[Federal Register Volume 79, Number 207 (Monday, October 27, 2014)]
[Notices]
[Pages 63997-63999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-25434]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73398; File No. TP 15-02]
Order Granting Limited Exemptions From Exchange Act Rule 10b-17
and Rules 101 and 102 of Regulation M to Global X JP Morgan Efficiente
Index and Global X JP Morgan US Sector Rotator Index ETFs Pursuant to
Exchange Act Rule 10b-17(b)(2) and Rules 101(d) and 102(e) of
Regulation M
October 21, 2014.
By letter dated October 21, 2014 (the ``Letter''), as supplemented
by conversations with the staff of the Division of Trading and Markets,
counsel for Global X Funds (the ``Trust''), on behalf of the Trust,
Global X JP Morgan Efficiente Index and Global X JP Morgan US Sector
Rotator Index ETFs (collectively the ``Funds''), any national
securities exchange on or through which shares issued by the Funds
(``Shares'') may subsequently trade, SEI Investment Distribution
Company, 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 Securities and Exchange Commission
(``Commission'') under the Investment Company Act of 1940, as amended
(``1940 Act''), as an open-end management investment company. The Funds
seek to track the performance of underlying indexes, specifically the
JP Morgan ETF Efficiente 10 TR Series X Index for the Global X JP
Morgan Efficiente Index ETF and the JP Morgan US Sector Rotator TR
Series X Index for the Global X JP Morgan US Sector Rotator Index ETF
(collectively the ``Indexes''). The Funds intend to operate as ``ETF of
ETFs'' by seeking to track the performance of their underlying Indexes
through investing at least 80% of their net assets (plus the amount of
any borrowings for investment purposes) in the ETFs and ETPs which
comprise the Indexes. Except for the fact that the Funds will operate
as an ETF of ETFs, the Funds will operate in a manner identical to the
ETFs and ETPs that are included in the Indexes.
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, Inc. or another exchange in accordance with exchange listing
standards that are, or will become, effective pursuant to Section 19(b)
of the Exchange Act (the ``Exchange''); \1\
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\1\ Further, the Letter states that should the Shares also trade
on a market pursuant to unlisted trading privileges, such trading
will be conducted pursuant to self-regulatory organization rules
that have become effective pursuant to Section 19(b) of the Exchange
Act.
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All ETFs and ETPs in which the Funds are invested will
meet all conditions set forth in a relevant class relief letter,\2\
will have received
[[Page 63998]]
individual relief from the Commission, or will be able to rely upon
individual relief even though they are not named parties (for example,
a no-action letter);
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\2\ Exchange Act Rel. No. 67215 (June 19, 2012); 77 FR 37941
(June 25, 2012); 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). See also Staff Legal Bulletin No. 9,
``Frequently Asked Questions About Regulation M'' (April 12, 2002)
(regarding actively-managed ETFs).
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At least 70% of the Funds are comprised of component
securities that will 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 Funds; provided, however, that if the Funds have 200 or more
component securities, then 50% of the component securities will meet
the actively-traded securities thresholds;
All the components of the Indexes will have publicly
available last sale trade information;
The intra-day proxy value of the Funds per share and the
value of the Indexes 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 the Funds' portfolio that
will be applicable that day to creation and redemption requests;
The Exchange or other market information provider will
disseminate (i) continuously every 15 seconds throughout the trading
day, through the facilities of the consolidated tape, the market value
of a Share and (ii) every 15 seconds throughout the trading day, a
calculation of the intraday indicative value of a Share;
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 held by the Funds and
the 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 Trust believes that arbitrageurs are expected to take
advantage of price variations between the Funds' market price and its
NAV; and
A close alignment between the market price of Shares and
the Funds' 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.\3\ However, we find that it is appropriate in the public
interest and is consistent with the protection of investors to grant a
conditional exemption from Rules 101 and 102 to persons who may be
deemed to be participating in a distribution of Shares of the Funds as
described in more detail below.
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\3\ 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 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 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 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.\4\
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\4\ Additionally, we confirm the interpretation that a
redemption of Creation Unit size aggregations 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 Unit size
aggregations 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 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, the Commission finds 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
[[Page 63999]]
adopting Rule 10b-17 will not be implicated.\5\
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\5\ 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, 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. This
exemption is based on the facts presented and the representations made
in the Letter. Any different facts or representations may require a
different response. In the event that any material change occurs in the
facts or representations in the Letter, transactions in Shares of the
Funds must be discontinued, pending presentation of the facts for our
consideration. 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.\6\
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\6\ 17 CFR 200.30-3(a)(6) and (9).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-25434 Filed 10-24-14; 8:45 am]
BILLING CODE 8011-01-P