[Federal Register Volume 77, Number 247 (Wednesday, December 26, 2012)]
[Notices]
[Pages 76106-76108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30889]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68459; File No. TP 13-02]
Order Granting Limited Exemptions From Exchange Act Rule 10b-17
and Rules 101 and 102 of Regulation M to ALPS ETF Trust, ALPS/GS
Momentum Builder Growth Markets Equities and U.S. Treasuries Index ETF,
ALPS/GS Momentum Builder Multi-Asset Index ETF, and ALPS/GS Momentum
Builder Asia ex-Japan Equities and U.S. Treasuries Index ETF Pursuant
to Exchange Act Rule 10b-17(b)(2) and Rules 101(d) and 102(e) of
Regulation M
December 18, 2012.
By letter dated December 18, 2012 (the ``Letter''), as supplemented
by conversations with the staff of the Division of Trading and Markets,
counsel for ALPS ETF Trust (the ``Trust'') on behalf of the Trust,
ALPS/GS Momentum Builder Growth Markets Equities and U.S. Treasuries
Index ETF, ALPS/GS Momentum Builder Multi-Asset Index ETF, and ALPS/GS
Momentum Builder Asia ex-Japan Equities and U.S. Treasuries Index ETF
(each a ``Fund'' and, collectively, the ``Funds''), any national
securities exchange on or through which shares issued by the Funds
(``Shares'') may subsequently trade, and persons or entities engaging
in transactions in Shares (collectively, the ``Requestors'') requested
exemptions, or interpretive or no-action relief, from Rule 10b-17 of
the Securities Exchange Act of 1934, as amended (``Exchange Act'') and
Rules 101 and 102 of Regulation M in connection with secondary market
transactions in Shares and the creation or redemption of aggregations
of Shares
[[Page 76107]]
of at least 50,000 shares (``Creation Units'').
The Trust is registered with the Commission under the Investment
Company Act of 1940, as amended (``1940 Act'') as an open-end
management investment company. Each Fund seeks to track the performance
of a particular underlying index (``Index''), which for each Fund is
comprised of shares of exchange traded products (``ETPs'') (primarily
exchange-traded funds, or ``ETFs,'' but also some exchange-traded
commodity pools). Using a methodology developed by the index provider,
each Index seeks to provide exposure to price momentum of certain
equity markets and U.S. fixed income markets by reflecting the
combination of weightings of the ETPs that underlie each Index that
would have provided the highest six-month historical return, subject to
constraints on maximum and minimum weights and volatility controls.\1\
The Index is rebalanced monthly, but may also be rebalanced as
frequently as daily if the daily volatility control is triggered.\2\
Each Fund intends to operate as an ``ETF of ETFs'' by seeking to track
the performance of its underlying Index in investing at least 80% of
its assets in the ETPs that comprise each Index. Except for the fact
that the Funds will operate as ETFs of ETFs, the Funds will operate in
a manner identical to the ETPs that comprise each Index.
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\1\ Two levels of volatility control are applied. The monthly
volatility control is performed on each monthly rebalancing date and
sets a maximum limit on the annualized historic six-month
``realized'' volatility of any selected combination of ETF weights.
Each Index is then rebalanced at that time to reflect such limit.
The daily volatility control rebalances a portion or all of the
current Index components into short-term fixed income ETFs in order
to reduce volatility when the annualized historic three-month
volatility of the current Index components exceeds a predetermined
level. Following any rebalance resulting from the Index components'
volatility exceeding such level, each Index is rebalanced into its
prior composition when the annualized historic three-month
volatility of such composition declines below the predetermined
level.
\2\ The Requestors represented to the staff of the Division of
Trading and Markets that, with regards to these volatility controls,
(1) if they trigger a rebalance, the rebalance will be posted three
days in advance to the relevant Web site by the calculation agent
and (2) based on historical backtesting performed by the Index
Provider, the daily volatility control would only have been
triggered in the past under rare circumstances.
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The Requestors represent, among other things, the following:
Shares of the Funds will be issued by the Trust, an open-
end management investment company that is registered with the
Commission;
The Trust will continuously redeem Creation Units at net
asset value (``NAV'') and the secondary market price of the Shares
should not vary substantially from the NAV of such Shares;
Shares of the Funds will be listed and traded on the NYSE
Arca (the ``Exchange'') or other exchange in accordance with exchange
listing standards that are, or will become, effective pursuant to
Section 19(b) of the Exchange Act;
All ETPs in which the Funds are invested will meet all
conditions set forth in a relevant class relief letter,\3\ or will have
received individual relief from the Commission; \4\
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\3\ Letter from Catherine McGuire, Esq., Chief Counsel, Division
of Market Regulation, to the Securities Industry Association
Derivative Products Committee (November 21, 2005); Letter from
Racquel L. Russell, Branch Chief, Division of Market Regulation, to
George T. Simon, Esq., Foley & Lardner LLP (June 21, 2006); Letter
from James A. Brigagliano, Acting Associate Director, Division of
Market Regulation, to Stuart M. Strauss, Esq., Clifford Chance US
LLP (October 24, 2006); Letter from James A. Brigagliano, Associate
Director, Division of Market Regulation, to Benjamin Haskin, Esq.,
Willkie, Farr & Gallagher LLP (April 9, 2007); or Letter from
Josephine Tao, Associate Director, Division of Trading and Markets,
to Domenick Pugliese, Esq., Paul, Hastings, Janofsky and Walker LLP
(June 27, 2007).
\4\ One Underlying ETF is an actively-managed ETF and has
received individual relief, but also is entitled to rely in part on
a prior letter from Josephine Tao, Associate Director, Division of
Trading and Markets, to Richard F. Morris of WisdomTree Asset
Management, Inc., dated May 9, 2008, with respect to relief
regarding Section 11(d)(1) of the Exchange Act and Rules 10b-10,
11d1-2, 15c1-5, and 15c1-6 under the Exchange Act.
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At least 70% of each Fund is comprised of component
securities that meet the minimum public float and minimum average daily
trading volume thresholds under the ``actively-traded securities''
definition found in Regulation M for excepted securities during each of
the previous two months of trading prior to formation of the relevant
Fund; provided, however, that if the Fund has 200 or more component
securities, then 50% of the component securities must meet the
actively-traded securities thresholds;
All the components of each Index will have publicly
available last sale trade information;
The intra-day proxy value of each Fund per share and the
value of each Index will be publicly disseminated by a major market
data vendor throughout the trading day;
On each business day before the opening of business on the
Exchange, the Funds' custodian, through the National Securities
Clearing Corporation, will make available the list of the names and the
numbers of securities and other assets of each Fund's portfolio that
will be applicable that day to creation and redemption requests;
The Exchange or other market information provider will
disseminate every 15 seconds throughout the trading day through the
facilities of the Consolidated Tape Association an amount representing
on a per-share basis, the current value of the securities and cash to
be deposited as consideration for the purchase of Creation Units;
The arbitrage mechanism will be facilitated by the
transparency of the Funds' portfolio and the availability of the intra-
day indicative value, the liquidity of securities and other assets held
by the Funds, ability to acquire such securities, as well as the
arbitrageurs' ability to create workable hedges;
The Funds will invest solely in liquid securities;
The Funds will invest in securities that will facilitate
an effective and efficient arbitrage mechanism and the ability to
create workable hedges;
The Requestors believe that arbitrageurs are expected to
take advantage of price variations between each Fund's market price and
its NAV; and
A close alignment between the market price of Shares and
each Fund's NAV is expected.
Regulation M
While redeemable securities issued by an open-end management
investment company are excepted from the provisions of Rule 101 and 102
of Regulation M, the Requestors may not rely upon that exception for
the Shares.\5\ However, we find that it is appropriate in the public
interest and is consistent with the protection of investors to grant a
conditional exception from Rules 101 and 102 to persons who may be
deemed to be participating in a distribution of Shares and the Funds as
described in more detail below.
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\5\ While ETFs operate under exemptions from the definitions of
``open-end company'' under Section 5(a)(1) of the 1940 Act and
``redeemable security'' under Section 2(a)(32) of the 1940 Act, the
Funds and their securities do not meet those definitions.
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Rule 101 of Regulation M
Generally, Rule 101 of Regulation M is an anti-manipulation rule
that, subject to certain exceptions, prohibits any ``distribution
participant'' and its ``affiliated purchasers'' from bidding for,
purchasing, or attempting to induce any person to bid for or purchase
any security which is the subject of a distribution until after the
applicable restricted period, except as specifically permitted in the
rule. Rule 100 of
[[Page 76108]]
Regulation M defines ``distribution'' to mean any offering of
securities that is distinguished from ordinary trading transactions by
the magnitude of the offering and the presence of special selling
efforts and selling methods. The provisions of Rule 101 of Regulation M
apply to underwriters, prospective underwriters, brokers, dealers, or
other persons who have agreed to participate or are participating in a
distribution of securities. The Shares are in a continuous distribution
and, as such, the restricted period in which distribution participants
and their affiliated purchasers are prohibited from bidding for,
purchasing, or attempting to induce others to bid for or purchase
extends indefinitely.
Based on the representations and facts presented in the Letter,
particularly that the Trust is a registered open-end management
investment company that will continuously redeem at the NAV Creation
Unit size aggregations of the Shares of the Funds and that a close
alignment between the market price of Shares and each Fund's NAV is
expected, the Commission finds that it is appropriate in the public
interest and consistent with the protection of investors to grant the
Trust an exemption under paragraph (d) of Rule 101 of Regulation M with
respect to the Funds, thus permitting persons participating in a
distribution of Shares of the Funds to bid for or purchase such Shares
during their participation in such distribution.\6\
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\6\ Additionally, we confirm the interpretation that a
redemption of Creation Unit size aggregations of Shares of the Fund
and the receipt of securities in exchange by a participant in a
distribution of Shares of the Fund would not constitute an ``attempt
to induce any person to bid for or purchase, a covered security
during the applicable restricted period'' within the meaning of Rule
101 of Regulation M and therefore would not violate that rule.
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Rule 102 of Regulation M
Rule 102 of Regulation M prohibits issuers, selling security
holders, or any affiliated purchaser of such person from bidding for,
purchasing, or attempting to induce any person to bid for or purchase a
covered security during the applicable restricted period in connection
with a distribution of securities effected by or on behalf of an issuer
or selling security holder.
Based on the representations and facts presented in the Letter,
particularly that the Trust is a registered open-end management
investment company that will redeem at the NAV Creation Units of Shares
of the Funds and that a close alignment between the market price of
Shares and each Fund's NAV is expected, the Commission finds that it is
appropriate in the public interest and consistent with the protection
of investors to grant the Trust an exemption under paragraph (e) of
Rule 102 of Regulation M with respect to the Funds, thus permitting the
Funds to redeem Shares of the Funds during the continuous offering of
such Shares.
Rule 10b-17
Rule 10b-17, with certain exceptions, requires an issuer of a class
of publicly traded securities to give notice of certain specified
actions (for example, a dividend distribution) relating to such class
of securities in accordance with Rule 10b-17(b). Based on the
representations and facts in the Letter, and subject to the conditions
below, we find that it is appropriate in the public interest, and
consistent with the protection of investors to grant the Trust a
conditional exemption from Rule 10b-17 because market participants will
receive timely notification of the existence and timing of a pending
distribution, and thus the concerns that the Commission raised in
adopting Rule 10b-17 will not be implicated.\7\
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\7\ We also note that timely compliance with Rule 10b-
17(b)(1)(v)(a) and (b) would be impractical in light of the nature
of the Fund. This is because it is not possible for the Fund to
accurately project ten days in advance what dividend, if any, would
be paid on a particular record date.
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Conclusion
It is hereby ordered, pursuant to Rule 101(d) of Regulation M, that
the Trust, based on the representations and facts presented in the
Letter is exempt from the requirements of Rule 101 with respect to the
Funds, thus permitting persons who may be deemed to be participating in
a distribution of Shares of the Funds to bid for or purchase such
Shares during their participation in such distribution.
It is further ordered, pursuant to Rule 102(e) of Regulation M,
that the Trust, based on the representations and the facts presented in
the Letter, is exempt from the requirements of Rule 102 with respect to
the Funds, thus permitting the Funds to redeem Shares of the Funds
during the continuous offering of such Shares.
It is further ordered, pursuant to Rule 10b-17(b)(2), that the
Trust, based on the representations and the facts presented in the
Letter and subject to the conditions below, is exempt from the
requirements of Rule 10b-17 with respect to transactions in the shares
of the Funds.
This exemptive relief is subject to the following conditions:
The Trust will comply with Rule 10b-17 except for Rule
10b-17(b)(1)(v)(a) and (b); and
The Trust will provide the information required by Rule
10b-17(b)(1)(v)(a) and (b) to the Exchange as soon as practicable
before trading begins on the ex-dividend date, but in no event later
than the time when the Exchange last accepts information relating to
distributions on the day before the ex-dividend date.
This exemptive relief is subject to modification or revocation at
any time the Commission determines that such action is necessary or
appropriate in furtherance of the purposes of the Exchange Act. Persons
relying upon this exemption shall discontinue transactions involving
the Shares of the Funds under the circumstances described above and in
the Letter, pending presentation of the facts for the Commission's
consideration, in the event that any material change occurs with
respect to any of the facts or representations made by the Requestors.
In addition, persons relying on this exemption are directed to the
anti-fraud and anti-manipulation provisions of the Exchange Act,
particularly Sections 9(a), 10(b), and Rule 10b-5 thereunder.
Responsibility for compliance with these and any other applicable
provisions of the federal securities laws must rest with the persons
relying on this exemption. This order should not be considered a view
with respect to any other question that the proposed transactions may
raise, including, but not limited to the adequacy of the disclosure
concerning, and the applicability of other federal or state laws to,
the proposed transactions.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(6) and (9).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30889 Filed 12-21-12; 8:45 am]
BILLING CODE 8011-01-P