[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