[Federal Register Volume 79, Number 62 (Tuesday, April 1, 2014)]
[Notices]
[Pages 18365-18367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-07188]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71805]


Order Granting a Limited Exemption From Rule 102 of Regulation M 
Concerning the NYSE Arca, Inc.'s Crowd Participant Program Pilot

March 26, 2014.
    The Securities and Exchange Commission (``Commission'') approved a 
proposed rule change of the NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') to add new NYSE Arca Equities Rule 7.25 (``New Rule 7.25'') 
which establishes the Crowd Participant (``CP'') Program (``CP 
Program'' or ``Program'') effective for one year on a pilot basis. The 
CP Program permits certain market makers to become CPs, a new class of 
equity trading permit holders.\1\ The Exchange states that the CP 
Program is designed to incentivize quoting and trading volume in 
certain low-volume exchange-traded products (``ETPs'') by providing 
credit to CPs for certain market making activity that is funded by 
participating issuers and credited to CPs from the Exchange's general 
revenues.\2\ Participating issuers (or sponsors on behalf of the 
issuer) fund the Program by paying non-refundable ``CP Program Fees,'' 
which are then credited to the Exchange's general revenues.\3\ The 
Commission believes that payment of the CP Program Fee by the issuer 
(or a sponsor on behalf of the issuer) for the purpose of incentivizing 
market makers to participate as a CP in the issuer's securities would 
constitute an indirect attempt by the issuer to induce a bid for or a 
purchase of a covered security during a restricted period.\4\ As a 
result, absent exemptive relief, participation in the CP Program by an 
issuer (or sponsor on behalf of the issuer) would violate Rule 102 of 
Regulation M.\5\ This order grants a limited exemption from Rule 102 of 
Regulation M solely to permit issuers and sponsors to participate in 
the Program during the pilot, subject to certain conditions described 
below.
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    \1\ See New Rule 7.25(a) (establishing the requirements to be a 
CP); see also NYSE Arca Equities Rule 1.1(m) and (n) (defining 
equity trading permits/ETPs and ETP holders) and Securities Exchange 
Act Release No. 71804 (March 26, 2014) (NYSE Arca 2013-141) 
(``Approval Order'') (providing more details regarding the Program).
    \2\ See Approval Order. The Approval Order contains a detailed 
description of the Program. The proposed rule change was published 
for comment in the Federal Register on December 26, 2013. Securities 
Exchange Act Release No. 71146 (Dec. 19, 2013), 78 FR 78426 (Dec. 
26, 2013). The Approval Order grants approval of the proposed rule 
change, as modified by Amendment No. 2.
    \3\ The program is similar to other programs, such as NYSE 
Arca's ``ETP Incentive Program'' and NASDAQ Stock Market LLC's 
``Market Quality Program,'' designed to permit ETP issuers to pay 
incentives to those who make markets in their ETPs. See Securities 
Exchange Act Release No. 69706 (June 6, 2013); 78 FR 35340 (June 12, 
2013) (NYSEArca 2013-34) and Securities Exchange Act Release No. 
69195 (Mar. 20, 2013); 78 FR 18393 (Mar. 26, 2013) (NASDAQ 2012-
137); see also Securities Exchange Act Release No. 69707 (June 6, 
2013); 78 FR 35330 (June 12, 2013) (approving a limited exception 
from Rule 102 of Regulation M concerning NYSE Arca's ETP Incentive 
Program pilot) and Securities Exchange Act Release No. 69196 (Mar. 
20, 2013); 78 FR 18410 (Mar. 26, 2013) (approving a limited 
exception from Rule 102 of Regulation M concerning NASDAQ Stock 
Market LLC's Market Quality Program pilot).
    \4\ See Securities Exchange Act Release No. 67411 (July 11, 
2012), 77 FR 42052 (July 17, 2012) (stating that ``[t]he Commission 
believes that issuer payments made under the [similar ETP Incentive 
and Market Quality Programs] would constitute an indirect attempt by 
the issuer of a covered security to induce a purchase or bid in a 
covered security during a restricted period in violation of Rule 
102'' and that ``[u]nder the [similar ETP Incentive Program], the 
purpose of the Program is `to create [an incentive program] for 
issuers of certain ETPs listed' on NYSE Arca, which . . . could 
induce bids or purchases for the issuer's security during a 
restricted period''). Similarly, the issuer pays for the CP Program 
for the stated purpose of incentivizing market makers to quote and 
trade in certain low-volume ETPs, which also could induce bids or 
purchases for the issuer's security during a restricted period. See 
Approval Order.
    \5\ 17 CFR 242.102.
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    NYSE Arca stated that the CP Program is designed to incentivize 
market makers to quote and trade in certain low-volume ETPs.\6\ In 
addition, the Exchange states that the Program is designed to add 
competition among existing qualified Market Makers on the Exchange.\7\ 
The Exchange states that the CP Program will offer an alternative to 
the existing Lead Market Maker program on the Exchange and the ETP 
Incentive Program (under NYSE Arca Equities Rule 8.800) for issuers to 
consider when determining where to list their securities.\8\
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    \6\ See Approval Order.
    \7\ Id.
    \8\ Id.
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    An issuer of an ETP that participates in the CP Program would elect 
to pay a ``CP Program Fee'' to NYSE Arca in an amount ranging from 
$50,000 to $100,000 per year, with the actual amount to be determined 
by the issuer.\9\ The CP Program Fee is in addition to the current 
listing and annual fees applicable to the ETP and is paid by the issuer 
to the Exchange's general revenues.\10\ Subject to the requirements set 
forth in New Rule 7.25, a CP participating in the CP Program would 
receive a payment monthly from NYSE Arca (``CP Payment'') in an amount 
not to exceed the CP Program Fee, less a 5% NYSE Arca administration 
fee, divided by the number of trading days in the calendar year.\11\ 
The payment structure of the CP Payment is specified in the Trading Fee 
Schedule and tied to the performance of the CP.\12\ If no CP is 
eligible to receive a CP Payment because the CP Program performance 
standards were not met by any CP, no CP would receive a CP Payment.\13\ 
The voluntary Program established by New Rule 7.25 will be effective 
for one year on a pilot basis.\14\
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    \9\ Id.
    \10\ Id.
    \11\ Id.
    \12\ Id.
    \13\ Id.
    \14\ Preamble to New Rule 7.25.
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    Under New Rule 7.25, NYSE Arca will be required to provide 
notification on its Web site regarding: (i) The ETPs participating in 
the CP Program, (ii) the date a particular ETP begins participating in 
the CP Program, (iii) the date the Exchange receives written notice of 
an issuer's intent to withdraw its ETP from the CP Program, and the 
intended withdrawal date, if provided, (iv) the date a particular ETP 
ceases participating in the CP Program, (v) the CPs assigned to each 
ETP participating in the CP Program, (vi) the date the Exchange 
receives written notice of a CP's intent to withdraw from its ETP 
assignment(s) in the CP Program, and the intended withdrawal date, if 
provided, and (vii) the amount of the CP Program Fee for each ETP.\15\ 
This page would also include a fair and balanced description of the CP 
Program, including (i) a description of the CP Program's operation as a 
pilot, including the effective date thereof, (ii) the potential 
benefits that may be realized by an ETP's participation in the CP 
Program, (iii) the potential risks that may be attendant with an ETP's 
participation in the CP Program, (iv) the potential impact resulting 
from an ETP's entry into and exit from the CP Program, and (v) how 
interested parties can request additional information regarding the CP 
Program and/or the ETPs participating therein.\16\ Furthermore, an 
issuer that is approved to participate in the CP Program shall issue a 
press release to the public, in a form and manner prescribed by the 
Exchange, when it commences participation or ceases to participate in 
the CP Program.\17\ Such press release would be issued, if practicable, 
at least two days before the ETP commences or ceases participation in 
the CP Program.\18\ The issuer also will be required to dedicate space 
on its Web site, or, if it does not

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have a Web site, on the Web site of the adviser or sponsor of the ETP, 
to (i) include any such press releases and (ii) provide a hyperlink to 
the dedicated page on NYSE Arca's Web site that describes the 
Program.\19\
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    \15\ New Rule 7.25(c)(4).
    \16\ Id.
    \17\ New Rule 7.25(c)(5).
    \18\ Id.
    \19\ Id.
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    The Commission received no comments on the proposal.\20\ However, 
certain commenters expressed concerns about similar ETP Incentive and 
Market Quality Programs,\21\ including the departure from rules 
precluding market makers from directly or indirectly accepting payment 
from an issuer of a security for acting as a market maker.\22\ In 
particular, commenters to those similar proposals discussed the 
potential distortive impact on the natural market forces of supply and 
demand.\23\ Commenters to those proposals also discussed what they 
viewed as the failure of those programs, as originally conceived, to 
adequately mitigate their potential negative impacts.\24\
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    \20\ See Approval Order.
    \21\ See note 2, supra.
    \22\ See, e.g., Letter from Gus Sauter, Managing Director and 
Chief Investment Officer, Vanguard, dated June 7, 2012 (citing to 
his comment letter regarding the similar NASDAQ Market Quality 
Program, in which he stated, ``The additional factor of payments by 
an issuer to a market maker would probably be viewed as a conflict 
of interest since it would undoubtedly influence, to some degree, a 
firm's decision to make a market and thereafter, perhaps, the prices 
it would quote. Hence, what might appear to be independent trading 
activity may well be illusory.''). In addition, another commenter 
noted ``that market maker incentive programs, such as the [then-
proposed Program], represent a departure from the current rules 
precluding market makers from accepting payment from an issuer of a 
security for acting as a market marker'' yet supported the concept 
of market maker incentive programs on a pilot basis. Letter from Ari 
Burstein, Investment Company Institute (``ICI''), dated June 7, 
2012. In a subsequent letter, however, the same commenter noted that 
certain of its members opposed the Program as originally proposed 
and stated that it ``could create a `pay-to-play' environment.'' 
Letter from Ari Burstein, ICI, dated Aug. 16, 2012. The Approval 
Order also notes that a number of aspects of the Program mitigate 
the concerns that the rule in question, FINRA Rule 5250 (Payments 
for Market Making), were designed to address.
    \23\ See, e.g., Letter from F. William McNabb, Chairman and 
Chief Executive Officer, Vanguard, dated Aug. 16, 2012.
    \24\ See, e.g., Letter from Gus Sauter, Managing Director and 
Chief Investment Officer, Vanguard, dated June 7, 2012.
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    One commenter stated that ``[i]ssuer payments to market makers have 
the potential to distort market forces, resulting in spreads and prices 
that do not reflect actual supply and demand.'' \25\ One commenter 
questioned whether any safeguards could alleviate their concerns 
regarding issuer payments to market makers.\26\ Another commenter 
questioned whether information relating to the similar Market Quality 
Program posted to that exchange's Web site in a similar manner as 
required in New Rule 7.25(c)(4) by NYSE Arca would adequately address 
investor protection and market integrity concerns because investors may 
not search an exchange Web site for important information about a 
particular ETP.\27\
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    \25\ Letter from F. William McNabb, Chairman and Chief Executive 
Officer, Vanguard, dated Aug. 16, 2012.
    \26\ Letter from Ari Burstein, ICI, dated Aug. 16, 2012 (stating 
that ``ICI members who oppose the Programs believe any fixes to the 
proposed parameters will be insufficient to address their overall 
concerns with market maker incentive programs'').
    \27\ Letter from Gus Sauter, Managing Director and Chief 
Investment Officer, Vanguard, dated (May 3, 2012) (asking whether it 
is likely that investors would consult NASDAQ's Web site for 
information about which ETFs and market makers are participating in 
the NASDAQ Market Quality Program given what is known about investor 
behavior and, if not, asserting that ``most investors would not be 
able to distinguish quotations that reflect true market forces from 
quotations that have been influenced by issuer payments'').
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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 persons, directly or 
indirectly, from bidding for, purchasing, or attempting to induce any 
person to bid for or purchase a covered security \28\ during the 
applicable restricted period in connection with a distribution of 
securities effected by or on behalf of an issuer or selling security 
holder, except as specifically permitted in the rule.\29\ As mentioned 
above, the Commission believes that the payment of the CP Program Fee 
would constitute an indirect attempt to induce a bid for or purchase of 
a covered security during the applicable restricted period.\30\ As a 
result, absent exemptive relief, participation in the Program by a 
sponsor or issuer would violate Rule 102.
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    \28\ Covered security is defined as any security that is the 
subject of a distribution, or any reference security. 17 CFR 
242.100(b).
    \29\ 17 CFR 242.102(a).
    \30\ See note 3, supra.
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    On the basis of the conditions set out below and the requirements 
set forth in New Rule 7.25, which in general are designed to help 
inform investors about the potential impact of the Program, the 
Commission finds that it is appropriate in the public interest, and is 
consistent with the protection of investors, to grant a limited 
exemption from Rule 102 of Regulation M solely to permit the payment of 
the CP Program Fee as set forth in New Rule 7.25 during the pilot.\31\ 
This limited exemption is conditioned on a requirement that the 
security participating in the Program is an ETP and the secondary 
market price for shares of the ETP must not vary substantially from the 
net asset value of such ETP shares during the duration of the ETP's 
participation in the Program. This condition is designed to limit the 
Program to ETPs that have a pricing mechanism that is expected to keep 
the price of the ETP shares tracking the net asset value of the ETP 
shares, which should make the shares less susceptible to price 
manipulation.
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    \31\ Rule 102(e) allows the Commission to grant an exemption 
from the provision of Rule 102, either unconditionally or on 
specified terms and conditions, to any transaction or class of 
transactions, or to any security or class of securities.
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    This limited exemption is further conditioned on disclosure 
requirements, as set forth below, which are designed to alert potential 
investors that the trading market for the otherwise less liquid 
securities in the Program may be affected by participation in the 
Program. By making it easier for investors to be able to distinguish 
which quotations may have been influenced by the CP Program Fee from 
those that have not, and by requiring the issuers and sponsors to 
provide information on the potential effect of Program participation on 
the price and liquidity of a security participating in the Program, the 
required enhanced disclosure requirements are designed to inform 
potential investors about the potential distortive impact of the CP 
Program Fee on the natural market forces of supply and demand. The 
general disclosures required by New Rule 7.25, while helpful, may not 
be sufficient to obtain this result.\32\ The required enhanced 
disclosures are expected to promote greater investor protection by 
helping to ensure that investors will have easier access to important 
information about a particular ETP.\33\
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    \32\ New Rule 7.25(c)(5) does not contain any specific content 
requirements for issuer or sponsor disclosure, other than a ``press 
release'' when entering or leaving the Program and a hyperlink on a 
dedicated issuer, advisor, or sponsor's Web page to the Exchange's 
Web site that contains a number of specific disclosures about the 
program. As outlined below, the enhanced disclosures required of the 
issuer or sponsor as conditions to this order require that the 
issuer's or sponsor's press release and Web page directly contain a 
number of helpful disclosures for investors, including risks of the 
program.
    \33\ The required Web site and press release disclosures should 
be less burdensome than other methods of notifying investors of a 
security's participation in the Program, such as requiring a ticker 
symbol identifier or flagging participating CP quotes and trades.
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    As a practical matter, these requirements are not intended to be 
duplicative with the issuer disclosures required by New Rule 7.25. 
These requirements can be satisfied via the press release and dedicated 
Web page

[[Page 18367]]

required by New Rule 7.25(c)(5), however. These materials must contain 
all the required disclosures outlined below, and be in the manner 
stated in the condition, in addition to any requirements of the 
Exchange. Issuers or sponsors of products that are not registered under 
the Investment Company Act of 1940, as amended (``1940 Act''), may also 
meet the press release requirements of these enhanced disclosures in a 
manner compliant with Regulation FD (other than Web site only 
disclosure).\34\ We also note that, to the extent that information 
about participation in the Program is material, disclosure of this kind 
may already be required by the federal securities laws and rules.
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    \34\ See condition (4), infra.
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Conclusion

    It is therefore ordered, that issuers or sponsors who pay a CP 
Program Fee are hereby exempted from Rule 102 of Regulation M solely to 
permit the payment of the CP Program Fee as set forth in New Rule 7.25 
in connection with a security participating in the Program during the 
pilot, subject to the conditions contained in this order and compliance 
with the requirements of New Rule 7.25.
    This exemption is subject to the following conditions:
    1. The security participating in the Program is an ETP and the 
secondary market price for shares of the ETP must not vary 
substantially from the net asset value of such ETP shares during the 
duration of the security's participation in the Program;
    2. The issuer of the participating ETP, or sponsor on behalf of the 
issuer, must provide prompt notice to the public by broadly 
disseminating a press release prior to entry (or upon re-entry) into 
the Program. This press release must disclose:
    a. The payment of a CP Program Fee is intended to generate more 
quotes and trading than might otherwise exist absent this payment, and 
that the security leaving the Program may adversely impact a 
purchaser's subsequent sale of the security; and
    b. A hyperlink to the Web page described in condition (5) below;
    3. The issuer of the participating ETP, or sponsor on behalf of the 
issuer, must provide prompt notice to the public by broadly 
disseminating a press release prior to a security leaving the Program 
for any reason, including termination of the Program. This press 
release must disclose:
    a. The date that the security is leaving the Program and that 
leaving the Program may have a negative impact on the price and 
liquidity of the security which could adversely impact a purchaser's 
subsequent sale of the security; and
    b. A hyperlink to the Web page described in condition (5) below;
    4. In place of the press releases required by conditions (2) and 
(3) above, an issuer of a participating ETP that is not registered 
under the 1940 Act, or sponsor on behalf of the issuer, may provide 
prompt notice to the public through the use of such other written 
Regulation FD compliant methods (other than Web site disclosure only) 
that is designed to provide broad public dissemination as provided in 
17 CFR 243.101(e), provided, however, that such other methods must 
contain all the information required to be disclosed by conditions (2) 
and (3) above;
    5. The issuer of the participating ETP, or sponsor on behalf of the 
issuer, must provide prompt, prominent and continuous disclosure on its 
Web site in the location generally used to communicate information to 
investors about a particular security participating in the Program, and 
for a security that has a separate Web site, the security's Web site 
of:
    a. The security participating in the Program and ticker, date of 
entry into the Program, and the amount of the CP Program Fee;
    b. Risk factors investors should consider when making an investment 
decision, including that participation in the Program may have 
potential impacts on the price and liquidity of the security; and
    c. Termination date of the pilot, anticipated date (if any) of the 
security leaving the Program for any reason, date of actual exit (if 
applicable), and that the security leaving the Program could adversely 
impact a purchaser's subsequent sale of the security; and
    6. The Web site disclosure in condition (5) above must be promptly 
updated if a material change occurs with respect to any information 
contained in the disclosure.
    This exemptive relief expires when the pilot terminates, and 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 exemptive relief is limited 
solely to the payment of the CP Program Fee as set forth in New Rule 
7.25 for a security that is an ETP participating in the Program,\35\ 
and does not extend to any other activities, any other security of the 
trust related to the participating ETP, or any other issuers.\36\ 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 does not represent Commission 
views with respect to any other question that the proposed activities 
may raise, including, but not limited to the adequacy of the disclosure 
required by federal securities laws and rules, and the applicability of 
other federal or state laws and rules to, the proposed activities.
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    \35\ All ETPs that are allowed to participate in the Program 
have a pool of underlying assets. See New Rule 7.25(b)(2). Should 
the program be modified to include other ETPs, such as exchange-
traded notes, that do not have a pool of underlying assets, the 
Commission would consider this a material change and outside the 
scope of this exemptive relief.
    \36\ Other activities, such as ETP redemptions, are not covered 
by this exemptive relief.
    \37\ 17 CFR 200.30-3(a)(6).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07188 Filed 3-31-14; 8:45 am]
BILLING CODE 8011-01-P