about the tightness of the supply of
immediately available copper, V&F submitted portions of a report
prepared by Bloomsbury Minerals Economics Ltd. for RK Capital
Management LLP. See id. Exhibit A.
    \46\ See id. at 8.
    \47\ See id. at 8-9. V&F states that the size of the market for
copper available for immediate delivery is relatively small in that
there is only 230,000 metric tons available on the LME, with an
additional 60,000 metric tons available on the COMEX. See id. at 8.
V&F further states that therefore, the Trust proposes to remove as
much as 61,800 metric tons, or about 21.3% of the copper available
for immediate delivery. See id.
    \48\ See Sen. Levin Letter, supra note 8, at 1. For example,
Senator Levin notes that ``it appears that most of the remaining
copper stocks available for immediate delivery are on the LME and
[COMEX].'' See id. at 5.
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    With respect to the number of shares registered by the Trust and
the size of the Trust, V&F states that there is no assurance that the
Exchange-required minimum will have any bearing on the ultimate size of
the offering.\49\ V&F points to the Trust's registration statement,
which contains an estimate that the number of shares under the
registration statement is roughly equivalent to the holding of
approximately 61,800 metric tons of copper by the Trust.\50\ V&F also
notes that the Trust Agreement places no limit on the amount of copper
the Trust may hold; thus the Trust may issue an unlimited number of
shares, subject to registration requirements, and may, in theory,
acquire an unlimited amount of copper.\51\
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    \49\ See V&F Letter II, supra note 7, at 7.
    \50\ See id. at 8.
    \51\ See id.
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    In response to NYSE Arca's statement that the sponsor of the Trust
believes that LME warranted copper will not be removed from the LME
system because of the cost and time that would be required to take
copper off warrant, V&F states its view that, although an authorized
participant can obtain LME grade copper available for immediate
delivery from owners of LME grade copper in LME warehouses by
purchasing long positions on the LME and taking delivery, the
authorized participant would have no guarantee of the location of its
copper, creating a risk that the authorized participant's copper is at
a location (or locations) that might be too expensive to transfer to a
Trust warehouse.\52\ V&F further states that, in comparison, an
authorized participant can create Shares at little or not cost by
purchasing LME warrants for copper in LME warehouses with the lowest
location cost premiums.\53\
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    \52\ See id. at 6.
    \53\ See id.
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    V&F believes that investors' ability to redeem Shares for the
Trust's physical copper would not limit the impact of removing
substantial quantities of copper from the market.\54\ According to V&F,
most investors in a copper-backed CB-ETP would not have any real
economic incentive to redeem their Shares for physical delivery as
investors would benefit from a rise in the price of copper and can do
so through sale of the Shares on the Exchange without having to assume
any risk of delivery.\55\ In its response, NYSE Arca points out that
Share creations may be offset by Share redemptions, which result in
copper being released from the Trust and becoming available to the
physical markets.\56\ V&F reiterates in its second letter its views
expressed in its first comment letter on the Exchange's assertion that
copper may return to the market through redemptions.\57\
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    \54\ See V&F Letter, supra note 4, at 5.
    \55\ See id.
    \56\ See Arca's Response, supra note 6, at 3.
    \57\ See V&F Letter II, supra note 7, at 7. V&F states that
while fabricators may purchase Shares and redeem them whenever they
need supply, doing so: (1) Would add cost and risk to fabricators
who otherwise would simply purchase available stocks from LME
warehouses; (2) may not have any appreciable effect on price or
supply in a rising market with tight supply; and (3) would be an
inefficient and perhaps impracticable way of obtaining copper
because the copper delivered by the Trust may be warehoused in an
unhelpful location (e.g., a fabricator in Alabama may need copper in
New Orleans, not Shanghai) or of an unacceptable brand or quality.
See V&F Letter, supra note 4, at 5-6.
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    Additionally, both Commenters reference another proposed CB-ETP,
the iShares Copper Trust. In a separate proposed rule change, NYSE Arca
proposes to list and trade shares of the iShares Copper Trust, which
would also hold physical copper.\58\ V&F states that this CB-ETP:
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    \58\ See Securities Exchange Act Release No. 67237 (June 22,
2012), 77 FR 38351 (June 27, 2012) (SR-NYSEArca-2012-66) (``iShares
Notice''). BlackRock Asset Management International Inc. is the
sponsor of this trust. See the iShares Notice and Pre-Effective
Amendment No. 4 to Form S-1 for iShares Copper Trust, filed with the
Commission on September 2, 2011 (No. 333-170131) for a detailed
description of the iShares Copper Trust and the Exchange's proposal
to list and trade the iShares Copper Trust.

    would remove as much as 120,000 metric tons of copper from the
market. And like JPM, BlackRock also intends to acquire LME-grade
copper from the LME warehouses where the location premiums being
charged are the lowest. Thus, approval of this rulemaking could lead
to the removal of all or nearly all of the LME and Comex supply of
copper available for immediate delivery.\59\
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    \59\ See V&F Letter, supra note 4, at 6.

    V&F further states that the collective effect of the Trust and the
iShares Copper Trust (collectively, ``Copper

Trusts'') would be ``far-reaching and potentially devastating to the
U.S. and world economies,'' including ``shortages of copper, higher
prices to consumers, and increased volatility.'' \60\ Senator Levin
also states that, if the Commission approves the listing and trading of
the Shares and shares of the iShares Copper Trust, the trusts would
hold approximately 34% of the copper stocks available for immediate
delivery and would remove from the U.S. market over 55% of the
available copper.\61\
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    \60\ See id. at 10.
    \61\ See Sen. Levin Letter, supra note 8, at 5-6.
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2. Impact on Copper Prices
    According to V&F, removing large amounts of copper from LME
warehouses would disrupt the supply of copper available for immediate
delivery and thereby cause a substantial rise in near-term copper
prices.\62\ V&F argues that this also would cause an immediate spike in
the cash-to-three-month spread price of copper, as near-term prices for
delivery accelerate compared to prices for delivery later in time.\63\
V&F is concerned that manufacturers and fabricators that rely on the
supply of copper available in LME warehouses would be forced to pay
substantially higher prices in the short term, and, in turn,
manufacturers and fabricators would pass these price increases on to
their customers.\64\ V&F predicts that the price increases both for
copper and copper products will be especially dramatic in the U.S.,
where copper currently is relatively inexpensive.\65\ Additionally, V&F
asserts that the supply of copper generally is inelastic and that
supply, therefore, will not increase fast enough to account for the
increased demand unleashed by the creation and growth of the Trust.\66\
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    \62\ See V&F Letter, supra note 4, at 5.
    \63\ See id.
    \64\ See id.
    \65\ See id. at 4-5.
    \66\ See id. at 5. According to V&F, it is difficult for copper
producers to increase supply, sometimes taking 15 years or longer to
open a new mine, and even in areas where copper is considered
plentiful, political instability can keep a mine from producing. See
id. Moreover, V&F states that U.S. producers do not have surplus
product to deliver. See id. Therefore, V&F asserts that once copper
stored in warehouses disappears, it likely will not be replenished
any time soon. See id. Senator Levin concurs that the copper market
is inelastic. See Sen. Levin Letter, supra note 8, at 3.
---------------------------------------------------------------------------

    V&F characterizes the physical copper market as currently volatile,
and believes that the successful creation and growth of the Trust would
create a bubble, and the bursting of the bubble would result in
increased price volatility in the physical copper market.\67\ V&F
states that, with
---------------------------------------------------------------------------

    \67\ See V&F Letter, supra note 4, at 2, 9.
---------------------------------------------------------------------------

    the risk of an ETF removing indefinitely all or substantially
all of the copper available for immediate delivery, the risk of
price volatility becomes enormous. This is because the greater
amount of copper artificially kept off-the-market, the greater the
chance that investors will eventually no longer keep propping up the
price with further purchases, and the greater the likelihood that
the bubble will burst, thus flooding the market with surplus copper,
and severely depressing the price.\68\
---------------------------------------------------------------------------

    \68\ See id. at 5.

    V&F further states that investors in a copper CB-ETP would benefit
immediately from any increase in the price of copper because the more
copper removed from the market to satisfy the demand for the copper CB-
ETP, the higher the price not only of copper, but of the copper CB-ETP
itself.\69\ V&F notes that, like all bubbles, as investor demand for
this product wanes, the bubble will burst, leaving in its wake a glut
of physical copper that the Trust will be forced to dump on the market,
causing prices to plummet, and leaving in its wake unsuspecting
investors who will have lost the value of their investment.\70\ Senator
Levin also makes statements about the potential effect of the Shares,
stating that the ``supply disruption is likely to affect the cash and
futures market for copper, increasing volatility and driving up [the
Share] price to create a bubble and burst cycle.'' \71\
---------------------------------------------------------------------------

    \69\ See id.
    \70\ See id. at 2.
    \71\ See Sen. Levin Letter, supra note 9, at 1.
---------------------------------------------------------------------------

    V&F further believes that investors in the Trust would be able to
measure how much impact their collective removal of copper from the
supply available for immediate delivery would have on copper prices
each day, and could adjust their purchasing strategies accordingly.\72\
V&F questions, therefore, whether the increased market transparency
that the Exchange asserts will result from the formation and operation
of the Trust will be in the public interest.\73\
---------------------------------------------------------------------------

    \72\ See V&F Letter, supra note 4, at 9.
    \73\ See id. at 10.
---------------------------------------------------------------------------

    The Exchange, in its response letter, states that V&F's concerns
about price volatility are speculative and misplaced.\74\ NYSE Arca
asserts that, because of the arbitrage mechanism common to all types of
CB-ETPs, CB-ETP share prices generally follow the price of the
underlying asset(s), rather than drive the price as V&F predicts.\75\
The Exchange agrees that, in theory, if extremely high demand for
shares of a CB-ETP caused it to grow very rapidly relative to the size
of the market for the underlying asset, such demand could place upward
pressure on the price of the underlying asset.\76\ The Exchange states
that Share redemptions would be able to drive down the price of copper
only if the size of the redemptions is extremely large relative to the
size of the physical copper markets and those redemptions occurred over
a very short period of time.\77\ The Exchange acknowledges that this is
a theoretical possibility, but states that V&F has not provided any
evidence to support its prediction.\78\ According to NYSE Arca, given
the anticipated size of the Trust relative to the size and depth of the
physical copper markets, the Sponsor of the Trust has informed the
Exchange that it does not expect the Trust to cause a spike in copper
prices.\79\
---------------------------------------------------------------------------

    \74\ See Arca's Response, supra note 6, at 4.
    \75\ See id.
    \76\ See id. at 5.
    \77\ See id.
    \78\ See id.
    \79\ See id.
---------------------------------------------------------------------------

    In response to the Exchange, V&F reiterates its concern that the
Trust, if launched, could trigger an increase in the price of
copper.\80\ Senator Levin also voices a concern that the Trust, if
launched, would have an impact on the price of copper.\81\ V&F and
Senator Levin refer to language in the Trust's Registration Statement
in which the issuer discusses the potential for the growth of the Trust
to impact the price of copper and the Shares. Specifically, the
Commenters reference statements from the Registration Statement that:
(1) because there is no limit on the amount of copper that the Trust
may acquire, the Trust, as it grows, may have an impact on the supply
and demand for copper that ultimately may affect the price of the
Shares in a manner unrelated to other factors affecting the global
markets for copper; and (2) if the amount of copper acquired by the
Trust were large enough in relation to global copper supply and demand,
in-kind creations and redemptions of Shares could have an impact on the
supply and demand for copper unrelated to other factors affecting the
global markets for copper, which in turn could affect the price at
which Shares are traded on the Exchange.\82\ V&F also states that
because the potential size of the Trust is large relative to the size
of the market for copper available for immediate delivery, even modest
investor demand for the Shares could place upward pressure on the price
of copper.\83\
---------------------------------------------------------------------------

    \80\ See V&F Letter II, supra note 7, at 8.
    \81\ See Sen. Levin Letter, supra note 8, at 5.
    \82\ See V&F Letter II, supra note 7, at 8 and Sen. Levin
Letter, supra note 8, at 5-6.
    \83\ See V&F Letter II, supra note 7, at 8-9.

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

3. Increased Likelihood of Copper Market Manipulation
    V&F asserts generally that the tightened supply of copper it
believes would be caused by fully funding the Trust would render the
physical copper market more susceptible to manipulation.\84\ V&F
compares the possible effect of funding the Trust to the conspiracy
(described in the V&F Letter) between Sumitomo Corporation and a U.S.
trader to squeeze the price of copper on the LME in the U.S. by, among
other things, removing 100% of the copper from the LME warehouse in
Long Beach, California.\85\
---------------------------------------------------------------------------

    \84\ See V&F Letter, supra note 4, at 1, 10.
    \85\ See id. at 6, 10 (describing the conspiracy).
---------------------------------------------------------------------------

    NYSE Arca, in its response letter, highlights several structural
features of the Trust and the Shares that are intended to prevent
fraudulent and manipulative practices, promote just and equitable
principles of trade, remove impediments to and perfect the mechanism of
a free and open market, and in general, protect investors and the
public interest, including that:
     The Trust may hold copper in multiple global locations,
which is intended to provide a larger, more liquid supply of copper
than would be available if creations and redemptions were only
permitted using copper held in a single location; \86\
---------------------------------------------------------------------------

    \86\ See Arca's Response, supra note 6, at 5.
---------------------------------------------------------------------------

     The Trust would be transparent, publishing information
about its holdings and operations through its Web site; \87\
---------------------------------------------------------------------------

    \87\ See id.
---------------------------------------------------------------------------

     The Trust would utilize a consistent, transparent, non-
discretionary, rules-based, and fully disclosed selection protocol for
redemptions; \88\ and
---------------------------------------------------------------------------

    \88\ See id.
---------------------------------------------------------------------------

     The Trust's copper would be valued by a recognized,
independent valuation agent.\89\
---------------------------------------------------------------------------

    \89\ See id. at 6.
---------------------------------------------------------------------------

    In response, V&F states that, although the Trust may hold its
copper in various locations worldwide, the Trust makes clear that it
intends to acquire copper from locations where the premiums are the
lowest, and that is in the United States.\90\ Senator Levin also states
that it is likely that the Trust's copper will come from LME warehouses
in the United States since the Trust will likely acquire its initial
copper holdings from the location with the lowest locational premia,
and the United States currently is the country with the lowest
locational premia.\91\
---------------------------------------------------------------------------

    \90\ See V&F Letter II, supra note 7, at 9. V&F states its view
that the most cost-efficient manner to create Shares would be to
acquire warrants for copper held in the New Orleans warehouse where
the Trust's copper may be stored and take that copper off warrant;
by doing so, an authorized participant would avoid transportation
costs and pay the lowest premium for the copper. See id. at 6.
    \91\ See Sen. Levin Letter, supra note 8, at 6.
---------------------------------------------------------------------------

    V&F further responds to Arca's statements about the structure of
the Trust by stating that the transparency of the Trust's holdings will
provide market participants with critical information about ``how much
copper needs to be removed on any given day in order to artificially
inflate [copper] prices and thus the price of the Trust's shares.''
\92\
---------------------------------------------------------------------------

    \92\ See V&F Letter II, supra note 7, at 10.
---------------------------------------------------------------------------

    Senator Levin states that approval of the proposed rule change
would make the copper market more susceptible to squeezes and corners
by speculators.\93\ According to Senator Levin, market participants
could use the Shares to remove copper from the available supply with
the intent to artificially inflate the price of copper, and this
activity would go undetected by the LME because CB-ETPs currently are
not subject to any form of commodity regulations.\94\ Senator Levin
states that, by holding physical copper rather than LME warrants, the
Trust can control more of the available supply of copper without
triggering LME reporting or rules.\95\ Senator Levin further states the
view that creating this market condition would be inconsistent with the
requirements in Section 6(b)(5) of the Act that exchange rules be
designed to prevent manipulative acts and protect investors and the
public interest.\96\
---------------------------------------------------------------------------

    \93\ See Sen. Levin Letter, supra note 8, at 7.
    \94\ See id.
    \95\ See id.
    \96\ See id. at 1, 7.
---------------------------------------------------------------------------

    Finally, V&F questions whether NYSE Arca's surveillance procedures
are adequate to prevent fraudulent and manipulative trading in the
Shares.\97\ According to V&F, NYSE Arca's surveillance procedures are
not adequate because they are the kind of garden-variety measures that
are always in place to prevent collusion and other forms of
manipulation by traders.\98\
---------------------------------------------------------------------------

    \97\ See V&F Letter, supra note 4, at 10.
    \98\ See id.
---------------------------------------------------------------------------

    In response, NYSE Arca asserts that it will be able to obtain
information regarding trading in the Shares and the underlying copper,
copper futures contracts, options on copper futures, or any other
copper derivative.\99\ NYSE Arca further states that it can obtain
trading information via the ISG from other exchanges that are members
of the ISG, including the New York Mercantile Exchange, of which COMEX
is a division.\100\ The Exchange also notes that it has entered into a
comprehensive surveillance sharing agreement with the LME that applies
with respect to trading in copper.\101\
---------------------------------------------------------------------------

    \99\ See Arca's Response, supra note 6, at 6.
    \100\ See id.
    \101\ See id.
---------------------------------------------------------------------------

B. Comparison to Other Commodity-Based Trusts

    V&F distinguishes the Trust from prior commodity-based trusts whose
shares have been approved for listing and trading by the
Commission.\102\ According to V&F, gold, silver, platinum, and
palladium are all precious metals that have traditionally been held for
investment purposes and are currently used as currency.\103\ As a
result, there are ample stored sources available to back physical CB-
ETPs holding precious metals, and the introduction of such CB-ETPs had
virtually no impact on the available supply.\104\ In contrast, V&F
states that copper generally is not held as an investment, but rather
is used exclusively for industrial purposes, with the annual demand
generally exceeding the available supply.\105\
---------------------------------------------------------------------------

    \102\ See V&F Letter, supra note 4, at 2-3.
    \103\ See id. at 2.
    \104\ See id.
    \105\ See id. at 2-3. V&F states that the consensus among
experts is that copper is in deficit, has been in deficit for the
past three years, and is expected to remain in deficit for at least
the next couple of years. See id. at 3.
---------------------------------------------------------------------------

    NYSE Arca states that: (1) The Trust will not be the first CB-ETP
to hold a metal that is used primarily for industrial purposes; (2)
NYSE Arca is unaware of empirical evidence demonstrating that the
launches of CB-ETPs that hold a metal that is used primarily for
industrial purposes (e.g., platinum and palladium) have disrupted the
markets for the underlying physical commodities or caused those
commodity prices to increase; and (3) V&F has not provided any evidence
that a copper-based CB-ETP would have such effects.\106\
---------------------------------------------------------------------------

    \106\ See Arca's Response, supra note 6, at 6.
---------------------------------------------------------------------------

    In its second letter, V&F states in response that platinum and
palladium are used for both industrial and investment purposes and
that, unlike copper, there is enough of a supply of platinum and
palladium available in storage and being produced that the introduction
of CB-ETPs backed by these metals did not cause the kind of disruption
to the market that a copper-backed CB-ETPs would cause.\107\
Specifically, V&F states that: (1) In recent years, there has been a
surplus in palladium due to the Russian

government's sell-off of its stockpile; (2) there is about a year's
supply of platinum reserves above ground; and (3) there is only a 1-2
week supply of copper available on the LME.\108\ Senator Levin states
that gold, silver, platinum, and palladium are substantially different
than copper because these four metals are the only precious metals that
are currently treated as world currencies and commonly held for
investment purposes, and as a result there are substantial existing
supplies of these metals that could be acquired to back an CB-ETPs
without affecting the world market price in these metals.\109\ Senator
Levin observes that copper is not currently held for investment
purposes because it is very expensive to store and difficult to
transport, and there is not the same existing supply of copper for the
Trust to acquire to back its CB-ETP, and concludes that holding copper
for investment purposes will have a significantly greater impact on the
copper market than CB-ETPs holding platinum, palladium, silver, or gold
had on their respective markets and the broader economy.\110\
---------------------------------------------------------------------------

    \107\ See V&F Letter II, supra note 7, at 11.
    \108\ See id.
    \109\ See Sen. Levin Letter, supra note 8, at 6-7.
    \110\ See id. at 7.
---------------------------------------------------------------------------

IV. Proceedings To Determine Whether to Approve or Disapprove SR-
NYSEArca-2012-28 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \111\ to determine whether this proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. As noted above, the
institution of proceedings does not indicate that the Commission has
reached any conclusions with respect to any of the issues involved.
Rather, as described in greater detail below, the Commission seeks and
encourages interested persons to provide additional comment on the
proposed rule change to inform the Commission's analysis of whether to
approve or disapprove the proposed rule change.
---------------------------------------------------------------------------

    \111\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act
also provides that proceedings to determine whether to disapprove a
proposed rule change must be concluded within 180 days of the date
of publication of notice of the filing of the proposed rule change.
Id. The time for conclusion of the proceedings may be extended for
up to 60 days if the Commission finds good cause for such extension
and publishes its reasons for so finding. Id.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B),\112\ the Commission is providing
notice of the grounds for disapproval under consideration. The
Commission believes that questions remain about whether the proposed
rule change is consistent with the requirements of Section 6(b)(5) of
the Act,\113\ which requires that the rules of an exchange be designed,
among other things, to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------

    \112\ Id.
    \113\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    As discussed above, the Commission received comment letters from
two parties opposing the proposed rule change. The Commenters assert
that the successful creation of the Trust would materially reduce the
supply of copper available for immediate delivery, which would increase
the price of copper and volatility in the copper market, and, in turn,
would harm the U.S. economy.\114\ In addition, the Commenters argue
that, by decreasing the amount of copper available for immediate
delivery, the Trust will make the copper market more susceptible to
manipulation.\115\ V&F also believes the Exchange's surveillance
procedures are inadequate to prevent fraudulent and manipulative
trading in the Shares.\116\
---------------------------------------------------------------------------

    \114\ See V&F Letter, supra note 4, at 5-7 and Sen. Levin
Letter, supra note 8, at 1, 7.
    \115\ See V&F Letter, supra note 4, at 1, 10 and Sen. Levin
Letter, supra note 8, at 7.
    \116\ See V&F Letter, supra note 4, at 10.
---------------------------------------------------------------------------

    In response, the Exchange believes V&F's arguments either are based
on incorrect information or are unsubstantiated,\117\ and disputes
V&F's conclusions regarding the Trust's impact on the copper
market.\118\ NYSE Arca states different expectations regarding the
source and amount of copper that would be used to create Shares of the
Trust, as well as the potential impact on the price of copper.\119\
---------------------------------------------------------------------------

    \117\ See Arca's Response, supra note 6, at 1.
    \118\ See id. at 4.
    \119\ See id. at 2-4.
---------------------------------------------------------------------------

    In light of the comments received and the Exchange's response, the
Commission is soliciting further comments on the proposed rule change,
including comments regarding the issues already commented upon.

V. Request for Written Comments

    The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
concerns identified above, as well as any others they may have
regarding the proposed rule change. In particular, the Commission
invites the written views of interested persons concerning whether the
proposed rule change is consistent with Section 6(b)(5) or any other
provision of the Act, or the rules and regulations thereunder. The
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\120\
---------------------------------------------------------------------------

    \120\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views and
arguments regarding whether the proposed rule change should be
disapproved by August 24, 2012. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
September 10, 2012.
    The Commission asks that commenters address the sufficiency and
merit of the Exchange's statements in support of the proposed rule
change and the comments received, in addition to any other comments
they may wish to submit about the proposed rule change. The Commission
requests that commenters support their responses to the questions below
with empirical data sufficient to inform the Commission's decision
making. In particular, the Commission seeks comment on the following:
    1. In light of the comments received, the Commission is soliciting
further comments regarding copper usage and supply trends. For example:
    [cir] What was the world mine production capacity in each of the
past 10 years? What data is available regarding projected world mine
production over the next 3 to 5 years? What factors impact the ability
to increase or decrease mine production?
    [cir] What was the refined production in each of the past 10 years?
How much of the refined production was from primary and secondary
sources? What was the world refinery capacity in each of the past 10
years? What data is available regarding projected refined production
over the next 3 to 5 years? What factors impact the ability to increase
or decrease refinery production?
    [cir] What was the world refined usage in each of the past 10
years? What data is available regarding projected usage over the next 3
to 5 years?

    [cir] How much copper has been held for investment purposes over
the past 10 years? How much of this copper was taken off LME warrant?
How much of this copper has been eligible to be placed on LME warrant?
    2. According to the International Copper Study Group (``ICSG'),
world refined usage of copper exceeded world refined production by
approximately 417,000 tons in 2010 and 231,000 tons in 2011, and world
refined stocks decreased by 161,000 tons in 2010 and increased by
13,000 tons in 2011.\121\ What factors account for refined stocks
decreasing less than the deficit amount (or even increasing) in 2010
and 2011? Are there any factors with respect to the supply of copper
available for immediate delivery that the Commission should consider in
evaluating the market's ability to meet demand for copper? When a
deficit occurs, are copper fabricators and other end users able to
access copper to meet excess demand? If so, what are the sources of
that copper? How much copper is available for immediate delivery that
is not on LME warrant?
---------------------------------------------------------------------------

    \121\ Press Release, ICSG, Copper: Preliminary Data for February
2012 (June 20, 2012), available at http://www.icsg.org/index.php?option=com_content&task=view&id=63&Itemid=64.
---------------------------------------------------------------------------

    3. The Commenters state that a material reduction in the supply of
copper available for immediate delivery will increase the price of
copper and volatility in the copper market, and, in turn, would harm
the U.S. economy.\122\ The Commission requests comment on whether
commenters agree or disagree with these concerns, and why or why not.
For example:
---------------------------------------------------------------------------

    \122\ See V&F Letter, supra note 4, at 5-7 and Sen. Levin
Letter, supra note 8, at 1.
---------------------------------------------------------------------------

    [cir] Do commenters believe creation of the Trust will have an
impact on the supply of copper? If so, what will that impact be? If
not, why not?
    [cir] How does a change in the supply of copper impact the price of
copper? To what extent do copper stocks need to be reduced or increased
to impact the price of copper?
    [cir] To what extent is the LME Settlement Price affected by the
amount of copper on LME warrant? To what extent must copper on LME
warrant be reduced to impact the LME Settlement Price? To what extent,
if at all, is the LME Settlement Price affected by the supply of copper
ineligible to be placed on LME warrant?
    [cir] How does a change in the supply of copper impact volatility
in the physical copper and copper derivatives markets?
    [cir] Is there empirical evidence that creation of the Trust will
impact copper prices and volatility? What impact, if any, will creation
of the Trust have on the US economy?
    4. V&F and Senator Levin state that the Trust and the proposed
iShares Copper Trust,\123\ collectively, will remove from the market a
substantial percentage of the copper available for immediate delivery,
with Senator Levin stating that the Copper Trusts would hold
approximately 34% of the copper stocks available for immediate delivery
and would remove from the U.S. market over 55% of the available
copper.\124\ V&F further states that the collective effect of the Trust
and the iShares Copper Trust would be ``far-reaching and potentially
devastating to the U.S. and world economies,'' including ``shortages of
copper, higher prices to consumers, and increased volatility.'' \125\
Do commenters agree or disagree with these statements? If so, why or
why not?
---------------------------------------------------------------------------

    \123\ See iShares Notice, supra note 58 (describing the iShares
Copper Trust).
    \124\ See V&F Letter, supra note 4, at 6 and Sen. Levin Letter,
supra note 8, at 5-6.
    \125\ See V&F Letter, supra note 4, at 10.
---------------------------------------------------------------------------

    5. V&F states that the only ``visible'' copper available to satisfy
the Trust's requirements is copper stored in LME warehouses.\126\ NYSE
Arca represents that it has been informed by the Sponsor that overall
physical copper stocks, including stocks that are immediately available
for sale, are substantially larger than V&F would suggest.\127\ V&F
responded, arguing that the copper stocks identified in Arca's Response
mainly consist of metal in the supply chain, which would not be
generally available for creation of Shares.\128\ The Commission is
soliciting further comments regarding physical copper stocks. For
example:
---------------------------------------------------------------------------

    \126\ See id. at 3.
    \127\ See Arca's Response, supra note 6, at 3.
    \128\ See V&F Letter II, supra note 7, at 5.
---------------------------------------------------------------------------

    [cir] How much copper is currently held in LME warehouses? How much
of the copper currently held in LME warehouses is on warrant? How much
copper in LME warehouses is available for investment purposes?
    [cir] How much copper is held in COMEX, Shanghai Futures Exchange
(``SHFE''), and Multi Commodity Exchange of India (``MCX'') warehouses?
How much copper held in COMEX, SHFE, and MCX warehouses is eligible to
be placed on LME warrant (i.e., is of a brand registered with the LME)?
How much of this LME warrant-eligible copper is available for
investment purposes? Where is this copper located?
    [cir] What quantity of copper stock, if any, is held in other
locations that would be eligible to be placed on LME warrant (if it
were located at an LME warehouse)?
    [cir] How accessible are stocks of copper eligible to be placed on
warrant that are not held in LME warehouses?
    [cir] Are commenters aware of any activities involving the
stockpiling of copper? If so, how much copper has been stockpiled?
Where is such copper located? How accessible is such copper? How much
of this stock was taken off LME warrant? How much of this copper is
eligible to be placed on LME warrant?
    6. The Trust will store copper in warehouses that are maintained by
the Warehouse-keeper. Initially, the permitted warehouse locations are
in the Netherlands (Rotterdam), Singapore (Singapore), South Korea
(Busan and Gwangyang), China (Shanghai), and the United States
(Baltimore, Chicago, and New Orleans) (each an ``Approved Warehouse''
and, collectively, the ``Approved Warehouses'').\129\ What is the
locational premium at each of the Approved Warehouses? What impact
would changes in locational premia have on supply and demand for copper
at each of the Approved Warehouses? How much copper is held at each of
the Approved Warehouses? How much of the copper held at each of the
Approved Warehouses is on LME warrant? How much is eligible to be
placed on LME warrant? How much copper eligible for LME warrant is
available for investment purposes? How much is not eligible to be
placed on LME warrant?
---------------------------------------------------------------------------

    \129\ See Notice, supra note 3, at 23779.
---------------------------------------------------------------------------

    7. V&F states that Shares will be created by acquiring LME-
warranted copper and taking it off warrant to be deposited in the
Trust.\130\ NYSE Arca represents that it has been informed by the
Sponsor that the economics do not support this suggestion, given the
large supply of non-warranted physical copper and the cost and time
that would be required in order to take LME warranted copper off
warrant solely for the purposes of creating Shares.\131\ V&F responded,
arguing that taking copper off LME warrant would involve little or no
cost if LME warrants are purchased for copper that is already stored at
the Approved Warehouses.\132\ The Commission requests comment on these
opposing views. Specifically:
---------------------------------------------------------------------------

    \130\ See V&F Letter, supra note 4, at 3.
    \131\ See Arca's Response, supra note 6, at 3.
    \132\ See V&F Letter II, supra note 7, at 6.
---------------------------------------------------------------------------

    [cir] What costs are involved in taking copper off LME warrant?
What costs are involved in putting copper on LME warrant?
    [cir] How long does it take to take copper off LME warrant? How
long does it take to put copper on LME warrant?

    [cir] How does the cost and time required to take copper off
warrant compare to the cost and time to ship copper to an Approved
Warehouse?
    8. The Commission understands that ETFS Physical Copper securities
currently trade on the London Stock Exchange. How much copper did ETFS
Physical Copper hold following the initial creation? How much copper
does ETFS Physical Copper currently hold? What change, if any, was
there in the price of copper following creation of ETFS Physical
Copper? Did the creation of ETFS Physical Copper result in an
observable impact on the copper market? Has ETFS Physical Copper
engaged in the lending of copper?
    9. The Commission has previously approved listing on the Exchange
under NYSE Arca Equities Rule 8.201 of other issues of CB-ETPs backed
by gold, silver, platinum, and palladium (collectively ``precious
metals''). While these precious metals are often held for investment
purposes, the Commission understands they are also used for various
industrial purposes. V&F asserts that copper is used exclusively for
industrial purposes and is not generally held for investment.\133\ The
Commission requests information regarding the production and use of
precious metals. How much gold, silver, platinum, and palladium has
been produced in each of the last 10 years? How much gold, silver,
platinum, and palladium has been used for investment purposes in each
of the last 10 years? How much gold, silver, platinum, and palladium
has been used for industrial purposes in each of the last 10 years? Are
there any other uses of gold, silver, platinum, and palladium relevant
to understanding utilization of these precious metals? What are the
current and historic stocks of gold, silver, platinum, and palladium?
Is there any empirical evidence that the listing of CB-ETPs backed by
gold, silver, platinum, or palladium impacted prices in these markets?
---------------------------------------------------------------------------

    \133\ See V&F Letter, supra note 4, at 2-3.
---------------------------------------------------------------------------

    10. V&F estimates that creation of the Trust could result in the
immediate removal of up to 61,800 metric tons of copper from LME
warehouses.\134\ NYSE Arca states its understanding that the Sponsor
currently expects that the value of the initial creation units to be
issued by the Trust would not exceed 10,185 metric tons.\135\ Further,
while the Trust is seeking to register 6,180,000 Shares, the Exchange
states that like the other CB-ETPs, the Trust is seeking to register
significantly more Shares than it intends to sell initially.\136\ What
is the likelihood that the Trust will sell all registered Shares
initially? What is the likelihood that the Trust will sell all
registered Shares in the three months after the registration goes
effective? How quickly did the CB-ETPs backed by gold, silver,
platinum, and palladium sell the shares registered in the first
registration statement?
---------------------------------------------------------------------------

    \134\ See id. at 1, 3.
    \135\ See Arca's Response, supra note 6, at 4.
    \136\ See id.
---------------------------------------------------------------------------

    11. V&F argues that, by decreasing the amount of copper available
for immediate delivery, the Trust will make the copper market more
susceptible to manipulation.\137\ Specifically, V&F states that ``the
drawing down of stocks in LME and Comex warehouses'' resulting from the
listing and trading of the Shares ``will make it much easier and
cheaper for [copper market] speculators to engage in temporary market
squeezes and corners.'' \138\ Senator Levin also argues that approval
of the proposed rule change would make the copper market more
susceptible to squeezes and corners by speculators.\139\ The Commission
requests comment on these concerns, as well as whether commenters agree
or disagree with the comments and why or why not. For example:
---------------------------------------------------------------------------

    \137\ See V&F Letter, supra note 4, at 1, 10.
    \138\ See id. at 9.
    \139\ See Sen. Levin Letter, supra note 8, at 7.
---------------------------------------------------------------------------

    [cir] Will creation of the Trust impact the ability to manipulate
the physical copper or copper derivatives markets? If so, how? If not,
why not?
    [cir] Has there been any increased manipulative behavior due to the
reduction of copper available for immediate delivery that resulted from
the prior years' deficits in copper production versus copper
consumption?
    [cir] Are there any structural aspects of the copper market that
render it more or less susceptible to manipulation?
    [cir] Is there empirical evidence that the creation of CB-ETPs
backed by gold, silver, platinum, and palladium has led to manipulation
of the physical markets for those precious metals? If so, please
describe.
    12. Both Commenters discuss concerns about the potential impact of
the Trust on the copper market, and how that potential impact could, in
turn, affect the Shares. V&F states that, with

    the risk of an ETF removing indefinitely all or substantially
all of the copper available for immediate delivery, the risk of
price volatility becomes enormous. This is because the greater
amount of copper artificially kept off-the-market, the greater the
chance that investors will eventually no longer keep propping up the
price with further purchases, and the greater the likelihood that
the bubble will burst, thus flooding the market with surplus copper,
and severely depressing the price.\140\

    \140\ See V&F Letter, supra note 4, at 5.

    V&F further states that investors in a copper CB-ETP would benefit
immediately from any increase in the price of copper because the more
copper removed from the market to satisfy the demand for the copper CB-
ETP, the higher the price not only of copper, but of the copper CB-ETP
itself.\141\ V&F notes that, like all bubbles, as investor demand for
this product wanes, the bubble will burst, leaving in its wake a glut
of physical copper that the Trust will be forced to dump on the market,
causing prices to plummet, and leaving in its wake unsuspecting
investors who will have lost the value of their investment.\142\
Senator Levin also makes statements about the potential effect on the
Shares, stating that the ``supply disruption is likely to affect the
cash and futures market for copper, increasing volatility and driving
up[hellip][the Share] price to create a bubble and burst cycle.'' \143\
---------------------------------------------------------------------------

    \141\ See id.
    \142\ See id. at 2.
    \143\ See Sen. Levin Letter, supra note 9, at 1.
---------------------------------------------------------------------------

    Do commenters agree or disagree with these comments? If so, why or
why not? Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-NYSEArca-2012-28 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2012-28. These
file numbers should be included on the subject line if email is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the

proposed rule change between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of the Exchanges.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-NYSEArca-2012-
28 and should be submitted on or before August 24, 2012. Rebuttal
comments should be submitted by September 10, 2012.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\144\
---------------------------------------------------------------------------

    \144\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-18107 Filed 7-24-12; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register: December 20, 2005 (Volume 70, Number 243)]
[Notices]
[Page 75514-75517]
[DOCID:fr20de05-94]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52948; File No. SR-MSRB-2005-11]

Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change and Amendment No. 1
Thereto Relating to Definition of Solicitation Under MSRB Rules G-37
and G-38

December 13, 2005.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 10, 2005, the Municipal Securities Rulemaking Board (``MSRB''
or ``Board'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the MSRB.
On December 7, 2005, the MSRB filed Amendment No. 1 to the proposed
rule change.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 clarifies that the central element in
determining whether a communication is a solicitation is whether the
communication occurs with the purpose of obtaining or retaining
municipal securities business, and makes certain other changes.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The MSRB has filed with the Commission a proposal consisting of an
interpretive notice relating to the definition of solicitation for
purposes of Rules G-37 and G-38. The text of the proposed rule change,
as amended, is available on the MSRB's Web site (http://www.msrb.org),

at the MSRB's principal office, and at the Commission's Public
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in

sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The MSRB has recently amended Rule G-38, on solicitation of
municipal securities business, to prohibit brokers, dealers and
municipal securities dealers (``dealers'') from making direct or
indirect payments to any persons who are not affiliated persons \4\ of
the dealers for solicitations of municipal securities business \5\ on
behalf of the dealers. The proposed rule change provides interpretive
guidance on the definition of ``solicitation'' as used in Rule G-38 and
in Rule G-37, on political contributions and prohibitions of municipal
securities business. This definition is important for purposes of
determining whether dealer payments to non-affiliated persons of the
dealer would be prohibited under Rule G-38. In addition, the definition
is central to determining whether communications by dealer personnel
would result in such personnel being considered municipal finance
professionals of the dealer for purposes of Rule G-37.
---------------------------------------------------------------------------

    \4\ Rule G-38(b)(ii) generally defines an affiliated person of a
dealer as an employee or other personnel of the dealer or of an
affiliated company of the dealer.
    \5\ Municipal securities business is defined in Rule G-37 as the
purchase of a primary offering from the issuer on other than a
competitive bid basis (e.g., negotiated underwriting), the offer or
sale of a primary offering on behalf of an issuer (e.g., private
placement or offering of municipal fund securities), and the
provision of financial advisory, consultant or remarketing agent
services to an issuer for a primary offering in which the dealer was
chosen on other than a competitive bid basis.
---------------------------------------------------------------------------

    The proposed rule change makes clear that the central element in
determining whether a communication is a solicitation is whether the
communication occurs with the purpose of obtaining or retaining
municipal securities business. As a general proposition, the proposed
rule change provides that a communication made under circumstances
reasonably calculated to obtain or retain municipal securities business
could be considered a solicitation unless the circumstances indicate
otherwise. The proposed rule change provides numerous examples of
circumstances where a communication may or may not be considered a
solicitation, including guidance on communications with issuer
representatives, promotional communications, work-related
communications, communications with conduit borrowers, and
communications by non-affiliated professionals.
2. Statutory Basis
    The MSRB believes that the proposed rule change, as amended, is
consistent with section 15B(b)(2)(C) of the Act,\6\ which provides that
the MSRB's rules shall:
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78o-4(b)(2)(C).

be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
---------------------------------------------------------------------------
the public interest.

The MSRB believes that the proposed rule change, as amended, is
consistent with the Act because it will further investor protection and
the public interest by ensuring that dealers understand their
obligations under MSRB rules designed to maintain standards of fair
practice and professionalism, thereby helping to maintain public trust
and confidence in the integrity of the municipal securities market.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change, as
amended, will result in any burden on competition that is not necessary
or appropriate in furtherance of the purposes of the Act since it would
apply equally to all dealers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The MSRB published notices for comment on draft amendments to Rule
G-38 on April 5, 2004 (the ``April 2004 Notice'') \7\ and September 29,
2004 (the ``September 2004 Notice'').\8\ The April 2004 Notice sought
comments on draft amendments limiting payments by a dealer for the
solicitation of municipal securities business on its behalf solely to
its associated persons, and also provided certain guidance on the
definition of solicitation. The MSRB received comments from 28
commentators, eight of which provided comments on the definition of
solicitation.\9\ The September 2004 Notice sought comments on revised
draft amendments to Rule G-38 prohibiting a dealer from making payments
for the solicitation of municipal securities business on its behalf to
any person who is not an associated person of the dealer. The September
2004 Notice also provided more detailed guidance on the definition of
solicitation. The MSRB received comments from 19 commentators, five of
which provided comments on the definition of solicitation.\10\ The
comments received on the April and September 2004 Notices relating to
the definition of solicitation are discussed below.\11\
---------------------------------------------------------------------------

    \7\ See MSRB Notice 2004-11 (April 5, 2004).
    \8\ See MSRB Notice 2004-32 (September 29, 2004), as modified by
MSRB Notice 2004-33 (October 12, 2004).
    \9\ Letters commenting on the definition of solicitation
consisted of letters from Jerry L. Chapman (``Mr. Chapman''), to
Ernesto A. Lanza, Senior Associate General Counsel, MSRB, dated
April 22, 2004; Maud Daudon, Managing Director, Investment Banking,
and John Rose, President & CEO, Seattle-Northwest Securities
Corporation (``Seattle-Northwest'') to Christopher A. Taylor, MSRB
Executive Director, dated May 19, 2004; Gordon Reis III, Managing
Principal, Seasongood & Mayer, LLC (``Seasongood'') to Mr. Taylor,
dated May 20, 2004; Bruce Moland, Vice President & Assistant General
Counsel, Wells Fargo & Company (``Wells Fargo''), to Mr. Lanza dated
June 2, 2004; Sarah A. Miller, General Counsel, ABA Securities
Association (``ABASA''), to Mr. Lanza dated June 4, 2004; Lynette
Kelly Hotchkiss, Senior Vice President and Associate General
Counsel, Bond Market Association (``BMA''), to Mr. Lanza dated June
4, 2004; Robyn A. Huffman, Vice President and Associate General
Counsel, Goldman Sachs & Co. (``Goldman''), to Mr. Lanza dated June
4, 2004; and James S. Keller, Chief Regulatory Counsel, PNC Capital
Markets, Inc. (``PNC''), to Mr. Lanza dated June 4, 2004.
    \10\ Letters commenting on the definition of solicitation
consisted of letters from Ms. Daudon and Mr. Rose, Seattle-
Northwest, to Mr. Lanza dated December 13, 2004; Mr. Moland, Wells
Fargo, to Mr. Lanza dated December 15, 2004; Ms. Hotchkiss, BMA, to
Mr. Lanza dated December 15, 2004; Ms. Huffman, Goldman, to Mr.
Lanza dated December 15, 2004; and Ms. Miller, ABASA, to Mr. Lanza
dated December 17, 2004.
    \11\ The remaining comments received on the April and September
2004 Notices were discussed in SR-MSRB-2005-04. See Exchange Act
Release No. 51561, 70 FR 20782 (April 21, 2005).
---------------------------------------------------------------------------

Communications With Conduit Borrowers

    In the April 2004 Notice, the MSRB asked whether a communication
with a conduit borrower to hire a dealer as an underwriter for a
private activity bond issue where the issuer ultimately must approve
the underwriter for the issue should be considered an indirect
communication with the issuer. In the September 2004 Notice, the MSRB
stated that, from a literal perspective, any communication by a dealer
with a conduit borrower intended to cause the borrower to select the
dealer to serve as underwriter for a conduit issue could be considered
a solicitation of municipal securities business. This is because the

conduit borrower eventually communicates its selection of the dealer to
the conduit issuer for approval, with the result that this series of
communications becomes an indirect communication by the dealer through
the conduit borrower to the conduit issuer with the intent of obtaining
municipal securities business. However, if the dealer can establish
that no reasonable nexus could exist between the making of
contributions to officials of the conduit issuer and the selection of
the underwriter for such conduit financing, then a communication with
the borrower would be deemed not to be a solicitation for purposes of
Rule G-38. For example, if a conduit issuer historically defers to its
conduit borrowers' selections of underwriters without influencing the
selection, communications with the conduit borrower to obtain the
underwriting assignment would not be treated as a solicitation, even if
that communication is relayed by the conduit borrower to the conduit
issuer.
    Comments Received. Several commentators stated that communications
with conduit borrowers should not be considered solicitations, or that
the circumstances under which they are so considered should be narrowly
drawn. ABASA, BMA, PNC and Wells Fargo stated that communications with
conduit borrowers generally should not be considered solicitations,
whereas Mr. Chapman stated that communications should be treated as
solicitations. The ABA noted that, in conduit financings, typically a
complete package (including the underwriter) is presented to the
selected conduit issuer, with the issuer either accepting or rejecting
the package. BMA stated that in a conduit deal, if an employee is only
communicating with a private obligor and not with the issuer, then
there is no possibility that a contribution made by that employee to an
official of such issuer would influence the underwriter selection
process. ABASA and Wells Fargo asked, in the alternative, that the MSRB
provide more specific guidance on what would cause a communication to
be a solicitation.
    ABASA and BMA characterized the MSRB's guidance in the September
2004 Notice as creating a presumption that a communication with a
conduit borrower is a solicitation which can be rebutted only under
narrowly drawn circumstances. They also observed that many
communications with conduit borrowers occur before the identity of the
issuer has been determined. As a result, they suggested that a dealer
often cannot know if a communication with a conduit borrower might
later be considered a solicitation since the dealer does not know if
the issuer ultimately used will meet the requirements for rebutting the
presumption that a communication with the borrower is a solicitation.
    MSRB Response. The MSRB believes that ABASA and BMA incorrectly
implied that the only way for a dealer to rebut the presumption that a
communication with a conduit borrower is a solicitation is by
establishing that a conduit issuer historically defers to its conduit
borrowers' selections of underwriters. The September 2004 Notice
provided that a communication would not be considered a solicitation if
there is no reasonable nexus between the making of contributions to
officials of a conduit issuer and the selection of the underwriter for
a conduit financing. The method mentioned by ABASA and BMA was simply
one example of how a dealer could establish that there was no such
reasonable nexus.
    Nonetheless, the MSRB agrees that a dealer's communication with a
conduit borrower generally should not be deemed an indirect
solicitation of the issuer unless a reasonable nexus can be established
between the making of contributions to officials of the conduit issuer
within the meaning of Rule G-37 and the selection of the underwriter
for such conduit financing. A determination of whether such a
reasonable nexus could exist depends on the specific facts and
circumstances. The proposed rule change reflects this position.

Inform and Refer

    In the April 2004 Notice, the MSRB noted that, where an issuer
representative asks an associated person of a dealer whether the dealer
has municipal securities capabilities, a limited affirmative response
by the associated person, together with the provision to the issuer
representative of contact information for dealer personnel who handle
municipal securities business, generally would not be presumed to be a
solicitation by such associated person. In the September 2004 Notice,
the MSRB provided further elaboration and additional examples, noting
in particular that the associated person could have an MFP of the
dealer contact the issuer representative directly in response to such
an inquiry. In both notices, the MSRB stated that, if the associated
person receives compensation such as a finder's or referral fee for
such business, the associated person generally would be viewed as
having solicited the business.
    Comments Received. In response to the April 2004 Notice, ABASA
stated that, in a bank holding company, bankers should be free to
inform issuers that affiliated dealers have municipal securities
capabilities and provide contact information without such communication
being deemed a solicitation. PNC stated that the draft amendment would
``negatively impact the ability of affiliated companies to conduct
banking business and make referrals. It would require dealers to
disassemble the structures and controls that have been created to
address requirements of the rule.''
    ABASA appreciated the clarification of the ``inform and refer''
concept provided in the September 2004 Notice. However, ABASA continued
to object that the MSRB viewed the receipt of a finder's fee or
referral fee as causing a communication to be considered a
solicitation. ABASA stated that this would significantly add to the
regulatory burden of bank dealers and, at a minimum, the MSRB should
exempt any referral fees permitted under the Gramm-Leach-Bliley Act.
PNC stated that dealer personnel should be permitted to approach issuer
representatives to inform them of the dealer's municipal securities
capabilities without such communication being considered a
solicitation, but Mr. Chapman disagreed.
    MSRB Response. The MSRB believes that the guidance provided in the
September 2004 Notice on this topic is appropriate and has not made any
further changes.

Technical Experts

    Comments Received. BMA, Goldman and Seattle-Northwest requested
that the MSRB explicitly exempt communications by attorneys,
accountants, engineers and legislative lobbyists with issuers from the
definition of solicitation. They noted that such technical experts were
exempted from former Rule G-38 relating to consultants \12\ and argued
that such exclusion should be continued in revised Rule G-38. BMA
argued that

``the MSRB's broad interpretation of the meaning of solicitation means
that broker-dealers would be prohibited from hiring outside persons to
perform necessary services given that they would have to, as a
practical matter, attend * * * meetings with issuers and will
ultimately make the broker-dealer more appealing to the issuer by doing
a good job.'' PNC stated that including conversations through or with
secondary participants of an issue would not serve to enhance the goal
of the rule. Seasongood stated that all contact by or through third
parties should be considered a solicitation.
---------------------------------------------------------------------------

    \12\ Attorneys, accountants and engineers were excluded from the
definition of consultant under former Rule G-38 only so long as
their sole basis of compensation from the dealer was the actual
provision of legal, accounting or engineering services on the
municipal securities business that the dealer is seeking. As BMA
noted, the rule did not exempt legislative lobbying; rather, the
MSRB had noted in a Question and Answer guidance that the activity
of lobbying legislators for legislation granting an issuer authority
to issue certain types of municipal securities would not, by itself,
result in the lobbyist being considered a consultant. See Rule G-38
Question & Answer 5, dated February 28, 1996, published in
MSRB Rule Book.
---------------------------------------------------------------------------

    MSRB Response. The proposed rule change makes clear that, so long
as non-affiliated persons providing legal, accounting, engineering or
other professional services \13\ are not being paid directly or
indirectly for their solicitation activities,\14\ they would not become
subject to Rule G-38. The MSRB believes that this language adequately
addresses the concerns raised by the commentators.
---------------------------------------------------------------------------

    \13\ The proposed rule change does not enumerate all
professional services that may be provided in connection with
municipal securities business but makes clear that such services are
not strictly limited to legal, accounting and engineering services
(e.g., another dealer serving as a syndicate member).
    \14\ The proposed rule change reminds dealers that the term
``payment'' under MSRB rules is broadly defined and can include,
depending on the facts and circumstances, quid pro quo arrangements
whereby a non-affiliated person solicits municipal securities
business for the dealer in exchange for being hired by the dealer to
provide other unrelated services.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number SR-MSRB-2005-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-MSRB-2005-11. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all

written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the MSRB's
offices. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
MSRB-2005-11 and should be submitted on or before January 10, 2006.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7523 Filed 12-19-05; 8:45 am]

BILLING CODE 8010-01-P