[Federal Register Volume 81, Number 92 (Thursday, May 12, 2016)]
[Notices]
[Pages 29588-29590]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11154]
[[Page 29588]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77779; File No. TP 16-06]
Order Granting Limited Exemptions From Exchange Act Rule 10b-17
and Rules 101 and 102 of Regulation M to IndexIQ ETF Trust, IQ Enhanced
Core Bond U.S. ETF, IQ Enhanced Core Plus Bond U.S. ETF, IQ Leaders
Bond Allocation Tracker ETF, and IQ Leaders GTAA Tracker ETF, Pursuant
to Exchange Act Rule 10b-17(b)(2) and Rules 101(d) and 102(e) of
Regulation M
May 6, 2016.
By letter dated May 6, 2016 (the ``Letter''), as supplemented by
conversations with the staff of the Division of Trading and Markets,
counsel for IndexIQ ETF Trust (the ``Trust''), on behalf of the Trust,
the IQ Enhanced Core Bond U.S. ETF, IQ Enhanced Core Plus Bond U.S.
ETF, IQ Leaders Bond Allocation Tracker ETF, and IQ Leaders GTAA
Tracker ETF (each, a ``Fund'' and collectively the ``Funds''), NYSE
Arca or any national securities exchange on or through which shares
issued by the Funds (``Shares'') may subsequently trade, ALPS
Distributors, Inc. (the ``Distributor''), 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. Each Fund
is an index fund that seeks to track, as closely as possible, before
fees and expenses, the performance of its stated index by holding a
portfolio of investments selected to correspond generally to the price
and yield performance of such index.
The IQ Enhanced Core Bond U.S. ETF and the IQ Enhanced Core Plus
Bond U.S. ETF seek investment results that correspond (before fees and
expenses) generally to the price and yield performance of their
indices, the IQ Enhanced Core Bond U.S. Index and IQ Enhanced Core Plus
Bond U.S. Index, respectively. These indices were designed to weight
each of the various sectors of the investment grade fixed income market
(and, in the case of the IQ Enhanced Core Plus Bond U.S. Index, the
high yield fixed income securities market) based on each index's
overall level of risk as measured by volatility and the total return
momentum of each fixed income sector, so that each index will
overweight fixed income sectors with high momentum and underweight
fixed income sectors with low momentum, with constraints to maintain
sector diversification.
The IQ Leaders Bond Allocation Tracker ETF and the IQ Leaders GTAA
Tracker ETF seek investment results that correspond (before fees and
expenses) generally to the price and yield performance of their
indices, the IQ Leaders Bond Allocation Index and IQ Leaders GTAA
Index, respectively. The IQ Leaders Bond Allocation Index seeks to
track the ``beta'' portion of the returns of the ten leading bond
mutual funds pursuing a global bond strategy and the IQ Leaders GTAA
Index seeks to track the beta portion of the returns of the ten leading
global allocation mutual funds based on fund performance and fund asset
size.\1\
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\1\ The global allocation mutual funds invest in a combination
of equity, fixed-income, and money market securities of U.S. and
foreign issuers, and may also invest in other asset classes such as
commodities.
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At least 80% of each Fund's portfolio holdings are, and will be,
shares of some or all of the exchange-traded products (``ETPs'') that
are the index constituents of its stated index. Some or all of the
remaining 20% may be invested in securities that are not index
constituents which the advisor believes will help the Fund track its
index, as well as cash, cash equivalents and various types of financial
instruments including, but not limited to, futures contracts, swap
agreements, forward contracts, reverse repurchase agreements, and
options on securities, indices, and futures contracts. In no case will
a Fund hold any non-ETP equity security issued by a single issuer in
excess of 20% of such Fund's portfolio holdings.
Accordingly, each Fund intends to operate primarily as an ``ETF of
ETFs.'' Except for the fact that each Fund intends to operate primarily
as an ETF of ETFs, each Fund will operate in a manner very similar to
that of the ETPs held in its portfolio.
The Requestors represent, among other things, the following:
Shares of each Fund 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 each Fund 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;
Each ETP in which each Fund is invested will meet all
conditions set forth in a relevant class relief letter,\2\ or will have
received individual relief from the Commission;
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\2\ Letter from Catherine McGuire, Esq., Chief Counsel, Division
of Market Regulation, to the Securities Industry Association
Derivative Products Committee (Nov. 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 (Oct.
24, 2006); Letter from James A. Brigagliano, Associate Director,
Division of Market Regulation, to Benjamin Haskin, Esq., Willkie.
Farr & Gallagher LLP (Apr. 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'' (Apr. 12, 2002) (regarding actively-
managed ETFs).
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All of the components of each Fund's underlying 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, each Fund's 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 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
the current value of the cash and securities held in the portfolio of a
Fund but does not reflect corporate actions, expenses, and other
adjustments made to such portfolio throughout the day (``Estimated
NAV'');
At least 80% of each Fund's portfolio holdings are, and
will be, shares of some or all of the ETPs that are the index
constituents of its stated index;
Each Fund will invest in securities that will facilitate
an effective and
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efficient arbitrage mechanism and the ability to create workable
hedges;
The Requestors believe that arbitrageurs can be expected
to take advantage of price variations between each Fund's market price
and its NAV;
The arbitrage mechanism will be facilitated by the
transparency of each Fund's portfolio and the availability of the
Estimated NAV, the liquidity of securities and other assets held by
each Fund, and the ability to acquire such securities, as well as
arbitrageurs' ability to create workable hedges; 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.\3\ However, we find that it is appropriate in the public
interest, and is consistent with the protection of investors, to grant
a limited exemption from Rules 101 and 102 to persons who may be deemed
to be participating in a distribution of Shares and the Fund 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, each
Fund and its 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 each Fund 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 each Fund, thus permitting persons participating in a
distribution of Shares of each Fund 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 each Fund
and the receipt of securities in exchange by a participant in a
distribution of Shares of each 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 each Fund 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
each Fund to redeem Shares of each Fund 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.\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 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.
Further, the Commission finds, based upon the representations of the
Requestors in the Letter, that the provision of the notices as
described in the Letter would not constitute a manipulative or
deceptive device or contrivance comprehended within the purpose of
Rule 10b-17.
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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 the facts presented in the
Letter, is exempt from the requirements of Rule 101 with respect to
each Fund, thus permitting persons who may be deemed to be
participating in a distribution of Shares of each Fund 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
each Fund, thus permitting each Fund to redeem Shares of each Fund
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 each Fund.
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
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the Commission determines that such action is necessary or appropriate
in furtherance of the purposes of the Exchange Act. Persons relying
upon this exemptive relief shall discontinue transactions involving the
Shares of the Funds, 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 and, consistent with all preceding letters, particularly
with respect to the close alignment between the market price of Shares
and each Fund's NAV. In addition, persons relying on this exemptive
relief 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 exemptive relief.
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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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11154 Filed 5-11-16; 8:45 am]
BILLING CODE 8011-01-P