[Federal Register Volume 78, Number 124 (Thursday, June 27, 2013)]
[Notices]
[Pages 38741-38743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15363]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69831; File No. TP 13-03]
Order Granting Limited Exemptions From Exchange Act Rule 10b-17
and Rules 101 and 102 of Regulation M to ALPS ETF Trust, the
VelocityShares Tail Risk Hedged Large Cap ETF, and the VelocityShares
Volatility Hedged Large Cap ETF
June 21, 2013.
By letter dated June 21, 2013 (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, the
VelocityShares Tail Risk Hedged Large Cap ETF and the VelocityShares
Volatility Hedged Large Cap 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, ALPS
Distributors, Inc., 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 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''). Each Fund's
underlying index reflects the performance of a portfolio consisting of
an exposure to a large cap equity portfolio, consisting of three
underlying ETFs which track the S&P 500 index (``Underlying Large-Cap
ETFs'') and a volatility strategy to hedge ``tail risk'' events (which
are market events that occur rarely but may have severe consequences
when they do occur), consisting of two underlying ETFs which reflect
leveraged or inverse positions on the S&P 500 VIX Short-Term Futures
Index (``Underlying Volatility ETFs''). The underlying index, at each
monthly rebalance, consists of an 85% allocation to the Underlying
Large-Cap ETFs and a 15% allocation to the Underlying Volatility ETFs.
The Funds intend to operate as ``ETFs of ETFs'' by seeking to track the
performance of the respective underlying Index by investing at least
80% of their assets in the ETPs that comprise each Index. Each Fund
also intends to enter into swap agreements designed to provide exposure
to (a) the Underlying Volatility ETFs and/or (b) leveraged and/or
inverse positions on the S&P 500 VIX Short-Term Futures Index directly.
Except for the fact that the Funds will operate as ETFs of ETFs and
intend to enter into swaps to obtain the leveraged and/or inverse
exposure to the Underlying Volatility ETFs and/or the S&P 500 VIX
Short-Term Futures Index, the Funds will operate in a manner identical
to the ETPs that comprise each Index.
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 that are invested in by the Funds will meet all
conditions set forth in a relevant class relief letter,\1\ will have
received individual relief from the Commission, or will be able to rely
on individual relief even though they are not named parties;
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\1\ 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, Assistant Director, Division of Trading and Markets,
to Domenick Pugliese, Esq., Paul, Hastings, Janofsky and Walker LLP
(June 27, 2007).
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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
[[Page 38742]]
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, the ability of the Funds and arbitrageurs 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.\2\
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\2\ 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
ETFs 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 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, and 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
Units of Shares of the Funds and that a close alignment between the
market price of Shares and the Funds' 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 from
Rule 101 of Regulation M, pursuant to paragraph (d) of Rule 101 of
Regulation M with respect to transactions in the Funds as described in
the Letter, 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.\3\
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\3\ Additionally, we confirm the interpretation that a
redemption of Creation Units of Shares of the Funds and the receipt
of securities in exchange by a participant in a distribution of
Shares of the Funds 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, and 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 the Funds' 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 from Rule 102 of
Regulation M, pursuant to paragraph (e) of Rule 102 of Regulation M
with respect to transactions in the Funds as described in the Letter,
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, in particular that the
concerns that the Commission raised in adopting Rule 10b-17 generally
will not be implicated if exemptive relief, subject to the conditions
below, is granted to the Trust because market participants will receive
timely notification of the existence and timing of a pending
distribution,\4\ 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.
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\4\ 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 Funds. This is because it is not possible for the Funds 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 is exempt from the requirements of Rules 101 with respect to
transactions in the Shares of the Funds as described in the Letter,
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 as described in the
Letter.
It is further ordered, pursuant to Rule 102(e) of Regulation M,
that the Trust is exempt from the requirements of Rule
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102 with respect to transaction in the Shares of the Funds as described
in the Letter, thus permitting the Funds to redeem Shares of the Funds
during the continuous offering of such Shares as described in the
Letter.
It is further ordered, pursuant to Rule 10b-17(b)(2), that the
Trust, subject to the conditions contained in this order, is exempt
from the requirements of Rule 10b-17 with respect to transactions in
the Shares of the Funds as described in the Letter.
This exemption from Rule 10b-17 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 exemption 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
in the event that any material change occurs with respect to any of the
facts presented 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) and 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.\5\
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\5\ 17 CFR 200.30-3(a)(6) and (9).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2013-15363 Filed 6-26-13; 8:45 am]
BILLING CODE 8011-01-P