[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Rules and Regulations]
[Pages 57162-57238]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21250]



[[Page 57161]]

Vol. 84

Thursday,

No. 206

October 24, 2019

Part II





Securities and Exchange Commission





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17 CFR Parts 210, 232, 239, et al.





Exchange-Traded Funds; Final Rule

  Federal Register / Vol. 84 , No. 206 / Thursday, October 24, 2019 / 
Rules and Regulations  

[[Page 57162]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 232, 239, 270, and 274

[Release Nos. 33-10695; IC-33646; File No. S7-15-18]
RIN 3235-AJ60


Exchange-Traded Funds

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (the ``Commission'') is 
adopting a new rule under the Investment Company Act of 1940 (the 
``Investment Company Act'' or the ``Act'') that will permit exchange-
traded funds (``ETFs'') that satisfy certain conditions to operate 
without the expense and delay of obtaining an exemptive order. In 
connection with the final rule, the Commission will rescind certain 
exemptive relief that has been granted to ETFs and their sponsors. The 
Commission also is adopting certain disclosure amendments to Form N-1A 
and Form N-8B-2 to provide investors who purchase and sell ETF shares 
on the secondary market with additional information regarding ETF 
trading and associated costs, regardless of whether such ETFs are 
structured as registered open-end management investment companies 
(``open-end funds'') or unit investment trusts (``UITs''). Finally, the 
Commission is adopting related amendments to Form N-CEN. The final rule 
and form amendments are designed to create a consistent, transparent, 
and efficient regulatory framework for ETFs that are organized as open-
end funds and to facilitate greater competition and innovation among 
ETFs. The Commission also is adopting technical amendments to Form N-
CSR, Form N-1A, Form N-8B-2, Form N-PORT, and Regulation S-X.

DATES: 
    Effective Date: This rule is effective December 23, 2019.
    Compliance Dates: The applicable compliance dates are discussed in 
section II.L. of this final rule.

FOR FURTHER INFORMATION CONTACT: Joel Cavanaugh (Senior Counsel), John 
Foley (Senior Counsel), J. Matthew DeLesDernier (Senior Counsel), Jacob 
D. Krawitz (Branch Chief), Melissa S. Gainor (Assistant Director), and 
Brian McLaughlin Johnson (Assistant Director), Investment Company 
Regulation Office, at (202) 551-6792, Kay-Mario Vobis (Senior Counsel), 
Daniele Marchesani (Assistant Chief Counsel), Chief Counsel's Office, 
at (202) 551-6825, Division of Investment Management, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting 17 CFR 270.6c-11 
(new rule 6c-11) under the Investment Company Act [15 U.S.C. 80a-1 et 
seq.]; amendments to Form N-1A [referenced in 17 CFR 274.11A] under the 
Investment Company Act and the Securities Act of 1933 [15 U.S.C. 77a et 
seq.] (``Securities Act''); and amendments to Forms N-8B-2 [referenced 
in 17 CFR 274.12] and N-CEN [referenced in 17 CFR 274.101] under the 
Investment Company Act.\1\ The Commission also is adopting technical 
amendments to Form N-CSR [referenced in Sec.  274.128], Form N-1A, Form 
N-8B-2, and Form N-PORT [referenced in Sec.  274.150] under the 
Investment Company Act, and 17 CFR 210.12-01 through 210.12-29 (Article 
12 of Regulation S-X).
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    \1\ Unless otherwise noted, all references to statutory sections 
are to the Investment Company Act, and all references to rules under 
the Investment Company Act are to title 17, part 270 of the Code of 
Federal Regulations [17 CFR part 270].
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Table of Contents

I. Introduction
    A. Overview of Exchange-Traded Funds
    B. Operation of Exchange-Traded Funds
II. Discussion
    A. Scope of Rule 6c-11
    1. Organization as Open-End Funds
    2. Index-Based ETFs and Actively Managed ETFs
    3. Leveraged/Inverse ETFs
    B. Exemptive Relief Under Rule 6c-11
    1. Treatment of ETF Shares as ``Redeemable Securities''
    2. Trading of ETF Shares at Market-Determined Prices
    3. Affiliated Transactions
    4. Additional Time for Delivering Redemption Proceeds
    C. Conditions for Reliance on Rule 6c-11
    1. Issuance and Redemption of Shares
    2. Listing on a National Securities Exchange
    3. Intraday Indicative Value (``IIV'')
    4. Portfolio Holdings Disclosure
    5. Baskets
    6. Website Disclosure
    7. Marketing
    8. ETF and ETP Nomenclature
    D. Recordkeeping
    E. Share Class ETFs
    F. Master-Feeder ETFs
    G. Effect of Rule 6c-11 on Prior Orders
    H. Amendments to Form N-1A
    1. Fee Disclosures for Mutual Funds and ETFs (Item 3)
    2. Disclosures Regarding ETF Trading and Associated Costs (Item 
6)
    3. Eliminated Disclosures
    I. Amendments to Form N-8B-2
    J. Amendments to Form N-CEN
    K. Technical and Conforming Amendments to Form N-1A, Form N-8B-
2, Form N-CSR, Form N-PORT, and Regulation S-X
    L. Compliance Dates
III. Other Matters
IV. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. ETF Industry Growth and Trends
    2. Exemptive Order Process and Certain Conditions Under Existing 
Orders
    3. Market Participants
    4. Secondary Market Trading, Arbitrage, and ETF Liquidity
    C. Benefits and Costs of Rule 6c-11 and Form Amendments
    1. Rule 6c-11
    2. Amendments to Forms N-1A, N-8B-2, and N-CEN
    D. Effects on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Reasonable Alternatives
    1. Website Disclosure of Basket Information
    2. Disclosure of ETF Premiums or Discounts Greater than 2%
    3. Website and Prospectus Disclosure of the Median Bid-Ask 
Spread Calculated Over the Most Recent 1-Year Period
    4. Additional Disclosures Showing the Impact of Bid-Ask Spreads
    5. Website Disclosure of a Modified IIV
    6. The Use of a Structured Format for Additional Website 
Disclosures and the Filing of Additional Website Disclosures in a 
Structured Format on EDGAR
    7. Pro Rata Baskets
    8. Treatment of Existing Exemptive Relief
    9. ETFs Organized as UITs
    10. Treatment of Leveraged/Inverse ETFs
V. Paperwork Reduction Act
    A. Introduction
    B. Rule 6c-11
    1. Website Disclosures
    2. Recordkeeping
    3. Policies and Procedures
    4. Estimated Total Burden
    C. Rule 0-2
    D. Form N-1A
    E. Forms N-8B-2 and S-6
    F. Form N-CEN
VI. Final Regulatory Flexibility Analysis
    A. Need for and Objectives of the Rule and Form Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Rule
    D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements
    1. Rule 6c-11
    2. Other Disclosure and Reporting Requirements
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority

I. Introduction

    The Commission is adopting rule 6c-11 under the Investment Company 
Act to permit ETFs that satisfy certain conditions to operate without 
the

[[Page 57163]]

expense and delay of obtaining an exemptive order from the Commission 
under the Act. This rule will modernize the regulatory framework for 
ETFs to reflect our more than two decades of experience with these 
investment products. The rule is designed to further important 
Commission objectives, including establishing a consistent, 
transparent, and efficient regulatory framework for ETFs and 
facilitating greater competition and innovation among ETFs.
    The Commission approved the first ETF in 1992. Since then, ETFs 
registered with the Commission have grown to $3.32 trillion in total 
net assets.\2\ They now account for approximately 16% of total net 
assets managed by investment companies,\3\ and are projected to 
continue to grow.\4\ ETFs currently rely on exemptive orders, which 
permit them to operate as investment companies under the Act, subject 
to representations and conditions that have evolved over time.\5\ We 
have granted over 300 of these orders over the last quarter century, 
resulting in differences in representations and conditions that have 
led to some variations in the regulatory structure for existing 
ETFs.\6\
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    \2\ This figure is based on data obtained from Bloomberg. As of 
December 2018, there were approximately 2,000 ETFs registered with 
the Commission.
    \3\ ICI, 2019 Investment Company Fact Book (59th ed., 2019) 
(``2019 ICI Fact Book''), available at https://www.ici.org/pdf/2019_factbook.pdf, at 93. When the Commission first proposed a rule 
for ETFs in 2008, aggregate ETF assets were less than 7% of total 
net assets held by mutual funds. See Exchange-Traded Funds, 
Investment Company Act Release No. 28193 (Mar. 11, 2008) [73 FR 
14618 (Mar. 18, 2008)] (``2008 ETF Proposing Release'').
    \4\ See Greg Tusar, The evolution of the ETF industry, Pension & 
Investments (Jan. 31, 2017), available at http://www.pionline.com/article/20170131/ONLINE/170139973/the-evolution-of-the-etf-industry 
(describing projections that ETF assets could reach $6 trillion by 
2020).
    \5\ As the orders are subject to the terms and conditions set 
forth in the applications requesting exemptive relief, references in 
this release to ``exemptive relief'' or ``exemptive orders'' include 
the terms and conditions described in the related application. See, 
e.g., Barclays Global Fund Advisors, Investment Company Act Release 
Nos. 24394 (Apr. 17, 2000) [65 FR 21215 (Apr. 20, 2000)] (notice) 
and 24451 (May 12, 2000) (order) and related application.
    \6\ In addition, since 2000, our ETF exemptive orders have 
provided relief for future ETFs. See id. This relief has allowed ETF 
sponsors to form ETFs without filing new applications to the extent 
that the new ETFs meet the terms and conditions set forth in the 
exemptive order. Applications granted before 2000, unless 
subsequently amended, did not include this relief.
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    On June 28, 2018, we proposed new rule 6c-11 under the Investment 
Company Act, which would simplify this regulatory framework by 
eliminating conditions included within our exemptive orders that we no 
longer believe are necessary for our exemptive relief and removing 
historical distinctions between actively managed and index-based 
ETFs.\7\ We also proposed to rescind certain exemptive orders that have 
been granted to ETFs and their sponsors in order to level the playing 
field for ETFs that are organized as open-end funds and pursue the same 
or similar investment strategies.\8\ In addition, the Commission 
proposed certain disclosure amendments to Form N-1A and Form N-8B-2 to 
provide investors additional information regarding ETF trading and 
associated costs, regardless of whether ETFs are organized as open-end 
funds or UITs. Finally, the Commission proposed related amendments to 
Form N-CEN.
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    \7\ See Exchange-Traded Funds, Investment Company Act Release 
No. 33140 (June 28, 2018) [83 FR 37332 (July 31, 2018)] (``2018 ETF 
Proposing Release'').
    \8\ Proposed rule 6c-11 did not include ETFs that: (i) Are 
organized as UITs; (ii) seek to exceed the performance of a market 
index by a specified multiple or to provide returns that have an 
inverse relationship to the performance of a market index, over a 
fixed period of time; or (iii) are structured as a share class of a 
fund that issues multiple classes of shares representing interests 
in the same portfolio (``share class ETFs''). Under the proposal, 
these ETFs would continue to operate pursuant to the terms of their 
exemptive orders. Since that time, we have granted an exemptive 
order permitting certain ETFs that are actively managed to operate 
without being subject to the daily portfolio transparency condition 
included in other actively managed ETF orders (``non-transparent 
ETFs''). See Precidian ETFs Trust, et al., Investment Company Act 
Release Nos. 33440 (Apr. 8, 2019) [84 FR 14690 (Apr. 11, 2019)] 
(notice) and 33477 (May 20, 2019) (order) and related application 
(``2019 Precidian''). Because these non-transparent ETFs do not 
provide daily portfolio transparency, they would not meet the 
conditions of rule 6c-11. We use the term ``actively managed ETFs'' 
in this release to refer to actively managed ETFs that provide daily 
portfolio transparency and ``non-transparent ETFs'' to refer to 
actively managed ETFs that do not.
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    We received more than 85 comment letters on the proposal.\9\ As 
discussed in greater detail below, commenters were supportive of the 
adoption of an ETF rule and generally supported rule 6c-11 as proposed. 
Commenters did, however, recommend modifications or clarifications to 
certain aspects of the rule. For example, several commenters suggested 
expanding the scope of ETFs covered by the rule or the scope of certain 
exemptions.\10\ Many commenters recommended modifications to the 
proposed rule's conditions, particularly relating to the timing and 
presentation of portfolio holdings information, the requirements 
related to custom baskets, the publication of basket information, and 
the availability of an intraday indicative value.\11\ In addition, 
although commenters were largely supportive of our efforts to improve 
the information that ETFs disclose to investors about the trading costs 
of investing in ETFs, several commenters objected to the bid-ask spread 
disclosure requirements and the related interactive calculator.\12\ 
Others recommended alternatives to the proposed format and placement of 
the trading cost disclosures.\13\ Finally, commenters were largely 
supportive of our proposal to rescind certain exemptive orders that 
have been granted to ETFs and their sponsors and to replace such relief 
with rule 6c-11.\14\
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    \9\ The comment letters on the 2018 ETF Proposing Release (File 
No. S7-15-18) are available at https://www.sec.gov/comments/s7-15-18/s71518.htm.
    \10\ See, e.g., Comment Letter of BNY Mellon (Sept. 27, 2018) 
(``BNY Mellon Comment Letter'') (suggesting the rule should cover 
all ETFs registered under the Investment Company Act); Comment 
Letter of Dechert LLP (Sept. 28, 2018) (``Dechert Comment Letter'') 
(suggesting that the Commission should provide ETFs with uniform 
exemptive relief from certain provisions of the Securities Exchange 
Act of 1934 (the ``Exchange Act'')).
    \11\ See, e.g., Comment Letter of the Asset Management Group of 
the Securities Industry and Financial Markets Association (Sept. 28, 
2018) (``SIFMA AMG Comment Letter I'') (relating to the timing and 
presentation of portfolio holdings and basket information); Comment 
Letter of the Investment Company Institute (Sept. 21, 2018) (``ICI 
Comment Letter'') (relating to custom baskets); Comment Letter of 
Professor James G. Angel, Georgetown University (Oct. 1, 2018) 
(``Angel Comment Letter'') (relating to intraday indicative values).
    \12\ See, e.g., Comment Letter of Independent Directors Council 
(Sept. 27, 2018) (``IDC Comment Letter''); Comment Letter of State 
Street Global Advisors (Oct. 1, 2018) (``SSGA Comment Letter I'').
    \13\ See e.g., Comment Letter of The Vanguard Group, Inc. (Sept. 
28, 2018) (``Vanguard Comment Letter''); Comment Letter of 
BlackRock, Inc. (Sept. 26, 2018) (``BlackRock Comment Letter''); IDC 
Comment Letter; Comment Letter of Fidelity Investments (Sept. 28, 
2018) (``Fidelity Comment Letter'').
    \14\ See, e.g., Comment Letter of Federal Regulation of 
Securities Committee, Business Law Section, American Bar Association 
(Oct. 11, 2018) (``ABA Comment Letter''); ICI Comment Letter; 
Comment Letter of Invesco Ltd. (Sept. 26, 2018) (``Invesco Comment 
Letter''). Exemptive orders granted to ETFs and their sponsors often 
include relief allowing funds to invest in other funds in excess of 
statutory limits. We did not propose to rescind that relief. See 
infra section II.G.
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    After consideration of the comments we received, we are adopting 
rule 6c-11 and the proposed form amendments with several modifications 
that are designed to reduce the operational challenges that commenters 
identified, while maintaining protections for investors and providing 
investors with useful information regarding ETFs. As proposed, we also 
are rescinding the exemptive relief that we have issued to ETFs that 
fall within the scope of rule 6c-11, while retaining the exemptive 
relief granted to ETFs outside the scope of the rule. In addition, we 
are retaining the exemptive relief allowing ETFs to enter into fund of 
funds arrangements. We believe that the resulting regulatory framework 
will level the playing field

[[Page 57164]]

for ETFs that are organized as open-end funds and pursue the same or 
similar investment strategies.\15\ The rule also will assist the 
Commission with regulating ETFs, as funds covered by the rule will no 
longer be subject to the varying provisions of exemptive orders granted 
over time. Furthermore, rule 6c-11 will allow Commission staff, as well 
as funds and advisers seeking exemptions, to focus exemptive relief on 
products that do not fall within the rule's scope.
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    \15\ Additionally, as discussed below in section II.B, the 
Commission is issuing an order granting an exemption from certain 
provisions of the Exchange Act and the rules thereunder for certain 
transactions in securities of ETFs that can rely on rule 6c-11. See 
Order Granting a Conditional Exemption from Exchange Act Section 
11(d)(1) and Exchange Act Rules 10b-10; 15c1-5; 15c1-6; and 14e-5 
for Certain Exchange Traded Funds, Release No. 34-87110 (September 
25, 2019) (``ETF Exchange Act Order'').
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    The Commission will continue to monitor this large, diverse and 
important market. We welcome continued engagement with ETF sponsors, 
investors and other market participants on matters related to the ETF 
market, including with regard to ETFs that do not fall within the scope 
of rule 6c-11 and ETFs that may not function in a manner consistent 
with the expectations embodied in our regulatory framework.

A. Overview of Exchange-Traded Funds

    ETFs are a type of exchange-traded product (``ETP'').\16\ ETFs 
possess characteristics of both mutual funds, which issue redeemable 
securities, and closed-end funds, which generally issue shares that 
trade at market-determined prices on a national securities exchange and 
are not redeemable.\17\ Because ETFs have characteristics that 
distinguish them from the types of investment companies contemplated by 
the Act, they require exemptions from certain provisions of the 
Investment Company Act in order to operate. The Commission routinely 
grants exemptive orders permitting ETFs to operate as investment 
companies under the Investment Company Act, generally subject to the 
provisions of the Act applicable to open-end funds (or UITs).\18\ The 
Commission also has approved the listing standards of national 
securities exchanges under which ETF shares are listed and traded.\19\
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    \16\ ETFs are investment companies registered under the 
Investment Company Act. See 15 U.S.C. 80a-3(a)(1). Other types of 
ETPs are pooled investment vehicles with shares that trade on a 
securities exchange, but they are not ``investment companies'' under 
the Act because they do not invest primarily in securities. Such 
ETPs may invest primarily in assets other than securities, such as 
futures, currencies, or physical commodities (e.g., precious 
metals). Still other ETPs are not pooled investment vehicles. For 
example, exchange-traded notes are senior, unsecured, unsubordinated 
debt securities that are linked to the performance of a market index 
and trade on securities exchanges.
    \17\ The Act defines ``redeemable security'' as any security 
that allows the holder to receive his or her proportionate share of 
the issuer's current net assets upon presentation to the issuer. 15 
U.S.C. 80a-2(a)(32). While closed-end fund shares are not 
redeemable, certain closed-end funds may elect to repurchase their 
shares at periodic intervals pursuant to rule 23c-3 under the Act. 
Other closed-end funds may repurchase their shares in tender offers 
pursuant to rule 13e-4 under the Exchange Act.
    \18\ Historically, ETFs have been organized as open-end funds or 
UITs. See 15 U.S.C. 80a-5(a)(1) (defining the term ``open-end 
company'') and 15 U.S.C. 80a-4(2) (defining the term ``unit 
investment trust'').
    \19\ Additionally, ETFs regularly request relief from 17 CFR 
242.101 and 242.102 (rules 101 and 102 of Regulation M); section 
11(d)(1) of the Exchange Act and 17 CFR 240.11d1-2 (rule 11d1-2 
under the Exchange Act); and certain other rules under the Exchange 
Act (i.e., 17 CFR 240.10b-10, 240.10b-17, 240.14e-5, 240.15c1-5, and 
240.15c1-6 (rules 10b-10, 10b-17, 14e-5, 15c1-5, and 15c1-6)). See 
Request for Comment on Exchange-Traded Products, Exchange Act 
Release No. 75165 (June 12, 2015) [80 FR 34729 (June 17, 2015)] 
(``2015 ETP Request for Comment''), at section I.D.2 (discussing the 
exemptive and no-action relief granted to ETPs under the Exchange 
Act and the listing process for ETP securities for trading on a 
national securities exchange).
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    As discussed above, ETFs have become an increasingly popular 
investment vehicle over the last 27 years, providing investors with a 
diverse set of investment options.\20\ They also have become a popular 
trading tool, making up a significant portion of secondary market 
equities trading. During the first quarter of 2019, for example, 
trading in U.S.-listed ETFs made up approximately 18.3% of U.S. equity 
trading by share volume and 27.2% of U.S. equity trading by dollar 
volume.\21\
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    \20\ While the first ETFs held portfolios of securities that 
replicated the component securities of broad-based domestic stock 
market indexes, some ETFs now track more specialized indexes, 
including international equity indexes, fixed-income indexes, or 
indexes focused on particular industry sectors. Some ETFs seek to 
track highly customized or bespoke indexes, while others seek to 
provide a level of leveraged or inverse exposure to an index over a 
predetermined period of time. The Commission historically has 
referred to ETFs that have stated investment objectives of 
maintaining returns that correspond to the returns of a securities 
index as ``index-based'' ETFs. Investors also have the ability to 
invest in ETFs that do not track a particular index and are actively 
managed. See 2018 ETF Proposing Release, supra footnote 7, at nn.18-
20.
    \21\ These estimates are based on trade and quote data from the 
New York Stock Exchange and Trade Reporting Facility data from 
FINRA.
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    Investors can buy and hold shares of ETFs (sometimes as a core 
component of a portfolio) or trade them frequently as part of an active 
trading or hedging strategy.\22\ Because certain costs are either 
absent in the ETF structure or are otherwise partially externalized, 
many ETFs have lower operating expenses than mutual funds.\23\ ETFs 
also may offer certain tax efficiencies compared to other pooled 
investment vehicles because redemptions from ETFs are often made in 
kind (that is, by delivering certain assets from the ETF's portfolio, 
rather than in cash), thereby avoiding the need for the ETF to sell 
assets and potentially realize capital gains that are distributed to 
its shareholders.
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    \22\ See, e.g., Chris Dieterich, Are You An ETF `Trader' Or An 
ETF `Investor'?, Barrons (Aug. 8, 2017), available at https://www.barrons.com/articles/are-you-an-etf-trader-or-an-etf-investor1470673638; Greenwich Associates, Institutions Find New, 
Increasingly Strategic Uses for ETFs (May 2012). ETF investors also 
can sell ETF shares short, write options on them, and set market, 
limit, and stop-loss orders on them.
    \23\ For instance, ETFs typically do not bear distribution or 
shareholder servicing fees. In addition, ETFs that transact on an 
in-kind basis can execute changes in the ETF's portfolio without 
incurring brokerage costs, leading to transaction cost savings.
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B. Operation of Exchange-Traded Funds

    An ETF issues shares that can be bought or sold throughout the day 
in the secondary market at a market-determined price. Like other 
investment companies, an ETF pools the assets of multiple investors and 
invests those assets according to its investment objective and 
principal investment strategies. Each share of an ETF represents an 
undivided interest in the underlying assets of the ETF. Similar to 
mutual funds, ETFs continuously offer their shares for sale.
    Unlike mutual funds, however, ETFs do not sell or redeem individual 
shares. Instead, ``authorized participants'' that have contractual 
arrangements with the ETF (or its distributor) purchase and redeem ETF 
shares directly from the ETF in blocks called ``creation units.'' \24\ 
An authorized participant may act as a principal for its own account 
when purchasing or redeeming creation units from the ETF. Authorized 
participants also may act as agent for others, such as market makers, 
proprietary trading firms, hedge funds or other institutional 
investors, and receive fees for processing creation units on their 
behalf.\25\ Market makers, proprietary

[[Page 57165]]

trading firms, and hedge funds provide additional liquidity to the ETF 
market through their trading activity. Institutional investors may 
engage in primary market transactions with an ETF through an authorized 
participant as a way to efficiently hedge a portion of their portfolio 
or balance sheet or to gain exposure to a strategy or asset class.\26\
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    \24\ As discussed below, rule 6c-11(a)(1) defines ``authorized 
participant'' as a member or participant of a clearing agency 
registered with the Commission, which has a written agreement with 
the ETF or one of its service providers that allows the authorized 
participant to place orders for the purchase and redemption of 
creation units.
    \25\ See David J. Abner, The ETF Handbook: How to Value and 
Trade Exchange Traded Funds, 2nd ed. (2016) (``ETF Handbook'').
    \26\ Id.
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    An authorized participant that purchases a creation unit of ETF 
shares directly from the ETF deposits with the ETF a ``basket'' of 
securities and other assets identified by the ETF that day, and then 
receives the creation unit of ETF shares in return for those 
assets.\27\ The basket is generally representative of the ETF's 
portfolio,\28\ and together with a cash balancing amount, it is equal 
in value to the aggregate net asset value (``NAV'') of the ETF shares 
in the creation unit.\29\ After purchasing a creation unit, the 
authorized participant may hold the individual ETF shares, or sell some 
or all of them in secondary market transactions.\30\ Investors then 
purchase individual ETF shares in the secondary market. The redemption 
process is the reverse of the purchase process: The authorized 
participant redeems a creation unit of ETF shares for a basket of 
securities and other assets.
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    \27\ An ETF may impose fees in connection with the purchase or 
redemption of creation units that are intended to defray operational 
processing and brokerage costs to prevent possible shareholder 
dilution (``transaction fees'').
    \28\ The basket might not reflect a pro rata slice of an ETF's 
portfolio holdings. Subject to the terms of the applicable exemptive 
relief, an ETF may substitute other securities or cash in the basket 
for some (or all) of the ETF's portfolio holdings. Restrictions 
related to flexibility in baskets have varied over time. See infra 
section II.C.4.c.
    \29\ An open-end fund is required by law to redeem its 
securities on demand from shareholders at a price approximating 
their proportionate share of the fund's NAV at the time of 
redemption. See 15 U.S.C. 80a-22(d). 17 CFR 270.22c-1 (``rule 22c-
1'') generally requires that funds calculate their NAV per share at 
least once daily Monday through Friday. See rule 22c-1(b)(1). Today, 
most funds calculate NAV per share as of the time the major U.S. 
stock exchanges close (typically at 4:00 p.m. Eastern Time). Under 
rule 22c-1, an investor who submits an order before the 4:00 p.m. 
pricing time receives that day's price, and an investor who submits 
an order after the pricing time receives the next day's price. See 
also 17 CFR 270.2a-4 (``rule 2a-4'') (defining ``current net asset 
value'').
    \30\ ETFs register offerings of shares under the Securities Act, 
and list their shares for trading under the Exchange Act. Depending 
on the facts and circumstances, authorized participants that 
purchase a creation unit and sell the shares may be deemed to be 
participants in a distribution, which could render them statutory 
underwriters and subject them to the prospectus delivery and 
liability provisions of the Securities Act. See 15 U.S.C. 77b(a)(11) 
(defining the term ``underwriter'').
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    The combination of the creation and redemption process with 
secondary market trading in ETF shares and underlying securities 
provides arbitrage opportunities that are designed to help keep the 
market price of ETF shares at or close to the NAV per share of the 
ETF.\31\ For example, if ETF shares are trading on national securities 
exchanges at a ``discount'' (a price below the NAV per share of the 
ETF), an authorized participant can purchase ETF shares in secondary 
market transactions and, after accumulating enough shares to compose a 
creation unit, redeem them from the ETF in exchange for the more 
valuable redemption basket. The authorized participant's purchase of an 
ETF's shares on the secondary market, combined with the sale of the 
ETF's basket assets, may create upward pressure on the price of the ETF 
shares, downward pressure on the price of the basket assets, or both, 
bringing the market price of ETF shares and the value of the ETF's 
portfolio holdings closer together.\32\ Alternatively, if ETF shares 
are trading at a ``premium'' (a price above the NAV per share of the 
ETF), the transactions in the arbitrage process are reversed and, when 
arbitrage is working effectively, keep the market price of the ETF's 
shares close to its NAV.
---------------------------------------------------------------------------

    \31\ The arbitrage mechanism for ETFs that would be subject to 
rule 6c-11 has been dependent on daily portfolio transparency.
    \32\ As part of this arbitrage process, authorized participants 
are likely to hedge their intraday risk. For example, when ETF 
shares are trading at a discount to an estimated intraday NAV per 
share of the ETF, an authorized participant may short the securities 
composing the ETF's redemption basket. After the authorized 
participant returns a creation unit of ETF shares to the ETF in 
exchange for the ETF's basket assets, the authorized participant can 
then use the basket assets to cover its short positions.
---------------------------------------------------------------------------

    Market participants also can engage in arbitrage activity without 
using the creation or redemption processes. For example, if a market 
participant believes that an ETF is overvalued relative to its 
underlying or reference assets (i.e., trading at a premium), the market 
participant may sell ETF shares short and buy the underlying or 
reference assets, wait for the trading prices to move toward parity, 
and then close out the positions in both the ETF shares and the 
underlying or reference assets to realize a profit from the relative 
movement of their trading prices. Similarly, a market participant could 
buy ETF shares and sell the underlying or reference assets short in an 
attempt to profit when an ETF's shares are trading at a discount to the 
ETF's underlying or reference assets. As with the creation and 
redemption process, the trading of an ETF's shares and the ETF's 
underlying or reference assets may bring the prices of the ETF's shares 
and its portfolio assets closer together through market pressure.\33\
---------------------------------------------------------------------------

    \33\ Some studies have found the majority of all ETF-related 
trading activity takes place on the secondary market. See, e.g., 
Rochelle Antoniewicz & Jane Heinrichs, Understanding Exchange-Traded 
Funds: How ETFs Work, ICI Research Perspective 20, No. 5 (Sept. 
2014) (``Antoniewicz I''), available at https://www.ici.org/pdf/per20-05.pdf, at 2 (``On most trading days, the vast majority of 
ETFs do not have any primary market activity--that is, they do not 
create or redeem shares.''); 2019 ICI Factbook, supra footnote 3 
(``On average, 90 percent of the total daily activity in ETFs occurs 
on the secondary market.'').
---------------------------------------------------------------------------

    The arbitrage mechanism is important because it provides a means to 
maintain a close tie between market price and NAV per share of the ETF, 
thereby helping to ensure ETF investors are treated equitably when 
buying and selling fund shares. In granting relief under section 6(c) 
of the Act for ETFs to operate, the Commission has relied on this close 
tie between what retail investors pay (or receive) in the secondary 
market and the ETF's approximate NAV to find that the required 
exemptions are necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act.\34\ Investors also 
have come to expect that an ETF's market price will maintain a close 
tie to the ETF's NAV per share, which may lead some investors to view 
ETFs or some types of ETFs more favorably than similar closed-end 
funds.\35\ On the other hand, if the expectation of a close tie to NAV 
per share is not met, investors may sell or refrain from purchasing ETF 
shares.\36\
---------------------------------------------------------------------------

    \34\ See 15 U.S.C. 80a-6(c).
    \35\ Scott W. Barnhart & Stuart Rosenstein, Exchange-Traded Fund 
Introductions and Closed-End Fund Discounts and Volume, 45 The 
Financial Review 4 (Nov. 2010) (within a year of the introduction of 
a similar ETF, the average discount widens significantly and volume 
falls significantly in U.S. domestic equity, international equity, 
and U.S. bond closed-end funds, which may indicate that closed-end 
funds lose some desirability when a substitute ETF becomes 
available). As of December 31, 2018, total net assets of ETFs were 
$3.4 trillion compared to $250 billion for closed-end funds. See 
2019 ICI Fact Book, supra footnote 3.
    \36\ See Staff of the Office of Analytics and Research, Division 
of Trading and Markets, Research Note: Equity Market Volatility on 
August 24, 2015 (Dec. 2015) (``August 24 Staff Report''), available 
at https://www.sec.gov/marketstructure/research/equity_market_volatility.pdf.
---------------------------------------------------------------------------

II. Discussion

    Given the growth in the ETF market, ETFs' popularity among retail 
and institutional investors, and our long experience regulating this 
investment vehicle, we believe that it is appropriate to adopt a rule 
that will allow most ETFs to operate without first obtaining

[[Page 57166]]

an exemptive order from the Commission under the Act. We believe, and 
commenters on proposed rule 6c-11 generally agreed, that such a rule 
will help create a consistent, transparent, and efficient regulatory 
framework for the regulation of most ETFs and help level the playing 
field for these market participants.\37\
---------------------------------------------------------------------------

    \37\ See, e.g., BlackRock Comment Letter; IDC Comment Letter; 
Fidelity Comment Letter; Angel Comment Letter; Comment Letter of 
Nasdaq, Inc. (Sept. 28, 2018) (``Nasdaq Comment Letter'').
---------------------------------------------------------------------------

    As adopted, rule 6c-11 will exempt ETFs organized as open-end funds 
from certain provisions of the Act and our rules. The exemptions will 
permit an ETF to: (i) Redeem shares only in creation unit aggregations; 
(ii) permit ETF shares to be purchased and sold at market prices, 
rather than NAV; (iii) engage in in-kind transactions with certain 
affiliates; and (iv) in certain limited circumstances, pay authorized 
participants the proceeds from the redemption of shares in more than 
seven days.
    These exemptions are subject to several conditions designed to 
address the concerns underlying the relevant statutory provisions and 
to support a Commission finding that the exemptions necessary to allow 
ETFs to operate are in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act. The conditions are based upon existing 
exemptive relief for ETFs, which we believe has served to support an 
efficient arbitrage mechanism, but reflect several modifications based 
on our experience regulating this product and commenters' input on the 
proposed rule.
     First, rule 6c-11 will require an ETF to disclose 
portfolio holdings each business day on its website before the opening 
of trading on the ETF's primary listing exchange in a standardized 
manner. The rule also will require daily website disclosure of the 
ETF's NAV, market price, premium or discount, and the extent and 
frequency of an ETF's premiums and discounts. These disclosures are 
designed to promote an effective arbitrage mechanism and inform 
investors about the risks of deviation between market price and NAV 
when deciding whether to invest in ETFs generally or in a particular 
ETF.
     In addition, the rule will require daily website 
disclosure of the ETF's median bid-ask spread over the last thirty 
calendar days. This requirement is designed to provide investors with 
additional information regarding potential costs associated with buying 
and selling ETF shares.
     With respect to baskets, the rule will require an ETF to 
adopt and implement written policies and procedures that govern the 
construction of baskets and the process that will be used for the 
acceptance of baskets. The rule will allow ETFs to use ``custom 
baskets'' if their basket policies and procedures: (i) Set forth 
detailed parameters for the construction and acceptance of custom 
baskets that are in the best interest of the ETF and its shareholders, 
including the process for any revisions to, or deviations from, those 
parameters; and (ii) specify the titles or roles of the employees of 
the ETF's investment adviser who are required to review each custom 
basket for compliance with those parameters. As discussed below, these 
conditions will provide ETFs with additional basket flexibility, which 
we believe could benefit investors through more efficient arbitrage and 
narrower bid-ask spreads, subject to protections designed to address 
the risks that such flexibility may present.
     Rule 6c-11 also will include a condition that excludes an 
ETF that seeks, directly or indirectly, to provide investment returns 
over a predetermined period of time that: (i) Correspond to the 
performance of a market index by a specified multiple; or (ii) have an 
inverse relationship to the performance of a market index (including by 
an inverse multiple) (``leveraged/inverse ETFs'').\38\
---------------------------------------------------------------------------

    \38\ See infra section II.A.3.
---------------------------------------------------------------------------

     An ETF also must retain certain records under rule 6c-11, 
including information regarding each basket exchanged with an 
authorized participant.
    In order to harmonize the regulation of most ETFs, we are 
rescinding, one year after the effective date of rule 6c-11, those 
portions of our prior ETF exemptive orders that grant relief related to 
the formation and operation of an ETF, including certain master-feeder 
relief.\39\ We are not rescinding the exemptive relief of UIT ETFs, 
leveraged/inverse ETFs, share class ETFs, and non-transparent ETFs, 
however, which are outside the scope of rule 6c-11. In addition, we are 
not rescinding the portions of our prior ETF exemptive orders allowing 
funds to invest in ETFs in excess of statutory limits in connection 
with this rulemaking and we are providing relief to allow newly formed 
ETFs to enter into certain fund of funds arrangements.\40\
---------------------------------------------------------------------------

    \39\ See infra sections II.F. and II.G. We are also amending 
approximately 200 ETF exemptive orders that automatically expire on 
the effective date of a rule permitting the operation of ETFs to 
give them time to make any adjustments necessary to rely on rule 6c-
11.
    \40\ See infra section II.G. In December 2018, we proposed new 
17 CFR 270.12d1-4 (rule 12d1-4 under the Act) to streamline and 
enhance the regulatory framework applicable to fund of funds 
arrangements. See Fund of Funds Arrangements, Investment Company Act 
Release No. 33329 (Dec. 19, 2018) [84 FR 1286 (Feb. 1, 2019)] 
(proposing release) (``FOF Proposing Release''). In connection with 
proposed rule 12d1-4, we also proposed to rescind the exemptive 
orders granting relief for certain fund of funds arrangements, 
including the relief from sections 12(d)(1)(A) and (B) that has been 
included in our ETF exemptive orders. See id. at nn.236-237 and 
accompanying text.
---------------------------------------------------------------------------

    Finally, we are adopting amendments to Forms N-1A and N-8B-2 to 
eliminate certain disclosures that we believe are no longer necessary 
and to require ETFs that do not rely on rule 6c-11 to provide secondary 
market investors with disclosures regarding certain ETF trading and 
associated costs. For example, the form amendments will require such an 
ETF to provide median bid-ask spread information either on its website 
or in its prospectus. We believe these amendments will provide 
investors who purchase ETF shares in secondary market transactions with 
information to better understand the total costs of investing in an 
ETF.

A. Scope of Rule 6c-11

1. Organization as Open-End Funds
    As proposed, rule 6c-11 will define an ETF as a registered open-end 
management investment company that: (i) Issues (and redeems) creation 
units to (and from) authorized participants in exchange for a basket 
and a cash balancing amount (if any); and (ii) issues shares that are 
listed on a national securities exchange and traded at market-
determined prices.\41\ ETFs organized as UITs (``UIT ETFs'') will 
continue operating pursuant to their exemptive orders, which include 
terms and conditions more appropriately tailored to address the unique 
features of a UIT.\42\ Additionally, as proposed,

[[Page 57167]]

our form amendments will require UIT ETFs to provide disclosures 
similar to those provided by other ETFs that are subject to the 
Investment Company Act.
---------------------------------------------------------------------------

    \41\ See rule 6c-11(a)(1). Under the rule, the term ``basket'' 
will be defined to mean the securities, assets, or other positions 
in exchange for which an ETF issues (or in return for which it 
redeems) creation units. The term ``exchange-traded fund'' thus will 
include ETFs that transact on an in-kind basis, on a cash basis, or 
both.
    \42\ A UIT is an investment company organized under a trust 
indenture or similar instrument that issues redeemable securities, 
each of which represents an undivided interest in a unit of 
specified securities. See section 4(2) of the Act [15 U.S.C. 80a-4]. 
By statute, a UIT is unmanaged and its portfolio is fixed. 
Substitution of securities may take place only under certain pre-
defined circumstances. A UIT does not have a board of directors, 
corporate officers, or an investment adviser to render advice during 
the life of the trust. See 2018 ETF Proposing Release, supra 
footnote 7, at section II.A.1.
    Unlike the exemptive relief we have granted to certain ETFs 
organized as open-end funds (see supra footnote 6), the relief we 
have granted to ETFs organized as UITs does not provide relief for 
future ETFs formed pursuant to the same order.
---------------------------------------------------------------------------

    We understand that most ETF sponsors prefer the open-end fund 
structure over the UIT structure given the increased investment 
flexibility the open-end structure affords.\43\ For example, ETFs 
organized as open-end funds can be actively managed or use a 
``sampling'' strategy to track an index.\44\ An open-end ETF also may 
participate in securities lending programs, has greater flexibility to 
reinvest dividends, and may invest in derivatives, which typically 
require a degree of management that is not provided for in the UIT 
structure.\45\
---------------------------------------------------------------------------

    \43\ We have received very few exemptive applications for new 
UIT ETFs since 2002, and no new UIT ETFs have come to market in that 
time. See 2018 ETF Proposing Release, supra footnote 7, at section 
II.A.1.
    \44\ UIT ETFs seek to track the performance of an index by 
investing in the component securities of an index in the same 
approximate proportions as in the index (i.e., ``replicating'' the 
index) rather than acquiring a subset of the underlying index's 
component securities or other financial instruments that the ETF's 
adviser believes will help the ETF track the underlying index (i.e., 
``sampling'' the index). In addition, because the exemptive relief 
granted to UIT ETFs does not provide relief from the portion of 
section 4(2) that requires UIT securities to represent an undivided 
interest in a unit of ``specified securities,'' the investment 
strategies that a UIT ETF can pursue are limited. See id. at n.37.
    \45\ See Use of Derivatives by Registered Investment Companies 
and Business Development Companies, Investment Company Act Release 
No. 31933 (Dec. 11, 2015) [80 FR 80883 (Dec. 28, 2015)] 
(``Derivatives Proposing Release''), at n.139.
---------------------------------------------------------------------------

    Commenters addressing this aspect of the proposal generally 
supported excluding UIT ETFs from the scope of rule 6c-11. These 
commenters stated that the structural and operational nuances 
associated with UIT ETFs would make their inclusion in rule 6c-11 
impractical.\46\ These commenters also generally agreed that existing 
UIT ETFs should continue to rely on their individual exemptive orders, 
and that the Commission should review new UIT ETFs as part of the 
exemptive order process. One commenter suggested, however, that the 
Commission consider potential updates to UIT ETFs' exemptive orders to 
account for certain sponsor services that were not contemplated at the 
time the orders were granted.\47\
---------------------------------------------------------------------------

    \46\ See, e.g., Invesco Comment Letter; SSGA Comment Letter I; 
Comment Letter of CFA Institute (Nov. 15, 2018) (``CFA Institute 
Comment Letter''); Comment Letter of Cboe Global Markets, Inc. (Oct. 
1, 2018) (``Cboe Comment Letter'') (stating that the ``unique issue 
set applicable to UITs as compared to non-UIT ETFs warrant the 
disparate treatment between UITs and other ETFs.'').
    \47\ Invesco Comment Letter (stating that these services include 
chief compliance officer services and ongoing trading services). UIT 
ETFs have obtained exemptive relief from section 26(a)(2)(C) of the 
Act to allow the ETF to pay certain enumerated expenses. See 2018 
ETF Proposing Release, supra footnote 7, at n.52 and accompanying 
text.
---------------------------------------------------------------------------

    After considering comments, we continue to believe that rule 6c-11 
should apply only to ETFs organized as open-end funds, while UIT ETFs 
should continue to rely on their existing exemptive orders.\48\ We 
acknowledge that excluding UIT ETFs will result in a segment of ETF 
assets outside the regulatory framework of rule 6c-11. However, we do 
not believe there is a need to include UIT ETFs within the scope of the 
rule given the limited sponsor interest in developing ETFs organized as 
UITs.
---------------------------------------------------------------------------

    \48\ The vast majority of ETFs currently in operation are 
organized as open-end funds, though the earliest ETFs were organized 
as UIT ETFs, and these early UIT ETFs represent a significant 
portion of the assets within the ETF industry. As of Dec. 31, 2018, 
the eight existing UIT ETFs had total assets of approximately $379 
billion, representing approximately 11.3% of total assets invested 
in ETFs (based on data obtained from MIDAS, Bloomberg, and 
Morningstar Direct).
---------------------------------------------------------------------------

    In addition, even if we were to include UIT ETFs within the scope 
of the rule, the unique structural and operational aspects of UIT ETFs 
noted by commenters would necessitate a regulatory framework that 
differs from the structure we are adopting for open-end ETFs. We 
believe that the unmanaged nature of the UIT structure, in particular, 
would require conditions that differ from the conditions applicable to 
open-end ETFs. For example, rule 6c-11 will allow ETFs the flexibility 
to use baskets that differ from a pro rata representation of the ETF's 
portfolio if certain conditions are met.\49\ Because such conditions 
require ongoing management and board oversight, we do not believe that 
extending such basket flexibility to UIT ETFs would be appropriate.\50\ 
The relief granted to UIT ETFs also includes relief from sections of 
the Act that govern key aspects of a UIT's operations, which differ 
from the relief we are providing under rule 6c-11.\51\ In short, we 
believe including UIT ETFs within the scope of rule 6c-11 would 
complicate the rule significantly and would continue to result in a 
regulatory framework where the relief and conditions applicable to UIT 
ETFs and open-end ETFs differ.
---------------------------------------------------------------------------

    \49\ See infra section II.C.4.c.
    \50\ See 2018 ETF Proposing Release, supra footnote 7, at nn.46-
48 and accompanying text.
    \51\ See, e.g., SPDR Trust, Series 1, Investment Company Act 
Release Nos. 18959 (Sept. 17, 1992) [57 FR 43996 (Sept. 23, 1992)] 
(notice) and 19055 (Oct. 26, 1992) (order) and related application 
(``SPDR'').
---------------------------------------------------------------------------

    To the extent that ETF sponsors develop novel UIT ETFs, we believe 
that the Commission should review such products as part of its 
exemptive process to determine whether the relief is necessary or 
appropriate in the public interest and consistent with the protection 
of investors. We also believe that the Commission's exemptive process 
is well-suited to handle requests to modify existing UIT ETF exemptive 
relief.
    Consistent with the proposal, we are not rescinding existing 
exemptive orders that allow UIT ETFs to operate. Two commenters 
addressing the exclusion of UIT ETFs from the rule urged the Commission 
to clarify that UIT ETFs operating pursuant to their exemptive orders 
can nevertheless continue marketing themselves as ``ETFs.'' \52\ As 
discussed below, the Commission is not limiting use of the term ``ETF'' 
or ``exchange-traded fund'' to funds relying on rule 6c-11. UIT ETFs 
therefore may continue to use these terms in their marketing materials 
and otherwise hold themselves out as ``ETFs.'' Further, while UIT ETFs 
are excluded from the scope of rule 6c-11, we are adopting amendments 
to Form N-8B-2 that will require them to provide certain additional 
disclosures regarding ETF trading costs.\53\
---------------------------------------------------------------------------

    \52\ See SSGA Comment Letter I; SIFMA AMG Comment Letter I.
    \53\ See Form N-8B-2 disclosure requirements infra section II.I.
---------------------------------------------------------------------------

2. Index-Based ETFs and Actively Managed ETFs
    Consistent with the proposal, rule 6c-11 will provide exemptions 
for both index-based ETFs and actively managed ETFs, but will not by 
its terms establish different requirements based on whether an ETF's 
investment objective is to seek returns that correspond to the returns 
of an index. Index-based and actively managed ETFs that comply with the 
rule's conditions function similarly with respect to operational 
matters, despite different investment objectives or strategies. For 
example, both index-based and actively managed ETFs register under the 
Act, issue and redeem shares in creation unit sizes in exchange for 
baskets of assets, list on national securities exchanges, and allow 
investors to trade ETF shares throughout the day at market-determined 
prices in the secondary market.
    The distinction between index-based ETFs and actively managed ETFs 
in our current exemptive orders is largely a product of ETFs' 
historical evolution.

[[Page 57168]]

The Commission did not approve the first actively managed ETF until 
nearly 15 years after index-based ETFs were introduced.\54\ Since 2008, 
however, the actively managed ETF market has grown considerably.\55\ 
The Commission has observed how actively managed ETFs operate during 
this time, and has not identified any operational issues that suggest 
additional conditions for actively managed ETFs are warranted.
---------------------------------------------------------------------------

    \54\ See 2018 ETF Proposing Release, supra footnote 7, at n.58. 
Approximately 100 exemptive orders have been issued since 2008 for 
actively managed, transparent ETFs.
    \55\ Based on data obtained from MIDAS, Bloomberg and 
Morningstar Direct as of December 31, 2018, we estimate that there 
are now over 270 actively managed ETFs with approximately $72 
billion in assets.
---------------------------------------------------------------------------

    Commenters that addressed this aspect of the proposal supported the 
rule's elimination of the historical distinction between index-based 
and actively managed ETFs.\56\ Specifically, commenters agreed that 
ETFs operate similarly irrespective of whether they are index-based or 
actively managed, and stated that there are no operational issues that 
warrant additional conditions for actively managed ETFs.\57\ In 
addition, one commenter stated that, in its experience, deviations 
between market price and NAV per share are more variable across asset 
classes underlying ETFs than between index-based and actively managed 
ETFs investing in the same asset class.\58\
---------------------------------------------------------------------------

    \56\ See, e.g., ICI Comment Letter; Invesco Comment Letter; 
Comment Letter of the Index Industry Association (Sept. 30, 2018); 
Comment Letter of the Fixed Income Market Structure Advisory 
Committee (Oct. 29, 2018) (``FIMSAC Comment Letter''); Comment 
Letter of NYSE Arca, Inc. (Oct. 10, 2018) (``NYSE Arca Comment 
Letter''); CFA Institute Comment Letter; Comment Letter of J.P. 
Morgan Asset Management (Oct. 1, 2018) (``JPMAM Comment Letter'').
    \57\ See, e.g., NYSE Arca Comment Letter; Comment Letter of 
WisdomTree Asset Management, Inc. (Oct. 1, 2018) (``WisdomTree 
Comment Letter''). As discussed in section II.C.4. infra, however, 
some commenters opposed, or suggested alternatives to, full 
portfolio transparency for actively managed ETFs.
    We also received 43 comment letters requesting that the 
Commission approve an ETP with an investment objective that seeks 
results that correspond to the performance of bitcoins or other 
digital assets. See, e.g., Comment Letter of Charles Brown (July 12, 
2018); Comment Letter of Lars Hoffman (July 14, 2018). Rule 6c-11, 
however, is based on existing relief for ETFs relating to the 
formation and operation of ETFs under the Investment Company Act and 
does not relate to specific strategies. See Letter from Dalia Blass, 
Director of Investment Management, to Paul Schott Stevens, President 
and CEO, Investment Company Institute and Timothy W. Cameron, Asset 
Management Group--Head, Securities Industry and Financial Markets 
Association (Jan. 18, 2018), available at http://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm (noting 
that in the staff's view ETFs and other funds that hold substantial 
amounts of cryptocurrencies and related products raise significant 
questions regarding how they would satisfy certain other 
requirements of the Investment Company Act and its rules). The 
Commission continues to welcome engagement with the public on issues 
related to cryptocurrency ETPs.
    \58\ See JPMAM Comment Letter (``[O]ur active ETFs trade with 
similar, and at times lower, deviations than our index ETFs; all of 
them typically trade within 50 basis points of their NAVs.'').
---------------------------------------------------------------------------

    We continue to believe that index-based and actively managed ETFs 
do not present significantly different concerns under the provisions of 
the Act from which the rule grants relief because they function 
similarly with respect to operational matters. As noted below, the 
arbitrage mechanism for existing actively managed ETFs has worked 
effectively with small deviations between market price and NAV per 
share.\59\ Permitting index-based and actively managed open-end ETFs to 
operate under the rule subject to the same conditions also will provide 
a level playing field among those market participants.
---------------------------------------------------------------------------

    \59\ See supra section II.B.2.
---------------------------------------------------------------------------

    Furthermore, we believe that it would be unreasonable to create a 
meaningful distinction within the rule between index-based and actively 
managed ETFs given the proliferation of highly customized, often 
methodologically complicated indexes. Commenters agreed that the 
proliferation of these indexes has blurred the distinction between 
index-based and actively managed ETFs, while ETF industry practices in 
areas such as portfolio transparency generally do not vary between 
these types of funds.\60\ We therefore believe that eliminating the 
regulatory distinction between index-based ETFs and actively managed 
ETFs for purposes of exemptive relief under the Act will help to 
provide a more consistent and transparent regulatory framework for ETFs 
organized as open-end funds. This approach is consistent with our 
regulation of other types of open-end funds, which does not distinguish 
between actively managed and index-based strategies.
---------------------------------------------------------------------------

    \60\ See FIMSAC Comment Letter (``[I]ndustry participants note 
that distinctions between active and passive products . . . are 
increasingly blurred with the advent of `smart beta' or factor 
products, or of index products with active elements . . . .); JPMAM 
Comment Letter (``[A]s the proposal notes, practices around 
portfolio transparency have converged across index-based and 
actively managed ETFs.'').
---------------------------------------------------------------------------

    In addition, consistent with our proposal, rule 6c-11 does not 
include additional conditions relating to index-based ETFs with 
affiliated index providers (``self-indexed ETFs''). Commenters 
generally agreed with the proposal's approach to self-indexed ETFs, 
indicating that existing securities laws adequately address any special 
concerns presented by these ETFs.\61\ One commenter, however, noted 
that the concerns that were expressed by the Commission when it granted 
individualized exemptive relief for self-indexed ETFs remain 
important.\62\ This commenter stated that the Commission should permit 
self-indexed ETFs only ``on the condition that [an information] 
firewall between the index provider and the asset manager exists.'' 
\63\
---------------------------------------------------------------------------

    \61\ See Invesco Comment Letter; BlackRock Comment Letter; IIA 
Comment Letter; JPMAM Comment Letter; SSGA Comment Letter 
(``[C]urrent regulatory requirements . . . effectively require a 
heightened set of requirements associated with affiliated index 
providers . . .''); WisdomTree Comment Letter (``Advisers are 
already required to adopt policies designed to prevent portfolio 
information from being misappropriated.'').
    \62\ See Morningstar Comment Letter. See also Guggenheim Funds 
Investment Advisors, LLC, et al., Investment Company Act Release 
Nos. 30560 (June 14, 2013) [78 FR 37614 (June 21, 2013)] (notice) 
and 30598 (July 10, 2013) (order) and related application 
(``Guggenheim Funds'') (discussing concerns regarding the ability of 
an affiliated index provider to manipulate an underlying index to 
the benefit or detriment of a self-indexed ETF and the potential for 
conflicts that may arise with respect to the personal trading 
activity of an affiliated index provider's personnel). Guggenheim 
Funds permitted a self-indexed ETF to address these concerns through 
full portfolio transparency, instead of certain policies and 
procedures that had been required in earlier exemptive orders for 
self-indexed ETFs. But see, e.g., HealthShares Inc., et al., 
Investment Company Act Release Nos. 27916 (July 27, 2007) [72 FR 
42447 (Aug. 2, 2007)] (notice) and 27930 (Aug. 20, 2007) (order) and 
related application.
    \63\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    We agree with the commenters who stated that the existing federal 
securities laws adequately address any special concerns that self-
indexed ETFs present, including the potential ability of an affiliated 
index provider to manipulate an underlying index to the benefit or 
detriment of a self-indexed ETF.\64\ For

[[Page 57169]]

example, ETF sponsors are likely to be in a position to understand the 
potential circumstances and relationships that could give rise to the 
misuse of non-public information, and can develop appropriate measures 
to address them. Therefore, we continue to believe that portfolio 
transparency combined with existing requirements should be sufficient 
to protect against the abuses addressed in exemptive applications of 
ETF sponsors that either use affiliated index providers or create their 
own indexes.\65\
---------------------------------------------------------------------------

    \64\ See 17 CFR 270.38a-1 (rule 38a-1 under the Act) (requiring 
funds to adopt policies and procedures reasonably designed to 
prevent violation of federal securities laws); 17 CFR 270.17j-
1(c)(1) (rule 17j-1(c)(1) under the Investment Company Act) 
(requiring funds to adopt a code of ethics containing provisions 
designed to prevent certain fund personnel (``access persons'') from 
misusing information regarding fund transactions); section 204A of 
the Investment Advisers Act of 1940 (``Advisers Act'') (15 U.S.C. 
80b-204A) (requiring an adviser to adopt policies and procedures 
that are reasonably designed, taking into account the nature of its 
business, to prevent the misuse of material, non-public information 
by the adviser or any associated person, in violation of the 
Advisers Act or the Exchange Act, or the rules or regulations 
thereunder); section 15(g) of the Exchange Act (15 U.S.C. 78o(f)) 
(requiring a registered broker or dealer to adopt policies and 
procedures reasonably designed, taking into account the nature of 
the broker's or dealer's business, to prevent the misuse of 
material, nonpublic information by the broker or dealer or any 
person associated with the broker or dealer, in violation of the 
Exchange Act or the rules or regulations thereunder).
    Cf., e.g., Rule Commentary .02(b)(i) of NYSE American Rule 1000A 
(requiring a ``fire wall'' between an ETF and an affiliated index 
provider).
    \65\ See infra section II.C.4. (discussing requirements in rule 
6c-11 regarding portfolio transparency).
---------------------------------------------------------------------------

3. Leveraged/Inverse ETFs
    As proposed, rule 6c-11 includes a condition that excludes 
leveraged/inverse ETFs.\66\ These ETFs may not rely on the rule, and 
will instead continue to operate pursuant to their exemptive 
orders.\67\ Broadly speaking, leveraged/inverse ETFs seek to amplify 
the returns of an underlying index by a specified multiple or to profit 
from a decline in the value of an underlying index over a predetermined 
period of time using financial derivatives. Leveraged/inverse ETFs also 
rebalance their portfolios on a daily or other periodic basis in order 
to maintain a constant leverage ratio.\68\ These funds' use of leverage 
together with this periodic rebalancing (or ``reset''), and the 
resulting effects of compounding, can result in performance that 
differs significantly from some investors' expectations of how index 
investing generally works.
---------------------------------------------------------------------------

    \66\ See rule 6c-11(c)(4).
    \67\ As of December 2018, 167 ETFs employed leveraged or inverse 
investment strategies. These ETFs had total net assets of $29.64 
billion or approximately 1% of all ETF assets.
    \68\ See Rafferty Asset Management, LLC, et al., Investment 
Company Act Release Nos. 28889 (Aug. 27, 2009) [74 FR 45495 (Sept. 
2, 2009)] (notice) and 28905 (Sept. 22, 2009) (order) and related 
application (amending the applicant's prior order) (``Rafferty II'') 
(providing a description of maintaining a stated ratio to an 
underlying index as a daily investment objective).
---------------------------------------------------------------------------

    For example, as a result of compounding, a leveraged/inverse ETF 
can outperform a simple multiple of its index's returns over several 
days of consistently positive returns, or underperform a simple 
multiple of its index's returns over several days of volatile 
returns.\69\ Investors holding shares over periods longer than the time 
period targeted by the ETF's investment objective may experience 
performance that is different, and at times substantially different, 
from the returns of the targeted index over the same investment period. 
Buy-and-hold investors with an intermediate or long-term time horizon 
that invest in a leveraged/inverse ETF--who may not evaluate their 
portfolios frequently--may experience large and unexpected losses or 
otherwise experience returns that are different from what they 
anticipated.\70\ As a result, leveraged/inverse ETFs are complex 
products that serve a markedly different investment purpose than most 
other ETFs.\71\
---------------------------------------------------------------------------

    \69\ See Office of Investor Education and Advocacy, SEC, 
Leveraged and Inverse ETFs: Specialized Products with Extra Risks 
for Buy-and-Hold Investors Investor Alert and Bulletins (Aug. 1, 
2009), available at http://www.sec.gov/investor/pubs/leveragedetfs-alert.htm; FINRA, Non-Traditional ETFs: FINRA Reminds Firms of Sales 
Practice Obligations Relating to Leveraged and Inverse Exchange-
Traded Funds, Regulatory Notice 09-31 (June 2009), available at 
http://www.finra.org/sites/default/files/NoticeDocument/p118952.pdf 
(``FINRA Regulatory Notice 09-31'').
    \70\ See FINRA Regulatory Notice 09-31, supra footnote 69 
(reminding member firms of their sales practice obligations relating 
to leveraged/inverse ETFs and noting that leveraged/inverse ETFs are 
typically not suitable for retail investors who plan to hold these 
products for more than one trading session).
    \71\ See Commission Interpretation Regarding Standard of Conduct 
for Investment Advisers, Investment Advisers Act Release No. 5248 
(June 5, 2019) [84 FR 33669 (July 12, 2019)] at n.39 and 
accompanying text (``[I]nverse or leveraged exchange-traded products 
that are designed primarily as short-term trading tools for 
sophisticated investors may not be in the best interest of a retail 
client absent an identified, short-term, client-specific trading 
objective and, to the extent that such products are in the best 
interest of a retail client initially, they would require daily 
monitoring by the adviser''). See also Regulation Best Interest, 
Exchange Act Release No. 86031 (June 5, 2019) [84 FR 33318 (July 12, 
2019)] at text accompanying n.596 (stating that broker-dealers 
recommending leveraged or inverse exchange-traded products with a 
daily reset should understand that such products may not be suitable 
for, and as a consequence also not in the best interest of, retail 
customers who plan to hold them for longer than one trading session, 
particularly in volatile markets); Order Granting Approval of a 
Proposed Rule Change, as Modified by Amendment No. 2, to Amend 
Nasdaq Rules 5705 and 5710 to Adopt a Disclosure Requirement for 
Certain Securities, Exchange Act Release No. 85362 (Mar. 19, 2019) 
[84 FR 11148 (Mar. 25, 2019)] (adopting certain disclosure 
requirements for leveraged/inverse ETFs).
---------------------------------------------------------------------------

    Leveraged/inverse ETFs' use of derivatives also raises issues under 
section 18 of the Act, which limits a fund's ability to obtain 
leverage.\72\ The Commission has been evaluating these section 18 
issues as part of a broader consideration of derivatives use by 
registered funds and business development companies (``BDCs'').\73\ We 
therefore proposed to exclude leveraged/inverse ETFs from the scope of 
rule 6c-11 so that the Commission could consider these concerns in a 
comprehensive manner with other funds that use leverage.\74\ We also 
proposed to allow leveraged/inverse ETFs and their sponsors to continue 
to rely on their existing exemptive relief in order to preserve the 
status quo.\75\
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 80a-18.
    \73\ See Derivatives Proposing Release, supra footnote 45 
(proposing new rule 18f-4 under the Act, which was designed to 
address the investor protection purposes and concerns underlying 
section 18 of the Act and to provide an updated and more 
comprehensive approach to the regulation of funds' (including 
leveraged/inverse ETFs') use of derivatives transactions).
    \74\ Proposed rule 6c-11 would have provided that an ETF relying 
on the rule ``may not seek, directly or indirectly, to provide 
returns that exceed the performance of a market index by a specified 
multiple, or to provide returns that have an inverse relationship to 
the performance of a market index, over a fixed period of time.'' 
See proposed rule 6c-11(c)(4).
    \75\ The staff has not supported new exemptive relief for 
leveraged/inverse ETFs since 2009. The orders issued to current 
leveraged/inverse ETF sponsors, as amended over time, relate to 
leveraged/inverse ETFs that seek daily investment results of up to 
300% of the return (or inverse of the return) of the underlying 
index. Rydex ETF Trust, et al., Investment Company Act Release Nos. 
27703 (Feb. 20, 2007) [72 FR 8810 (Feb. 27, 2007)] (notice) and 
27754 (Mar. 20, 2007) (order) and related application; Rafferty 
Asset Management, LLC, et al., Investment Company Act Release Nos. 
28379 (Sept. 12, 2008) [73 FR 54179 (Sept. 18, 2008)] (notice) and 
28434 (Oct. 6, 2008) (order) and related application (``Rafferty 
I''). See also ProShares Trust, et al., Investment Company Act 
Release Nos. 28696 (Apr. 14, 2009) [74 FR 18265 Apr. 21, 2009)] 
(notice) and 28724 (May 12, 2009) (order) and related application 
(amending the applicant's prior order) (``ProShares''); Rafferty II, 
supra footnote 68.
---------------------------------------------------------------------------

    Most commenters who addressed this aspect of the proposal agreed 
that leveraged/inverse ETFs present issues and concerns that should be 
addressed outside the context of rule 6c-11.\76\ One such commenter 
stated that leveraged/inverse ETFs present ``highly specific and 
accentuated risks'' and stated that the Commission should regulate 
these products under tailored exemptive orders.\77\ Other commenters 
urged the Commission to consider additional investor protection 
requirements for leveraged/inverse ETFs, such as requiring marketing 
materials to notify retail investors about the risks of investing in 
these instruments or other enhanced disclosure requirements.\78\ Some 
commenters stated that the Commission should not permit

[[Page 57170]]

leveraged/inverse ETFs to use the terms ``ETF'' or ``exchange-traded 
fund'' in their names, because investors might mistakenly assume that 
all products referred to as ETFs are structured and regulated like 
``traditional'' ETFs.\79\
---------------------------------------------------------------------------

    \76\ See BlackRock Comment Letter; Invesco Comment Letter; SSGA 
Comment Letter I; Comment Letter of ICE Data Services (Oct. 1, 2018) 
(``IDS Comment Letter''); FIMSAC Comment Letter; CFA Institute 
Comment Letter; see also Cboe Comment Letter (indicating that these 
ETFs should be ``treated differently'' but not specifically stating 
whether such ETFs should be excluded from the scope of the rule).
    \77\ See Invesco Comment Letter.
    \78\ See CFA Institute Comment Letter; Nasdaq Comment Letter 
(stating that there is significant investor confusion regarding 
existing leveraged/inverse ETFs' daily investment horizon). See also 
Comment Letter of Rafferty Asset Management, LLC (Oct. 1, 2018) 
(``Direxion Comment Letter'') (supporting enhanced disclosure 
requirements for leveraged/inverse ETFs if reliance on rule 6c-11 is 
allowed for the operation of leveraged/inverse ETFs).
    \79\ See BlackRock Comment Letter; FIMSAC Comment Letter.
---------------------------------------------------------------------------

    Other commenters were less specific as to whether the Commission 
should regulate leveraged/inverse ETFs under exemptive orders or 
through a separate rule, but stated that leveraged/inverse ETFs should 
be regulated by means other than rule 6c-11.\80\ One commenter agreed 
that leveraged/inverse ETFs ``raise important disclosure and investor 
protection issues,'' but strongly encouraged the Commission to 
``initiate proceedings, whether as part of its consideration of 
derivative usage or otherwise, to determine what its future approach'' 
to leveraged/inverse ETFs will be.\81\
---------------------------------------------------------------------------

    \80\ See SSGA Comment Letter I (``Leveraged ETFs . . . present 
issues which are appropriately addressed through means other than 
the Proposed ETF Rule.''); IDS Comment Letter (``IDS believes that 
leveraged and inverse ETFs strategies carry significantly different 
risk profiles than index-based ETFs. For that reason we agree that 
they should be excluded from the scope of funds that may rely on the 
proposed rule.'').
    \81\ Comment Letter of the Mutual Fund Directors Forum (Oct. 1, 
2018) (``MFDF Comment Letter'').
---------------------------------------------------------------------------

    Sponsors of leveraged/inverse ETFs, however, advocated that the 
rule should not exclude leveraged/inverse ETFs. They asserted that 
leveraged/inverse ETF investors understand the special concerns related 
to these products, accept the products' risks, and utilize the products 
appropriately.\82\ One of these commenters stated that the rule's 
exemptive relief targets ETFs' structural and operational 
characteristics, and that leveraged/inverse ETFs are structured and 
operated in the same manner as other ETFs within the rule's scope.\83\ 
Among other similarities, the commenter noted that leveraged/inverse 
ETFs are structured as open-end funds, provide full portfolio 
transparency, and accept creation and redemption baskets using the same 
operating mechanisms as other ETFs. The commenter also opined that 
leveraged/inverse ETFs should not be excluded from the scope of the 
rule because other ETFs that utilize leverage in their investment 
strategies are not excluded from the scope of the rule.
---------------------------------------------------------------------------

    \82\ See Direxion Comment Letter (``Given [certain data findings 
and educational efforts by regulators, brokerage firms, and the ETFs 
themselves] we believe it would be hard for investors not to 
understand that our leveraged ETFs are complex products that are 
`different' from other ETFs, and we have not seen any recent 
empirical data or other evidence to the contrary.''); Comment Letter 
of ProShare Advisors LLC (Oct. 1, 2018) (``ProShares Comment 
Letter'').
    \83\ See ProShares Comment Letter.
---------------------------------------------------------------------------

    Another commenter did not object to excluding leveraged/inverse 
ETFs from rule 6c-11, but opined that the proposed rule's condition 
excluding leveraged/inverse ETFs was overly broad, potentially 
capturing ETFs that have an inverse relationship to the performance of 
a market index or ETFs that use other hedging strategies to reduce 
risk.\84\ This commenter also asked the Commission to confirm that the 
exclusion would not, in effect, apply to every ETF that seeks to track 
an index that includes derivatives. Additionally, several commenters 
did not specifically address leveraged/inverse ETFs, but generally 
stated that rule 6c-11 should apply across all ETFs registered under 
the Investment Company Act to create an even playing field.\85\
---------------------------------------------------------------------------

    \84\ See Cboe Comment Letter (stating that the exclusion should 
cover only those inverse ETFs that seek to provide returns that 
exceed the performance of a market index by a ``specified inverse 
multiple'').
    \85\ See, e.g., BNY Mellon Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we have determined to include a 
condition that prevents leveraged/inverse ETFs from relying on the 
rule.\86\ Although leveraged/inverse ETFs are structurally and 
operationally similar to other types of ETFs within the scope of rule 
6c-11, we believe it is premature to permit sponsors to form and 
operate leveraged/inverse ETFs in reliance on the rule without first 
addressing the investor protection purposes and concerns underlying 
section 18 of the Act. We therefore believe that the Commission should 
complete its broader consideration of the use of derivatives by 
registered funds before considering allowing leveraged/inverse ETFs to 
rely on the rule.
---------------------------------------------------------------------------

    \86\ See Rule 6c-11(c)(4).
---------------------------------------------------------------------------

    Given that rule 6c-11 is intended to help create a consistent 
regulatory framework for ETFs and a level playing field among ETF 
sponsors, we acknowledge that excluding leveraged/inverse ETFs from the 
rule's scope and permitting existing leveraged/inverse ETFs to continue 
to operate pursuant to their exemptive orders at this time delays, in 
part, achieving those goals. However, because leveraged/inverse ETFs 
raise policy considerations that are different from those we seek to 
address in the rule, we believe rule 6c-11 should exclude leveraged/
inverse ETFs.
    As adopted, rule 6c-11 will exclude ETFs that seek to provide 
leveraged or inverse investment returns over a predetermined period of 
time. The periodic reset that such strategies necessitate distinguish 
leveraged/inverse ETFs from other types of ETFs that may use leverage. 
In the proposal we did not specify the period of time over which an ETF 
had to seek to deliver a leveraged or inverse return of an index to be 
covered by the proposed rule's leveraged/inverse ETF exclusion, and we 
similarly decline to specify a period of time here.\87\ However, the 
condition relating to leveraged/inverse ETFs continues to include a 
temporal element (i.e., ``over a predetermined period of time'') in 
order to specifically capture ETFs that seek to deliver the leveraged 
or inverse return of a market index over a set period of time, daily or 
otherwise.\88\
---------------------------------------------------------------------------

    \87\ See 2018 ETF Proposing Release, supra footnote 7, at 
section II.A.3.
    \88\ See rule 6c-11(c)(4). The current exemptive orders that 
allow leveraged/inverse ETFs contemplate a daily reset, because the 
orders relate to ETFs that pursue daily investment objectives. See 
2018 ETF Proposing Release, supra footnote 7 at n.77 and related 
discussion. Proposed rule 6c-11 used the term ``fixed period of 
time'' to prevent both these ETFs and leveraged/inverse ETFs 
contemplating non-daily resets (e.g., weekly or monthly resets) from 
relying on the rule. See proposed rule 6c-11(c)(4). Rule 6c-11 as 
adopted uses the term ``predetermined period of time'' to clarify 
that leveraged/inverse ETFs contemplating predetermined but variable 
resets (e.g., leveraged/inverse ETFs that contemplate a range of 
daily-to-weekly resets) are similarly prohibited from relying on the 
rule.
---------------------------------------------------------------------------

    In addition, while the rule uses the term ``multiple,'' leveraged/
inverse ETFs with strategies that seek directionally leveraged or 
inverse returns of an index present the investor protection concerns 
discussed above regardless of whether the amplification factor or 
inverse factor is evenly divisible by 100 (e.g., a fund that seeks to 
provide a daily investment return equal to 150% of the performance of 
an index). Thus, to clarify the rule's use of the term ``multiple,'' 
leveraged/inverse ETFs are excluded from the scope of the rule 
regardless of whether the returns they seek over a predetermined time 
period are evenly divisible by 100.\89\ The exclusion also includes 
strategies that pursue a specified range of a multiple or inverse 
multiple of an index's performance (e.g., 200% to 300% of an index's 
performance or -200% to -300% of an index's performance). This approach 
is consistent with our existing exemptive orders and will capture those 
ETFs that have historically been considered ``leveraged/inverse ETFs'' 
in the marketplace.
---------------------------------------------------------------------------

    \89\ Additionally, though a strict mathematical interpretation 
of the term ``multiple'' may include a multiple of 100%, an ETF that 
simply seeks to track the performance of an index is not considered 
``leveraged'' for these purposes and may rely on the rule. But see 
infra footnotes 90-91 and accompanying text.

---------------------------------------------------------------------------

[[Page 57171]]

    We also continue to believe that it is important to specify that an 
ETF relying on the rule may not indirectly seek to provide investment 
returns that correspond to the performance of a market index by a 
specified multiple or to provide returns that have an inverse 
relationship to the performance of a market index over a predetermined 
period of time in order to prevent a fund from circumventing this 
condition, such as by embedding leverage in the underlying index.\90\ 
For example, an ETF could not circumvent the rule's conditions and rely 
on the rule to track an index if the index itself tracks 300% or -100% 
of the performance of the S&P 500.\91\ In response to commenter 
concerns discussed above, however, this does not mean that the 
exclusion would apply to every ETF that tracks an index with 
constituents that are derivatives.\92\ Whether a particular index is 
``leveraged'' would depend on the economic characteristics of the 
index's constituents, and not just on whether some or all of the 
constituents are derivatives.
---------------------------------------------------------------------------

    \90\ Rule 6c-11(c)(4) (emphasis added). See also 2018 ETF 
Proposing Release, supra footnote 7, at text following n.82.
    \91\ The exemptive orders that we have issued to sponsors of 
leveraged/inverse ETFs do not provide relief to ETFs described as 
seeking investment returns that correspond to the performance of a 
leveraged or inverse leveraged market index over a predetermined 
period of time. See supra footnote 75.
    \92\ See supra footnote 84 and following text.
---------------------------------------------------------------------------

    Finally, we are not adopting enhanced website or other disclosure 
requirements for leveraged/inverse ETFs at this time as some commenters 
had recommended. We believe all registered funds that pursue leveraged 
or inverse strategies raise similar disclosure issues. We therefore 
believe that the Commission should address any such potential 
disclosure issues separately for all leveraged/inverse registered 
funds.

B. Exemptive Relief Under Rule 6c-11

    Rule 6c-11 will provide ETFs that fall within the scope of the rule 
exemptive relief from certain provisions of the Act that are necessary 
to allow ETFs to operate. These exemptions are consistent with the 
relief we have given to ETFs under our exemptive orders.\93\ As 
discussed below in section II.C., the exemptions will be subject to 
conditions that are designed to address the concerns underlying the 
relevant statutory provisions and to support a Commission finding that 
the exemptions are in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the policy 
and provisions of the Act.\94\
---------------------------------------------------------------------------

    \93\ See 2018 ETF Proposing Release, supra footnote 7, at n.88 
and related discussion. Our exemptive orders also provide relief 
allowing certain types of funds to invest in ETFs beyond the limits 
of section 12(d)(1) of the Act. See infra section II.F. (discussing 
our treatment of master-feeder relief) and section II.G. (discussing 
our treatment of other relief for fund investments in ETFs).
    \94\ See 15 U.S.C. 80a-6(c).
---------------------------------------------------------------------------

1. Treatment of ETF Shares as ``Redeemable Securities''
    Consistent with our proposal, ETFs relying on rule 6c-11 will be 
considered to issue a ``redeemable security'' within the meaning of 
section 2(a)(32) of the Act.\95\ ETFs have features that distinguish 
them from both traditional open-end and closed-end funds. A defining 
feature of open-end funds is that they offer redeemable securities, 
which allow the holder to receive his or her proportionate share of the 
fund's NAV per share upon presentation of the security to the issuer. 
Although individual ETF shares cannot be redeemed, except in limited 
circumstances, they can be redeemed in creation unit aggregations.\96\ 
Therefore, we believe that ETF shares are most appropriately classified 
under the final rule as redeemable securities within the meaning of 
section 2(a)(32), and that ETFs should be regulated as open-end funds 
within the meaning of section 5(a)(1) of the Act.\97\
---------------------------------------------------------------------------

    \95\ Rule 6c-11(b)(1).
    \96\ See rule 6c-11(a)(1) (defining an exchange-traded fund, in 
part, as a registered open-end management company that issues and 
redeems its shares in creation units). The rule defines ``creation 
unit'' to mean a specified number of ETF shares that the ETF will 
issue to (or redeem from) an authorized participant in exchange for 
the deposit (or delivery) of a basket and a cash balancing amount 
(if any). See rule 6c-11(a)(1). See also infra section II.C.1. 
(discussing circumstances where ETF shares can be individually 
redeemed).
    \97\ 15 U.S.C. 80a-2(a)(32) (defining ``redeemable security''); 
15 U.S.C. 80a-5(a)(1) (defining ``open-end company'' as ``a 
management company which is offering for sale or has outstanding any 
redeemable security of which it is the issuer''). If ETF shares were 
not classified as redeemable securities within the meaning of 
section 2(a)(32) of the Act, an ETF that is a management company (as 
defined under the Act) would be subject to the provisions of the Act 
applicable to closed-end funds. See 15 U.S.C. 80a-5(a)(2) (defining 
a ``closed-end company'' as any management company other than an 
open-end company).
---------------------------------------------------------------------------

    Unlike our exemptive orders, which have provided exemptions from 
the definitions of ``redeemable security'' in section 2(a)(32) and 
``open-end company'' in section 5(a)(1), rule 6c-11 will not provide 
exemptions from these definitions. Instead, we believe that it is more 
appropriate for the rule to address these questions of status by 
classifying ETF shares as ``redeemable securities.'' Thus, any ETF that 
relies on the rule's conditions and requirements will be subject to 
requirements imposed under the Act and our rules that apply to open-end 
funds.\98\
---------------------------------------------------------------------------

    \98\ See, e.g., 15 U.S.C. 80a-22; 17 CFR 270.22c-1. ETFs that 
are management companies and operate in reliance on rule 6c-11 and 
those that operate in reliance on an exemptive order would equally 
be subject to the Act and our rules as open-end funds.
---------------------------------------------------------------------------

    In addition, the rules under the Exchange Act that apply to 
transactions in redeemable securities issued by an open-end fund will 
apply to ETFs relying on rule 6c-11.\99\ Shares issued by ETFs relying 
on rule 6c-11 therefore are eligible for the ``redeemable securities'' 
exceptions in rules 101(c)(4) and 102(d)(4) of Regulation M and rule 
10b-17(c) under the Exchange Act in connection with secondary market 
transactions in ETF shares and the creation or redemption of creation 
units. ETFs relying on rule 6c-11 similarly will qualify for the 
``registered open-end investment company'' exemption in rule 11d1-2 
under the Exchange Act.
---------------------------------------------------------------------------

    \99\ See, e.g., 17 CFR 240.15c3-1. See also Securities 
Transaction Settlement Cycle, Exchange Act Release No. 80295 (Mar. 
22, 2017) [82 FR 15564 (Mar. 29, 2017)] (shortening the standard 
settlement cycle for most broker-dealer securities transactions to 
two business days).
---------------------------------------------------------------------------

    Many commenters supported our proposed classification of ETF shares 
as ``redeemable securities.'' \100\ Commenters also supported our view 
that the arbitrage mechanism that is central to the operation of an ETF 
(and the conditions in the final rule designed to facilitate an 
effective arbitrage mechanism) serves to keep the market price of ETF 
shares at or close to the ETF's NAV per share.\101\ As a result, even 
though only authorized participants may redeem creation units at NAV 
per share, commenters agreed that investors are able to sell their ETF 
shares on the secondary market at or close to NAV, similar to investors 
in an open-end fund that redeem their shares at NAV per share.\102\
---------------------------------------------------------------------------

    \100\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Comment Letter of the Asset Management Group of the Securities 
Industry and Financial Markets Association (Feb. 22, 2019) (``SIFMA 
AMG Comment Letter II''); Vanguard Comment Letter; SSGA Comment 
Letter; Comment Letter of Virtu Financial, Inc. (Oct. 3, 2018) 
(Virtu Comment Letter''); Comment Letter of Eaton Vance Corp. (Oct. 
4, 2018) (``Eaton Vance Comment Letter''); ABA Comment Letter.
    \101\ See, e.g., ICI Comment Letter. See also 2018 ETF Proposing 
Release, supra footnote 7, at n.95 and related discussion.
    \102\ See, e.g., ICI Comment Letter; Virtu Comment Letter.
---------------------------------------------------------------------------

    Commenters also supported the resulting eligibility for the 
redeemable securities exceptions and the registered open-end investment 
company exemption under the Exchange Act

[[Page 57172]]

rules discussed above.\103\ Commenters stated that such treatment would 
reduce regulatory complexity and eliminate potential inconsistencies 
between rule 6c-11 and this Exchange Act relief.\104\ Several 
commenters recommended extending the ``redeemable security'' 
classification to ETFs that are not eligible to rely on rule 6c-11, 
such as UIT ETFs or share class ETFs, to make them similarly eligible 
for the exceptions under the Exchange Act that apply to redeemable 
securities issued by an open-end fund.\105\
---------------------------------------------------------------------------

    \103\ See, e.g., Dechert Comment Letter; BlackRock Comment 
Letter; Invesco Comment Letter I; ABA Letter.
    \104\ See, e.g., Vanguard Comment Letter; Dechert Comment 
Letter; WisdomTree Comment Letter; ABA Comment Letter; SIFMA AMG 
Comment Letter I.
    \105\ See ICI Comment Letter; Dechert Comment Letter; SIFMA AMG 
Comment Letter I; Vanguard Comment Letter; SSGA Comment Letter I; 
ABA Comment Letter; BlackRock Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we are clarifying that we view 
securities of all ETFs, including those that do not rely on rule 6c-11, 
as eligible for the redeemable securities exceptions in rules 101(c)(4) 
and 102(d)(4) of Regulation M and rule 10b-17(c) under the Exchange Act 
in connection with secondary market transactions in ETF shares and the 
creation or redemption of creation units and the exemption in rule 
11d1-2 under the Exchange Act for securities issued by a registered 
open-end investment company or unit investment trust. We believe that 
securities issued by ETFs that are exempt from the definitions of 
``redeemable security'' in section 2(a)(32) and ``open-end company'' in 
section 5(a)(1) of the Investment Company Act pursuant to their orders 
do not raise different concerns with respect to these Exchange Act 
provisions than those issued by ETFs relying on rule 6c-11.
    Several commenters recommended further harmonization between rule 
6c-11 and certain other Exchange Act relief that ETFs must currently 
seek in order to operate.\106\ Commenters expressed concern that this 
Exchange Act relief is duplicative or, in some cases, inconsistent with 
other requirements applicable to ETFs.\107\ In particular, commenters 
noted that rule 6c-11 as proposed would not address relief for ETFs 
from section 11(d)(l) of the Exchange Act as well as rules 10b-10, 
15c1-5, 15c1-6, and 14e-5 thereunder.\108\ Commenters also recommended 
that the ETF generic listing standards of national securities exchanges 
be broadened and harmonized with any final ETF rule.\109\
---------------------------------------------------------------------------

    \106\ See, e.g., BlackRock Comment Letter; ICI Comment Letter; 
Fidelity Comment Letter; SIFMA AMG Comment Letter I; Comment Letter 
of John Hancock Investments (Oct. 1, 2018) (``John Hancock Comment 
Letter''); Comment Letter of Flow Traders US LLP (Oct. 1, 2018) 
(``Flow Traders Comment Letter'').
    \107\ See, e.g., BlackRock Comment Letter. See also, e.g., ICI 
Comment Letter (``Currently, ETFs often must satisfy multiple and 
sometimes conflicting requirements from different divisions within 
the SEC.''). Commenters also expressed concerns about the 
administrative delay in obtaining these additional approvals. See, 
e.g., SIFMA AMG Comment Letter I.
    \108\ See, e.g., Dechert Comment Letter; see also 2015 ETP 
Request for Comment, supra footnote 19.
    \109\ See, e.g., Cboe Comment Letter (``Cboe encourages the 
Commission to evaluate exchange proposals to broaden their generic 
listing standards . . . in order to achieve efficiencies with 
exchange listing processes in a manner very similar to those which 
[rule 6c-11] is designed to accomplish.''). See also, e.g., ABA 
Comment Letter, Nasdaq Comment Letter.
---------------------------------------------------------------------------

    We agree that complementary exemptive relief under the Exchange Act 
could further reduce regulatory complexity, administrative delay, and 
eliminate potential inconsistencies between rule 6c-11 and the related 
Exchange Act relief that ETFs must obtain to operate. Accordingly, the 
Commission is issuing an order granting exemptive relief to ETFs 
operating in reliance on rule 6c-11 from the requirements of section 
11(d)(1) of the Exchange Act and rules 10b-10, 15c1-5, 15c1-6, and 14e-
5 under the Exchange Act for ETFs, where certain conditions are 
met.\110\
---------------------------------------------------------------------------

    \110\ See ETF Exchange Act Order, supra footnote 15. ETFs that 
do not operate in reliance on rule 6c-11 and currently have relief 
from the Exchange Act provisions discussed above may continue to 
rely on such relief.
---------------------------------------------------------------------------

    Finally, commenters asked that we exempt ETF insiders and large 
shareholders from certain section 13(d) and section 16 reporting 
requirements under the Exchange Act beyond the conditions in several 
staff no-action letters.\111\ The staff no-action letters stated that 
the staff would not recommend enforcement action to the Commission if 
certain insiders and large shareholders of ETFs seeking to track the 
performance of a benchmark index through a replication strategy did not 
file reports under section 13(d) and section 16(a) based on certain 
facts and circumstances, including that there is no material deviation 
between the ETF's secondary market price and NAV.\112\ Commenters 
stated that the portfolio transparency requirements in rule 6c-11 would 
address the concerns underlying section 13(d) and section 16 without 
conditioning relief on there being no material deviation between the 
ETF's market price and NAV per share.\113\
---------------------------------------------------------------------------

    \111\ See, e.g., Fidelity Comment Letter; Comment Letter of 
Thompson Hine LLP (Oct. 1, 2018) (``Thompson Hine Comment Letter'').
    \112\ See PDR Services Corporation, SEC Staff No-Action Letter 
(pub. avail. December 14, 1998) (``PDR Services Letter''); Select 
Sector SPDR Trust, SEC Staff No-Action Letter (pub. avail. May 6, 
1999) (``Select Sector SPDR Trust Letter'').
    \113\ See, e.g., Thompson Hine Comment Letter.
---------------------------------------------------------------------------

    As discussed above, the exemptions we are providing today under 
rule 6c-11 are based on the existence of a close tie between market 
price and NAV per share. Expanding on the existing staff no-action 
letters by providing exemptions from the reporting requirements in 
sections 13(d) and 16 even when there is a material deviation between 
market price and NAV would be inconsistent with the exemptions in rule 
6c-11. We therefore refrain from taking additional action concerning 
the conditions outlined in our existing staff no-action letters.
2. Trading of ETF Shares at Market-Determined Prices
    Rule 6c-11 will provide exemptions from section 22(d) and rule 22c-
1 to permit secondary market trading of ETF shares at market-determined 
prices as proposed. Section 22(d) of the Act, among other things, 
prohibits investment companies, their principal underwriters, and 
dealers from selling a redeemable security to the public except at a 
current public offering price described in the prospectus.\114\ Rule 
22c-1 generally requires that a dealer selling, redeeming, or 
repurchasing a redeemable security do so only at a price based on its 
NAV.\115\ Together, section 22(d) and rule 22c-1 are designed to: (i) 
Prevent dilution caused by certain riskless trading practices of 
principal underwriters and dealers; (ii) prevent unjust discrimination 
or preferential treatment among investors purchasing and redeeming fund 
shares; and (iii) preserve an orderly distribution of investment 
company shares.\116\ ETFs seeking to register under the Act obtain 
exemptions from these provisions because investors may purchase and 
sell individual ETF shares from and to dealers on the secondary market 
at market-determined prices (i.e., at prices other than those described 
in the prospectus or based on NAV). Consistent with our prior exemptive 
orders, rule 6c-11 will provide exemptions from these provisions.\117\
---------------------------------------------------------------------------

    \114\ 15 U.S.C. 80a-22(d).
    \115\ See 17 CFR 270.22c-1.
    \116\ See generally Mutual Fund Distribution Fees; 
Confirmations, Investment Company Act Release No. 29367 (July 21, 
2010) [75 FR 47064 (Aug. 4, 2010)] (discussing legislative history 
of section 22(d)).
    \117\ See rule 6c-11(b)(2). The reference in the rule to 
``repurchases . . . at market-determined prices'' refers to 
secondary market transactions with dealers. Thus, the rule will not 
allow an ETF to repurchase shares from an investor at market-
determined prices.

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[[Page 57173]]

    As discussed above, only authorized participants can purchase and 
redeem shares directly from an ETF at NAV per share and only in 
creation unit aggregations. Because authorized participants (and other 
market participants transacting through an authorized participant) can 
take advantage of disparities between the market price of ETF shares 
and NAV per share, they may be in a different position than investors 
who buy and sell individual ETF shares only on the secondary 
market.\118\ However, if the arbitrage mechanism is functioning 
effectively, entities taking advantage of these disparities in market 
price and NAV per share move the market price to a level at or close to 
the NAV per share of the ETF. The final rule will provide exemptions 
from section 22(d) and rule 22c-1 because we believe this arbitrage 
mechanism--and the conditions in this rule designed to promote a 
properly functioning arbitrage mechanism--have adequately addressed, 
over the significant operating history of ETFs, the potential concerns 
regarding shareholder dilution and unjust discrimination that these 
provisions were designed to address.
---------------------------------------------------------------------------

    \118\ See 2018 ETF Proposing Release, supra footnote 7, at n.113 
and accompanying discussion.
---------------------------------------------------------------------------

    The arbitrage mechanism is the foundation for why retail and other 
secondary market investors generally can buy and sell ETF shares at 
prices that are at or close to the prices at which authorized 
participants are able to buy and redeem shares directly from the ETF at 
NAV. In the Commission's experience, the deviation between the market 
price of ETFs and NAV per share has generally been relatively 
small.\119\ However, we recognize that under certain circumstances, 
including during periods of market stress, the arbitrage mechanism may 
work less effectively.\120\ We also recognize that secondary market 
investors who trade in ETF shares during these periods may be harmed by 
trading at a price that is not close to the NAV per share of the ETF 
(or the contemporaneous value of the ETF's portfolio). On balance, 
however, we continue to believe these investors are more likely to 
weigh the potential benefits of ETFs (e.g., low cost and intraday 
trading) against any potential for market price deviations when 
deciding whether to utilize ETFs.\121\ Further, we believe that the 
conditions we are adopting as part of rule 6c-11, along with other 
recent actions that are designed to promote an effective arbitrage 
mechanism, will continue to result in a sufficiently close alignment 
between an ETF's market price and NAV per share in most circumstances, 
and provide an appropriate basis for the exemptive relief we are 
granting.\122\ We particularly find this to be the case given the 
benefits ETFs offer investors as discussed above.
---------------------------------------------------------------------------

    \119\ In an analysis of various asset classes during 2017-2018, 
end-of-day deviations between closing price of ETFs and NAV were 
relatively rare and generally not persistent. See also id., at 
nn.119-123 and accompanying text (discussing similar staff analysis 
for 2016-2017 period).
    \120\ The Commission and its staff have observed the operation 
of the arbitrage mechanism during periods of market stress when the 
deviation between intraday market prices and the next-calculated NAV 
per share significantly widened for short periods of time. During 
periods of extraordinary volatility in the underlying ETF holdings, 
it may be difficult for authorized participants or market makers to 
confidently ascribe precise values to an ETF's holdings, thereby 
making it more difficult to effectively hedge their positions. These 
market participants may widen their quoted spreads in ETF shares or, 
in certain cases, may elect not to transact in or quote ETF shares, 
rather than risk loss. See 2018 ETF Proposing Release, supra 
footnote 7, at nn.124-130 and accompanying text.
    \121\ See id., at n.131 and accompanying text. The Commission 
also has taken steps to address disruptions in the arbitrage 
mechanism. For example, the Commission approved changes to the limit 
up-limit down rules following the market events on August 24, 2015. 
See Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change to Clarify the Operation of the Regulation NMS 
Plan to Address Extraordinary Market Volatility, Exchange Act 
Release No. 78435 (July 28, 2016) [81 FR 51239 (Aug. 3, 2016)]; 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change to Extend the Effective Date of SR-FINRA-2016-
028, Exchange Act Release No.78660 (Aug. 24, 2016) [81 FR 59676 
(Aug. 30, 2016)].
    \122\ For example, 17 CFR 270.22e-4 (rule 22e-4) under the Act 
requires ETFs to consider certain additional factors that address 
the relationship between the liquidity of the ETF's portfolio and 
the arbitrage mechanism in assessing, managing, and periodically 
reviewing its liquidity risk. See Investment Company Liquidity Risk 
Management Programs, Investment Company Act Release No. 32315 (Oct. 
13, 2016) [81 FR 82142 (Nov. 18, 2016)] (``LRM Adopting Release''). 
We have taken these requirements into consideration in adopting the 
conditions in rule 6c-11.
---------------------------------------------------------------------------

    Moreover, to the extent that there are instances where bid-ask 
spreads widen, or premiums and discounts persist, the final rule and 
disclosure amendments will require ETFs to disclose certain information 
on their website.\123\ These disclosure requirements are designed to 
increase investor awareness of these risks. We continue to believe that 
it is important for investors to be informed where costs may increase 
beyond what they would reasonably expect.
---------------------------------------------------------------------------

    \123\ See infra section II.C.6.
---------------------------------------------------------------------------

    Commenters generally agreed that rule 6c-11 should provide the 
proposed exemptions from section 22(d) and rule 22c-1.\124\ These 
commenters highlighted the ability of investors to transact in ETF 
shares intraday at market-determined prices as one of the primary 
benefits of the ETF structure. Commenters also agreed with our 
observation that the arbitrage mechanism generally has kept the 
deviation between the ETF market price and NAV per share relatively 
small, and that an efficient arbitrage mechanism adequately addresses 
potential concerns under section 22(d) and rule 22c-1.\125\ One 
commenter agreed that, on balance, given the historically insignificant 
and short duration of unusual ETF premiums and discounts, and the 
relatively low risks presented to investors as a result, ETF investors 
are likely to weigh the potential benefits of ETFs against any 
potential for market price deviations when selecting an investment in 
ETFs.\126\
---------------------------------------------------------------------------

    \124\ See, e.g., ICI Comment Letter; SSGA Comment Letter I; 
Invesco Comment Letter.
    \125\ See, e.g., ICI Comment Letter; Invesco Comment Letter.
    \126\ See Invesco Comment Letter.
---------------------------------------------------------------------------

3. Affiliated Transactions
    As proposed, rule 6c-11 will provide exemptions from sections 
17(a)(1) and (a)(2) of the Act with regard to the deposit and receipt 
of baskets by a person who is an affiliated person of an ETF (or who is 
an affiliated person of such a person) solely by reason of: (i) Holding 
with the power to vote 5% or more of an ETF's shares; or (ii) holding 
with the power to vote 5% or more of any investment company that is an 
affiliated person of the ETF.\127\ The relief from section 17(a) in 
rule 6c-11 is consistent with the exemptive relief that we have granted 
to ETF applicants.\128\
---------------------------------------------------------------------------

    \127\ See rule 6c-11(b)(3).
    \128\ ETF applicants have requested, and we have granted, 
exemptive relief from section 17(a) of the Act for: (i) Persons 
affiliated with the ETF based on their ownership of 5% or more of 
the ETF's outstanding securities (``first-tier affiliates''); and 
(ii) affiliated persons of the first-tier affiliates or persons who 
own 5% or more of the outstanding securities of one or more funds 
advised by the ETF's investment adviser (``second-tier 
affiliates''). In seeking this relief, applicants have stated that 
first- and second-tier affiliates are not treated differently from 
non-affiliates when engaging in purchases and redemptions of 
creation units. All purchases and redemptions of creation units are 
at an ETF's next-calculated NAV pursuant to rule 22c-1. 
Additionally, the securities deposited or delivered upon redemption 
are valued in the same manner, using the same standards, as those 
securities are valued for purposes of calculating the ETF's NAV per 
share. See 2018 ETF Proposing Release, supra footnote 7, at nn.140-
141 and accompanying discussion.
---------------------------------------------------------------------------

    Section 17(a) of the Act generally prohibits an affiliated person 
of a registered investment company, or an affiliated person of such 
person, from knowingly selling any security or other

[[Page 57174]]

property to or purchasing any security from the company.\129\ Purchases 
and redemptions of ETF creation units are typically effected in kind, 
and section 17(a) would prohibit these in-kind purchases and 
redemptions by affiliated persons of the ETF. An affiliated person of 
an ETF includes, among others: (i) Any person directly or indirectly 
owning, controlling, or holding with power to vote, 5% or more of the 
outstanding voting securities of the ETF; (ii) any person 5% or more of 
whose outstanding voting securities are directly or indirectly owned, 
controlled, or held with power to vote by the ETF; and (iii) any person 
directly or indirectly controlling, controlled by, or under common 
control with the ETF.\130\
---------------------------------------------------------------------------

    \129\ 15 U.S.C. 80a-17(a).
    \130\ 15 U.S.C. 80a-2(a)(3)(A), (B) and (C). A control 
relationship is presumed when one person owns more than 25% of 
another person's outstanding voting securities. 15 U.S.C. 80a-
2(a)(9).
---------------------------------------------------------------------------

    Commenters expressed support for our proposed exemptions from 
sections 17(a)(1) and (a)(2), concurring with our view that this relief 
is necessary to facilitate the efficient functioning of the arbitrage 
mechanism.\131\ Commenters noted that, without this relief, an 
authorized participant or other market participant that becomes an 
affiliated person of the ETF due to its holdings would be prevented 
from engaging in arbitrage using an in-kind basket, which, in turn, 
could have the adverse effect of limiting the pool of market 
participants that could engage in arbitrage.\132\ Ultimately, this 
could result in the deviation between market price and NAV per share 
widening in cases where there are very few authorized participants or 
other market participants actively engaged in transactions with the 
ETF. Commenters also stated that in-kind purchases and redemptions of 
ETF creation units between an ETF and authorized participants, which 
may be affiliated persons, or affiliated persons of affiliated persons, 
as a result of such transactions are not the types of potentially 
harmful transactions that section 17(a) is designed to prevent.\133\
---------------------------------------------------------------------------

    \131\ See e.g., Thompson Hine Comment Letter; ICI Comment 
Letter; JPMAM Comment Letter; SSGA Comment Letter I; Fidelity 
Comment Letter; SIFMA AMG Comment Letter I.
    \132\ See, e.g., ICI Comment Letter. Newly launched ETFs could 
face particular challenges without this relief because every 
purchaser of a creation unit would be considered an affiliated 
person of the ETF so long as there are fewer than twenty creation 
units outstanding.
    \133\ See, e.g., Thompson Hine Comment Letter; see also 
Compliance Programs of Investment Companies and Investment Advisers, 
Investment Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 
74714 (Dec. 24, 2003)] (``Rule 38a-1 Adopting Release'') (``To 
prevent self-dealing and overreaching by persons in a position to 
take advantage of the fund, the Investment Company Act prohibits 
funds from entering into certain transactions with affiliated 
persons.'') (internal citations omitted).
---------------------------------------------------------------------------

    We continue to believe that this relief is appropriate to 
facilitate the efficient functioning of the arbitrage mechanism after 
considering comments. As noted above, all purchases and redemptions of 
creation units with such an affiliated person are at an ETF's next-
calculated NAV, and an ETF would value the securities deposited or 
delivered upon redemption in the same manner, using the same standards, 
as the ETF values those securities for purposes of calculating the 
ETF's NAV. We do not believe that these transactions will give rise to 
the policy concerns that section 17(a) is designed to prevent.
    Several commenters asked us to confirm that the section 17(a) 
relief in rule 6c-11 would extend to entities that are affiliated with 
the ETF by virtue of holding more than 25% of the ETF's shares or more 
than 25% of any investment company that is an affiliated person of the 
ETF (``25% holders''), consistent with the terms of our existing 
exemptive orders.\134\ Our proposal was designed to provide relief from 
section 17(a) similar to our orders.\135\ We do not believe that an 
express reference to 25% holders in rule 6c-11(b)(3) is necessary, 
however, because the rule text will capture entities that are 
affiliated with the ETF by virtue of share ownership greater than 5%. 
We confirm that 25% holders are within the scope of this exemption.
---------------------------------------------------------------------------

    \134\ See e.g., SIFMA Comment Letter I. The related exemptive 
application to our orders usually includes an express reference to 
holders of 25% or more of the ETF's shares or 25% or more of an 
investment company that is an affiliated person of the ETF. See, 
e.g., Pacer Funds, et al., Investment Company Act Release Nos. 33374 
(Feb. 13, 2019) [84 FR 5125 (Feb. 20, 2019)] (notice) and 33397 
(March 12, 2019) (order).
    \135\ Our 2008 proposal expressly included section 17(a) relief 
for 25% holders. See 2008 ETF Proposing Release, supra footnote 3. 
One commenter on that proposal stated that the reference to 25% 
holders was superfluous in light of the reference to 5% holders. See 
Comment Letter of Stradley Ronan Stevens & Young, LLP (May 19, 
2008).
---------------------------------------------------------------------------

    A number of commenters also recommended expanding the relief to 
cover additional types of affiliated relationships, such as exempting 
broker-dealers that are affiliated with the ETF's adviser,\136\ or 
permitting an ETF's adviser or its affiliates to transact with the ETF 
to provide in-kind seed capital to the ETF.\137\ These commenters noted 
that increasing the entities eligible to transact with an ETF could 
further help facilitate the arbitrage mechanism, reduce concentration 
risk, and lower transaction costs. These commenters also noted that a 
fund's policies and procedures on baskets and custom baskets, as well 
as the federal securities laws and regulations that prohibit 
manipulative practices and misuse of nonpublic information, would 
address potential concerns regarding overreaching and similar abusive 
practices by these affiliated entities.
---------------------------------------------------------------------------

    \136\ See ICI Comment Letter; JPMAM Comment Letter; SSGA Comment 
Letter I.
    \137\ See Fidelity Comment Letter; SIFMA AMG Comment Letter I.
---------------------------------------------------------------------------

    While permitting additional types of affiliated entities to 
transact with the ETF could provide additional benefits to an ETF, 
expanding the scope of affiliated persons covered by the exemption 
would constitute novel section 17(a) relief. To date, our exemptive 
orders have been narrowly tailored to permit in-kind purchases and 
redemptions between an ETF and certain affiliates to facilitate 
efficient arbitrage. Expanding this relief would raise novel 
affiliation issues that would require a careful consideration of 
whether the current protections embedded in our relief sufficiently 
address any risks posed by such transactions with additional categories 
of affiliates. This would be especially the case if the exemption were 
expanded to include affiliated entities such as the ETF's sponsor and 
other service providers that typically have greater ability to 
influence an ETF. Given that rule 6c-11 is generally intended to codify 
existing relief for ETFs, we therefore do not believe that it is 
appropriate to expand the scope of affiliated persons covered by the 
exemption as part of this rulemaking, although such exemptions may be 
considered within our regular exemptive applications process.
4. Additional Time for Delivering Redemption Proceeds
    We are adopting, largely as proposed, an exemption from section 
22(e) to permit an ETF to delay satisfaction of a redemption request in 
the case of certain foreign investments for which a local market 
holiday or the extended delivery cycles of another jurisdiction make 
timely delivery unfeasible. Section 22(e) of the Act generally 
prohibits a registered open-end management investment company from 
postponing the date of satisfaction of redemption requests for more 
than seven days after the tender of a security for redemption.\138\ 
This prohibition can cause operational difficulties for ETFs that hold 
foreign investments and exchange in-kind baskets for creation

[[Page 57175]]

units. For example, local market delivery cycles for transferring 
foreign investments to redeeming investors, together with local market 
holiday schedules, can sometimes require a delivery process in excess 
of seven days.\139\
---------------------------------------------------------------------------

    \138\ 15 U.S.C. 80a-22(e).
    \139\ ETFs that hold foreign investments have previously 
requested, and we have granted, relief from section 22(e) so that 
they may satisfy redemptions up to a specified maximum number of 
days (depending upon the local markets), as disclosed in the ETF's 
prospectus or statement of additional information (``SAI''). Other 
than in the disclosed situations, these ETFs satisfy redemptions 
within seven days.
---------------------------------------------------------------------------

    Section 22(e) was designed to prevent unreasonable delays in the 
actual payment of redemption proceeds.\140\ Rule 6c-11 will provide an 
exemption from section 22(e) of the Act because we believe that the 
limited nature of the exemption addresses the concerns underlying this 
section of the Act. Rule 6c-11 will grant relief from section 22(e) to 
permit an ETF to delay satisfaction of a redemption request for more 
than seven days if a local market holiday, or series of consecutive 
holidays, or the extended delivery cycles for transferring foreign 
investments to redeeming authorized participants, or the combination 
thereof prevents timely delivery of the foreign investment included in 
the ETF's basket.\141\
---------------------------------------------------------------------------

    \140\ See Investment Trusts and Investment Companies: Hearings 
on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and 
Currency, 76th Cong., 3d Sess. 291-293 (statements of David 
Schenker).
    \141\ Rule 6c-11(b)(4). The relief from section 22(e) does not 
affect any obligations arising under rule 15c6-1 under the Exchange 
Act, which requires that most securities transactions settle within 
two business days of the trade date. 17 CFR 240.15c6-1.
---------------------------------------------------------------------------

    Under this exemption, an ETF must deliver foreign investments as 
soon as practicable, but in no event later than 15 days after the 
tender to the ETF. The exemption therefore will permit a delay only to 
the extent that additional time for settlement is actually required, 
when a local market holiday, or series of consecutive holidays, or the 
extended delivery cycles for transferring foreign investments to 
redeeming authorized participants prevents timely delivery of the 
foreign investment included in the ETF's basket.\142\ If a foreign 
investment settles in less than 15 days, the rule will require an ETF 
to deliver it pursuant to the standard settlement time of the local 
market where the investment trades. To the extent that settlement times 
continue to shorten, the ``as soon as practicable'' language embedded 
in the exemption is designed to minimize any unnecessary settlement 
delays.\143\
---------------------------------------------------------------------------

    \142\ This exemption permits a delay in the delivery of foreign 
investments only if the foreign investment is being transferred in 
kind as part of the basket. While mutual funds also may invest in 
foreign investments that require a delivery process in excess of 
seven days, mutual funds typically deliver redemption proceeds in 
cash, rather than in kind. Mutual funds, ETFs that redeem in cash, 
and ETFs that substitute cash in lieu of a particular foreign 
investment in a basket do not require an exemption from section 
22(e) of the Act.
    \143\ See 2018 ETF Proposing Release, supra footnote 7, at n.155 
(discussing settlement cycles for various foreign markets).
---------------------------------------------------------------------------

    Commenters generally supported our proposed exemption from section 
22(e).\144\ Commenters stated that the relief would provide additional 
assurance that an ETF could postpone payment of redemption proceeds in 
certain circumstances outside of its control.\145\ One commenter 
observed that a period of 15 days, accompanied by a requirement that 
delivery be made as soon as practicable, is appropriate and 
reasonable.\146\ Another commenter agreed that it was appropriate to 
limit the exemption to the particular foreign investment and not the 
entire basket.\147\
---------------------------------------------------------------------------

    \144\ See, e.g., ICI Comment Letter; Fidelity Comment Letter; 
Comment Letter of Charles Schwab Investment Management (Oct. 1, 
2018) (``CSIM Comment Letter''); John Hancock Comment Letter.
    \145\ See John Hancock Comment Letter; ICI Comment Letter.
    \146\ See CSIM Comment Letter.
    \147\ See ICI Comment Letter.
---------------------------------------------------------------------------

    Proposed rule 6c-11 would have included a ten-year sunset provision 
in light of the continued movement toward shorter settlement times in 
markets around the world.\148\ Commenters generally objected to the 
proposed sunset provision, citing a number of reasons for why the 
section 22(e) relief would likely remain necessary beyond the sunset 
period. Although we continue to believe that technological innovation 
and changes in market infrastructures and operations should lead to 
further shortening of settlement cycles, we recognize commenters' 
concerns that these developments may be gradual and difficult to 
predict.\149\ Moreover, given that certain local market holidays may 
last for up to seven business days, we agree with commenters that 
settlement within seven days may continue to pose challenges even in 
light of continued technological progress and changes in market 
operations.\150\ We therefore are not adopting a sunset provision to 
limit the relief from section 22(e) to ten years from the rule's 
effective date.
---------------------------------------------------------------------------

    \148\ See 2018 ETF Proposing Release, supra footnote 7, at n.156 
and accompanying text (proposing that the exemption from section 
22(e) for postponement of delivering redemption proceeds expire ten 
years from the rule's effective date).
    \149\ See, e.g., Dechert Comment Letter; CSIM Comment Letter; 
ICI Comment Letter; Invesco Comment Letter; Fidelity Comment Letter; 
WisdomTree Comment Letter; ABA Comment Letter.
    \150\ See, e.g., Invesco Comment Letter (citing Taiwan market 
holidays); CSIM Comment Letter; Fidelity Comment Letter; ICI Comment 
Letter; John Hancock Comment Letter.
---------------------------------------------------------------------------

    The rule will define ``foreign investment'' as any security, asset 
or other position of the ETF issued by a foreign issuer (as defined by 
rule 3b-4 under the Exchange Act), and that is traded on a trading 
market outside of the U.S.\151\ As under the proposal, this definition 
is not limited to ``foreign securities,'' but also includes other 
investments that may not be considered securities. Although these other 
investments may not be securities, they may present the same challenges 
for timely settlement as foreign securities if they are transferred in 
kind. This approach is consistent with the terms of some recent 
exemptive orders that provide relief from section 22(e) for the 
delivery of foreign investments that may not be securities.\152\ We 
received no comments on this aspect of the definition of ``foreign 
investment.''
---------------------------------------------------------------------------

    \151\ See rule 6c-11(a)(1). We believe this approach is 
appropriate because it creates consistency with a long-accepted 
definition under Exchange Act rules.
    \152\ See, e.g., Redwood Investment Management, LLC, et al., 
Investment Company Act Release Nos. 33076A (Apr. 26, 2018) [83 FR 
19367 (May 2, 2018)] (notice) and 33100 (May 21, 2018) (order) and 
related application.
---------------------------------------------------------------------------

    Unlike our proposal, we are not defining ``foreign investment'' as 
an investment for which there is no ``established U.S. public trading 
market.'' \153\ A number of commenters recommended that we modify or 
eliminate this aspect of the definition.\154\ These commenters 
expressed concern that this requirement could make the exemption from 
section 22(e) unavailable whenever a foreign issuer has issued a 
security in the U.S. Commenters stated that ETFs investing in certain 
foreign markets typically hold the security that is traded in the 
foreign issuer's local trading market (``foreign-traded security'') 
rather than its U.S.-traded equivalent.\155\ These commenters explained 
that this is particularly true for ETFs tracking certain international 
indexes because those indexes often include foreign-traded securities, 
which

[[Page 57176]]

generally have greater liquidity and trading volume than their U.S.-
traded equivalents. Several commenters cited potential compliance 
costs, operational considerations (e.g., transacting in the foreign-
traded security may entail lower transaction costs for the ETF), and 
possible disruptions to their investment strategy (e.g., tracking 
error) that might result due to this requirement.\156\
---------------------------------------------------------------------------

    \153\ See 2018 ETF Proposing Release, supra footnote 7, at n.166 
and accompanying text (proposing to define ``foreign investment'' as 
any security, asset or other position of the ETF issued by a foreign 
issuer (as defined by rule 3b-4 under the Exchange Act) for which 
there is no established U.S. public trading market (as that term is 
used in Regulation S-K)).
    \154\ See ICI Comment letter; SIFMA AMG Comment Letter I; SSGA 
Comment Letter I; BlackRock Comment Letter; Invesco Comment Letter.
    \155\ See, e.g., ICI Comment Letter; SIFMA Comment Letter I.
    \156\ See, e.g., BlackRock Comment Letter (stating that ``ETFs 
currently do not monitor whether a foreign issuer has equivalent 
securities that both trade on a US market and the foreign issuer's 
local market since our primary investment practices are to invest in 
the securities of the underlying index.''); Invesco Comment Letter; 
SSGA Comment Letter I.
---------------------------------------------------------------------------

    The proposed definition of foreign investment was designed to make 
relief from section 22(e) unavailable to an ETF that included a foreign 
issuer's U.S.-traded investment in its basket, thereby avoiding the 
settlement delay that is the basis for the relief.\157\ It was not 
intended to require an ETF to buy and sell the U.S.-traded equivalent 
of a foreign-traded security when one is available, nor was it intended 
to deny section 22(e) relief to an ETF that includes a foreign-traded 
security in its basket because a U.S.-traded equivalent exists. In 
order to address commenters' concerns and potential confusion, however, 
we have eliminated the requirement that the foreign investment have 
``no established U.S. public trading market.'' Instead, in relevant 
part, rule 6c-11(a)(1) will define ``foreign investment'' as an 
investment that ``is traded on a trading market outside of the U.S.'' 
\158\ We believe this definition will capture the foreign investments 
that may experience settlement delays without creating unintended 
consequences for ETF portfolio management. Under rule 6c-11, a delay in 
settlement is permitted only to the extent that additional time for 
settlement is actually required due to a local market holiday or the 
extended delivery cycles in a foreign market. As a result, the 
exemption from section 22(e) already is unavailable where an ETF could 
readily trade an investment in its basket on a U.S. market.
---------------------------------------------------------------------------

    \157\ See 2018 ETF Proposing Release, supra footnote 7, at n.166 
and accompanying discussion. As proposed, the rule will not rely on 
registration status because an unregistered large foreign private 
issuer may have an active U.S. market for its securities, in which 
case the ETF should be able to meet redemption requests in a timely 
manner. See Termination of a Foreign Private Issuer's Registration 
of a Class of Securities Under Section 12(g) and Duty to File 
Reports Under Section 13(a) or 15(d) of the Securities Exchange Act 
of 1934, Exchange Act Release No. 55540 (Mar. 27, 2007) [72 FR 16934 
(Apr. 5, 2007)].
    \158\ See, e.g., BlackRock Comment Letter (recommending that 
``foreign investment'' be defined by reference to whether ``there is 
an established trading market [. . .] outside of the US''). As 
proposed, we also are not requiring an ETF to disclose in its 
registration statement the foreign holidays that it expects may 
prevent timely delivery of foreign securities, and the maximum 
number of days that it anticipates it will need to deliver the 
foreign securities. See 2018 ETF Proposing Release, supra footnote 
7, at n.161 and accompanying discussion. No commenters disagreed 
with this aspect of the proposal.
---------------------------------------------------------------------------

C. Conditions for Reliance on Rule 6c-11

    Rule 6c-11 requires ETFs to comply with certain conditions designed 
to protect investors and to be consistent with the purposes fairly 
intended by the policy and provisions of the Act in order to operate 
within the scope of the Act. These conditions generally are consistent 
with the conditions in our exemptive orders, which we believe have 
effectively accommodated the unique structural and operational features 
of ETFs while maintaining appropriate protections for ETF investors. 
The conditions also reflect certain modifications that, based on our 
experience regulating ETFs and comments we received on the proposal, we 
believe will improve the overall regulatory framework for these 
products.
1. Issuance and Redemption of Shares
    As proposed, the definition of exchange-traded fund under rule 6c-
11 will require that an ETF issue (and redeem) creation units to (and 
from) authorized participants in exchange for baskets and a cash 
balancing amount (if any).\159\ This definition is designed to preserve 
the existing ETF structure, reflected in our exemptive orders, which 
permit only an authorized participant of an ETF to purchase creation 
units from (or sell creation units to) the ETF. An orderly creation 
unit issuance and redemption process is essential to a properly 
functioning arbitrage mechanism. Commenters supported the proposed 
definition of exchange-traded fund.\160\
---------------------------------------------------------------------------

    \159\ See rule 6c-11(a)(1). See also infra section II.C.4.c. 
(discussing definitions of baskets and cash balancing amount).
    \160\ See, e.g., Invesco Comment Letter.
---------------------------------------------------------------------------

    Rule 6c-11 will define an authorized participant to mean a member 
or participant of a clearing agency registered with the Commission that 
has a written agreement with the ETF or one of its service providers 
that allows the authorized participant to place orders for the purchase 
and redemption of creation units, as proposed.\161\ This definition 
differs from the definition of ``authorized participant'' in the 
Commission's exemptive orders and Form N-CEN because it does not 
include a specific reference to an authorized participant's 
participation in DTC, as DTC is itself a clearing agency.\162\ We 
proposed to amend Form N-CEN to make the two definitions consistent. We 
believe the definition that we are adopting remains largely consistent 
with the exemptive relief we have granted to ETFs, while eliminating 
unnecessary terms.
---------------------------------------------------------------------------

    \161\ See rule 6c-11(a)(1).
    \162\ See 2018 ETF Proposing Release, supra footnote 7, at 
nn.170-171. Form N-CEN, in relevant part, defined the term as a 
broker-dealer that is also a member of a clearing agency registered 
with the Commission or a DTC Participant and has a written agreement 
with the ETF or one of its service providers that allows the 
authorized participant to place orders to purchase and redeem 
creation units of the ETF. See Form N-CEN, Item E.2.
---------------------------------------------------------------------------

    Several commenters expressed support for the proposed definition of 
authorized participant.\163\ One commenter, however, asserted that rule 
6c-11 should use the existing definition of authorized participant in 
Form N-CEN to avoid confusion and regulatory inconsistency.\164\ We 
believe that amending Form N-CEN to make the definition of authorized 
participant consistent with the definition in rule 6c-11 addresses this 
commenter's concern.\165\
---------------------------------------------------------------------------

    \163\ See SSGA Comment Letter I; ICI Comment Letter; Cboe 
Comment Letter.
    \164\ See Invesco Comment Letter.
    \165\ See infra section II.J.
---------------------------------------------------------------------------

    We also received several comments on issues relating to authorized 
participants more generally. One commenter, for example, suggested that 
the Commission confirm that authorized participants who buy and sell 
ETF shares in creation units are not considered, for that reason alone, 
``principal underwriters'' under the Investment Company Act.\166\ The 
commenter stated that the plain language of section 2(a)(29) of the Act 
would exclude an authorized participant from the definition of 
principal underwriter when the authorized participant purchases ETF 
shares through a principal underwriter acting as agent for the 
ETF.\167\ We agree that an authorized participant that purchases ETF 
shares from the ETF's principal underwriter is not a principal 
underwriter as defined in section 2(a)(29) of the Act solely because it 
buys and sells ETF shares in creation units.
---------------------------------------------------------------------------

    \166\ See ABA Comment Letter.
    \167\ Id. (noting that the definition of principal underwriter 
excludes ``a dealer who purchases from such company through a 
principal underwriter acting as agent.'').
---------------------------------------------------------------------------

    Another commenter suggested that the Commission require an ETF to 
have a minimum number of authorized participants (i.e., 2 or 3) to 
reduce the risk of anti-competitive behavior and to

[[Page 57177]]

safeguard the arbitrage mechanism.\168\ This commenter, however, also 
pointed to data indicating that large ETFs (with more than $790 million 
in assets) typically have an average of nine active authorized 
participants, and that smaller ETFs (with less than $27 million in 
assets) have an average of two active authorized participants.\169\ 
This commenter further noted that it has observed ETFs using single 
authorized participants in ``some markets outside of the United 
States'' but that this type of arrangement is ``less common within the 
United States.'' \170\ We have not observed the types of ``excessive 
deviations'' between ETFs' NAV and market price that, according to this 
commenter, could indicate that ETFs' use of one authorized participant 
is a persistent problem.\171\ Additionally, based upon Form N-CEN data 
through September 5, 2019, we found that out of 1672 funds reviewed 
that could rely on rule 6c-11, only 30 (approximately 1.8% of the funds 
reviewed) reported having fewer than 2 authorized participants. We 
therefore do not believe that it is appropriate at this time to 
prescribe a minimum number of authorized participants that an ETF may 
use.
---------------------------------------------------------------------------

    \168\ See Comment Letter of Jane Street Capital, LLC (Oct. 1, 
2018) (``Jane Street Comment Letter''). Another commenter suggested 
that the Commission should provide guidance regarding ETF sponsors 
giving certain APs special treatment in the negotiation of baskets. 
See Comment Letter of Bluefin Trading, LLC (Oct. 19, 2018) 
(``Bluefin Comment Letter''). We address this comment in our 
discussion of custom basket policies and procedures, infra, in 
section II.C.5.a.
    \169\ See Jane Street Comment Letter (citing ``The Role and 
Activities of Authorized Participants of Exchange-Traded Funds,'' 
Investment Company Institute, March 2015).
    \170\ See id.
    \171\ See, e.g., 2018 ETF Proposing Release, supra footnote, at 
section II.B.2.
---------------------------------------------------------------------------

    As proposed, rule 6c-11 will define ``creation unit,'' to mean a 
specified number of ETF shares that the ETF will issue to (or redeem 
from) an authorized participant in exchange for the deposit (or 
delivery) of a basket and a cash balancing amount (if any).\172\ Rule 
6c-11 will not mandate a maximum or minimum creation unit size or 
otherwise place requirements on creation unit size. We continue to 
believe, and commenters agreed, that ETFs are incentivized to establish 
creation unit sizes that are appropriate for market demand pursuant to 
their investment strategies and objectives.\173\ Thus, ETFs are not 
likely to set very large or very small creation unit sizes that could 
disrupt the arbitrage mechanism or prevent the use of in-kind baskets 
when in-kind baskets would otherwise be desirable for an ETF to obtain 
the typical efficiencies of ETFs. We also believe that the conditions 
in rule 6c-11, as adopted, are better suited to promote effective 
arbitrage than conditions related to creation unit size.\174\
---------------------------------------------------------------------------

    \172\ See rule 6c-11(a)(1).
    \173\ See 2018 ETF Proposing Release, supra footnote 7, at 
nn.175-176 and accompanying text (noting that an ETF tracking a 
narrowly focused niche strategy may establish a smaller creation 
unit size than an ETF tracking a broad-based index, such as the S&P 
500, in order to facilitate arbitrage). See, e.g., ICI Comment 
Letter; SIFMA AMG Comment Letter I; Vanguard Comment Letter. See 
also Nasdaq Comment Letter (noting that minimum creation unit size 
requirement can lead to wider spreads, particularly for newer, 
thinly-traded ETFs).
    \174\ One commenter also suggested that the rule should not 
require an ETF to define a specific creation unit size, noting that 
permitting variable creation unit sizes could help further 
facilitate market making and reduce transaction costs. See Nasdaq 
Comment Letter. The rule's definition of ``creation unit'' will 
require an ETF to specify a single number of ETF shares composing a 
creation unit. Although an ETF could not use variable creation unit 
sizes under this definition, an ETF could change its specified 
creation unit size as conditions change over time.
---------------------------------------------------------------------------

    An ETF generally would issue and redeem shares in creation unit 
size aggregations, rather than as individual shares, under the rule. We 
proposed to permit an ETF to sell or redeem individual shares on the 
day of consummation of a reorganization, merger, conversion, or 
liquidation.\175\ In these limited circumstances, an ETF may need to 
issue or redeem individual shares, and may need to transact without 
utilizing authorized participants. Commenters that addressed this 
aspect of the proposal generally supported it.\176\ One commenter, 
however, suggested that the rule should explicitly provide that an ETF 
may transact with investors other than authorized participants in these 
limited circumstances.\177\ We agree and have modified rule 6c-11 to 
clarify that, on the day of a reorganization, merger, conversion, or 
liquidation, an ETF may sell or redeem individual shares and is not 
limited to transacting with authorized participants.\178\ We believe 
that permitting ETFs to conduct redemptions with investors other than 
authorized participants in these circumstances is operationally 
necessary to facilitate these transactions and will allow an ETF to 
compensate individual shareholders exiting the reorganized, merged, 
converted or liquidated ETF--activities likely to involve small amounts 
and to be outside the scope of an authorized participant's expected 
role of transacting in creation units.
---------------------------------------------------------------------------

    \175\ See 2018 ETF Proposing Release, supra footnote 7, at text 
preceding n.82 (discussing proposed rule 6c-11(c)(5)).
    \176\ See, e.g., BlackRock Comment Letter; Thompson Hine Comment 
Letter.
    \177\ See Thompson Hine Comment Letter. This commenter also 
suggested moving this exception to the definition of exchange-traded 
fund because it is not a condition to reliance on the rule. We agree 
and have moved this exception to rule 6c-11(a)(2).
    \178\ See rule 6c-11(a)(2).
---------------------------------------------------------------------------

    Commenters also addressed the Commission's proposed guidance 
concerning the extent to which an ETF may directly or indirectly 
suspend the issuance or redemption of ETF shares.\179\ An ETF that 
suspends the issuance or redemption of creation units indefinitely 
could cause a breakdown of the arbitrage mechanism, resulting in 
significant deviations between market price and NAV per share. Such 
deviations may harm investors that purchase shares at market prices 
above NAV per share and/or sell shares at market prices below NAV per 
share.
---------------------------------------------------------------------------

    \179\ See 2018 ETF Proposing Release, supra footnote 7, at 
section II.C.1.
---------------------------------------------------------------------------

    With respect to redemptions, an ETF may suspend the redemption of 
creation units only in accordance with section 22(e) of the Act,\180\ 
and may charge transaction fees on these redemptions only in accordance 
with rule 22c-2.\181\ While no commenters disagreed with our statement 
in the 2018 ETF Proposing Release that an ETF may suspend redemptions 
only in compliance with section 22(e), several commenters requested 
that we eliminate the 2% cap on redemption fees for ETFs.\182\ One 
commenter asserted that, unlike the mutual fund redemption fees that 
were the Commission's focus in adopting rule 22c-2, the transaction 
fees charged by an ETF on redemptions are not intended to inhibit 
frequent trading of the ETF's shares, but are primarily designed to 
protect shareholders against the costs of certain cash 
redemptions.\183\

[[Page 57178]]

This commenter further stated that an ETF's inability to pass through 
certain incremental costs to an authorized participant could adversely 
impact performance and result in dilution of the interests of the ETF's 
remaining shareholders.
---------------------------------------------------------------------------

    \180\ Section 22(e) of the Act permits open-end funds to suspend 
redemptions and postpone payment for redemptions already tendered 
for any period during which the New York Stock Exchange is closed 
(other than customary weekend and holiday closings) and in three 
additional situations if the Commission has made certain 
determinations. See LRM Adopting Release, supra footnote 123, at 
n.36.
    \181\ 17 CFR 270.22c-2 (rule 22c-2) limits redemption fees to no 
more than 2% of the value of shares redeemed. See rule 22c-
2(a)(1)(i).
    \182\ See, e.g., Dechert Comment Letter; WisdomTree Comment 
Letter; Invesco Comment Letter (noting that the redemption fee 
framework for ETFs under rule 22c-2 is ``workable'' in most 
circumstances, but that in certain circumstances greater flexibility 
to charge redemption fees in excess of 2% would benefit ETFs). 
Commenters did not provide any fee-related data in support of their 
contention that the 2% limit on redemption fees should be eliminated 
for ETFs.
    \183\ See Dechert Comment Letter. See also Invesco Comment 
Letter (noting that these fees include the difference between the 
cash in-lieu amount calculated on the trade date and the actual sale 
price of the security (reflecting market movement)).
---------------------------------------------------------------------------

    As discussed above, we believe that ETFs should be regulated as 
open-end funds and that ETF shares are most appropriately classified as 
redeemable securities under the relevant provisions of the Act. In 
adopting the 2% limit on redemption fees under rule 22c-2, we stated 
that higher redemption fees would impose an undue restriction on the 
redeemability of shares.\184\ Consistent with this belief, our 
exemptive orders permitting ETFs to operate as open-end funds have not 
permitted ETFs to charge transaction fees in excess of the 2% limit. We 
believe the 2% limit allows ETFs to pass on certain costs related to 
the redemption transaction to authorized participants, while preserving 
the redeemability of ETF shares.\185\ Accordingly, we believe that ETFs 
may charge transaction fees on the redemption of creation units only in 
accordance with rule 22c-2.
---------------------------------------------------------------------------

    \184\ See Mutual Fund Redemption Fees, Investment Company Act 
Release No. 26782 (March 11, 2005) [70 FR 13328 (March 18, 2005)] 
(noting that a goal of the Commission under the Act is to preserve 
the redeemability of mutual fund shares).
    \185\ See id. at text accompanying nn. 29-30. Mutual funds, 
particularly those that invest in foreign markets, may face similar 
types of costs and are subject to the 2% cap in rule 22c-2.
---------------------------------------------------------------------------

    We also stated in the 2018 ETF Proposing Release that we believe 
that an ETF generally may suspend the issuance of creation units only 
for a limited time and only due to extraordinary circumstances, such as 
when the markets on which the ETF's portfolio holdings are traded are 
closed for a limited period of time.\186\ Some commenters agreed that 
an ETF may suspend creations only for a limited time and only due to 
extraordinary circumstances, but requested that we provide 
clarification regarding the specific circumstances under which an ETF 
may suspend creations.\187\ Other commenters did not support our 
position on this issue. For example, one commenter stated that current 
ETF practices for suspending creations have proven effective and 
advocated against limiting or imposing restrictions on the 
circumstances in which ETFs may suspend creations.\188\ Another 
commenter recommended that, rather than precluding an ETF from 
suspending the issuance of creation units, the Commission should 
require ETFs that suspend creations to add supplemental disclosures 
addressing the risk that the ETF's market price may deviate from NAV 
per share.\189\
---------------------------------------------------------------------------

    \186\ See 2018 ETF Proposing Release, supra footnote 7, at n.185 
and accompanying text. In addition, we stated that an ETF could not 
set transaction fees so high as to effectively suspend the issuance 
of creation units. See id. One commenter addressed this issue, 
stating that ETFs generally do not set transaction fees at a level 
that would effectively suspend creations ``in lieu of transparently 
informing the market that creations are halted.'' Jane Street 
Comment Letter.
    \187\ See, e.g., BlackRock Comment Letter; SIFMA AMG Comment 
Letter I; SSGA Comment Letter I; Vanguard Comment Letter; Invesco 
Comment Letter.
    \188\ See Comment Letter of ETF BILD LLC (Oct. 1, 2018) (``ETF 
BILD Comment Letter'') (``[T]here may be a variety of reasons to 
suspend creations and limiting them or [restricting] certain 
activity will not allow for differentiation of the circumstances 
related to the underlying securities. . . . [C]urrent practices 
developed in the ETF industry allow for the flexibility needed to 
address this issue.'').
    \189\ See Eaton Vance Comment Letter. Another commenter 
suggested requiring any ETF that suspends creations, or otherwise 
has its creation process halted, to immediately notify the market 
via a Form 8-K or other mechanism. See Jane Street Comment Letter.
---------------------------------------------------------------------------

    As discussed above, however, the expected close tie between an 
ETF's market price and NAV per share provides a basis for our relief 
from section 22(d) and rule 22c-1 under rule 6c-11 (as well as our 
prior exemptive orders).\190\ If a suspension of creations impairs the 
arbitrage mechanism, it could lead to significant deviations between 
what retail investors pay (or receive) in the secondary market and the 
ETF's approximate NAV. Such a result would run counter to the basis for 
relief from section 22(d) and rule 22c-1 and therefore would be 
inconsistent with rule 6c-11.
---------------------------------------------------------------------------

    \190\ See supra section II.B.2 (discussing the potential 
concerns regarding shareholder dilution, unjust discrimination and 
preferential treatment among investors purchasing and redeeming fund 
shares that section 22(e) and rule 22c-1 were designed to address).
---------------------------------------------------------------------------

2. Listing on a National Securities Exchange
    As proposed, rule 6c-11 will define an ``exchange-traded fund,'' in 
part, to mean a fund that issues shares that are listed on a national 
securities exchange and traded at market-determined prices.\191\ 
Exchange-listing is one of the fundamental characteristics that 
distinguishes ETFs from other types of open-end funds (and UITs) and is 
one reason that ETFs need certain exemptions from the Act and the rules 
thereunder. Exchange-listing provides an organized and ongoing trading 
market for the ETF shares at market-determined prices, and therefore is 
important to a functioning arbitrage mechanism.\192\ The Commission has 
premised all of its previous exemptive orders on an ETF listing its 
shares for trading on a national securities exchange.
---------------------------------------------------------------------------

    \191\ Rule 6c-11(a)(1). As proposed, rule 6c-11(a)(1) also will 
define a ``national securities exchange'' as an exchange that is 
registered with the Commission under section 6 of the Exchange Act.
    \192\ As proposed, the definition also requires that an ETF's 
shares trade at market-determined prices. This requirement is not 
designed to establish a minimum level of trading volume for ETFs 
necessary in order to rely on the rule, but rather to distinguish 
ETFs from other products that are listed on exchanges but trade at 
NAV-based prices (i.e., exchange-traded managed funds (``ETMFs'')). 
See 2018 ETF Proposing Release, supra footnote 7, at text 
accompanying n.192. Commenters did not address this aspect of the 
definition of exchange-traded fund.
---------------------------------------------------------------------------

    Several commenters generally supported the requirement that an ETF 
list its shares on a national securities exchange.\193\ On the other 
hand, one commenter stated that ETFs that are temporarily suspended 
from listing or engaged in an orderly delisting and liquidation process 
should not fall outside of the scope of the proposed rule.\194\ Another 
commenter opined that delisted ETFs should remain within the rule to 
prevent a possible race to redeem the ETF's shares that could result 
from confusion about the ETF's regulatory status.\195\ This commenter 
stated the definition of exchange-traded fund instead should include 
ETFs that have been listed within the past 90 days. Other commenters 
requested that we clarify the specific circumstances that constitute a 
``delisting,'' citing trading suspensions and trading halts as examples 
of circumstances that should not disqualify an ETF from relying on rule 
6c-11.\196\ These commenters also urged the Commission to clarify that 
a temporary non-compliance notice from an exchange for failure to 
continuously meet the exchange's listing standards would not disqualify 
an ETF from relying on the rule.
---------------------------------------------------------------------------

    \193\ See, e.g., ICI Comment Letter; SSGA Comment Letter I.
    \194\ SIFMA AMG Comment Letter I.
    \195\ Thompson Hine Comment Letter (``[D]eeming the former ETF 
to no longer have [status as an ETF under the rule] may lead to 
confusion and a possible race to redeeming shares by remaining 
shareholders while liquid assets are still available.'').
    \196\ See SSGA Comment Letter I; ICI Comment Letter; Invesco 
Comment Letter. See also FINRA, Investor Alert, When Trading Halts: 
What You Need to Know About Halts, Suspensions and Other 
Interruptions (February 7, 2013), available at http://www.finra.org/investors/alerts/when-trading-stops-halts-suspensions-other-interruptions (describing trading halts and trading suspensions).
---------------------------------------------------------------------------

    As noted above, the listing requirement was designed to ensure that 
all ETF shares have an organized and ongoing secondary trading market 
to support an effective arbitrage mechanism. We therefore continue to 
believe that an ETF should no longer be

[[Page 57179]]

eligible to rely on rule 6c-11 and must meet individual redemption 
requests within seven days pursuant to section 22(e) of the Act or 
liquidate if it is not listed on an exchange.\197\ In response to 
commenters' request that we clarify the specific circumstances 
constituting a ``delisting'' for purposes of rule 6c-11, an ETF is 
considered no longer listed on an exchange as of the effective date of 
the removal of the ETF's shares from listing pursuant to rule 12d2-2 
under the Exchange Act.\198\ Circumstances such as a trading 
suspension, a trading halt, or a temporary non-compliance notice from 
the exchange therefore would not constitute a ``delisting'' for 
purposes of rule 6c-11. An ETF also may request temporary relief from 
the Commission to permit the ETF to suspend redemptions for a limited 
period of time where necessary to protect ETF shareholders.\199\
---------------------------------------------------------------------------

    \197\ Indeed, an ETF that does not comply with the provisions of 
the rule would be required to comply with the Investment Company Act 
in all respects unless it was relying on other relief.
    \198\ See 17 CFR 240.12d2-2 (rule 12d2-2 under the Exchange Act) 
(requiring a national securities exchange to file with the 
Commission an application on Form 25 (17 CFR 249.25) to strike a 
class of securities from listing on a national securities exchange 
and/or registration under section 12(b) of the Exchange Act).
    \199\ See section 22(e)(3) of the Act.
---------------------------------------------------------------------------

3. Intraday Indicative Value (``IIV'')
    As proposed, rule 6c-11 will not require ETFs to disseminate an 
intraday estimate of their NAV per share (an ``intraday indicative 
value'' or ``IIV'') as a condition for reliance on the rule. Our orders 
require the dissemination of an IIV, and ETFs have stated in their 
exemptive applications that an ETF's IIV is useful to investors because 
it allows them to determine (by comparing the IIV to the market value 
of the ETF's shares) whether and to what extent the ETF's shares are 
trading at a premium or discount on an intraday basis.\200\ The 
exchange listing standards also currently require ETFs to disseminate 
an IIV at least every 15 seconds during regular trading hours.\201\
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    \200\ See, e.g., WisdomTree Investments, Inc., et al., 
Investment Company Act Release Nos. 27324 (May 18, 2006) [71 FR 
29995 (May 24, 2006)] (notice) and 27391 (June 12, 2006) (order) and 
related application (``2006 WisdomTree Investments'').
    \201\ See, e.g., NYSE Arca Equities Rule 5.2E(j)(3), Commentary 
.01(c) (stating that IIV may be based upon ``current information 
regarding the required deposit of securities and cash amount to 
permit creation of new shares of the series or upon the index 
value''). The IIV is also sometimes referred to as the ``iNAV'' 
(indicative net asset value) or the ``PIV'' (portfolio indicative 
value).
---------------------------------------------------------------------------

    We did not propose, however, an IIV dissemination requirement under 
rule 6c-11 because of our concerns regarding the accuracy of IIV 
estimates for certain ETFs.\202\ For example, the IIV may not 
accurately reflect the value of an ETF that holds securities that trade 
less frequently. The IIV can be stale or inaccurate for ETFs with 
foreign securities or less liquid debt instruments. For such ETFs, 
there may be a difference between the IIV, which is constructed using 
the last available market quotations or stale prices, and the ETF's 
NAV, which uses fair value when market quotations are not readily 
available.\203\ Conversely, in today's fast moving markets, given the 
dissemination lags, the IIV may not accurately reflect the value of an 
ETF that holds frequently traded component securities.\204\ Because 
there are no uniform methodology requirements, the IIV also can be 
calculated in different and potentially inconsistent ways.
---------------------------------------------------------------------------

    \202\ See 2018 ETF Proposing Release, supra footnote 7, at 
section II.C.3. The exemptive relief we provided to certain non-
transparent ETFs included a condition requiring those ETFs to 
provide a verified intraday indicative value (``VIIV'') throughout 
the trading day. See 2019 Precidian, supra footnote 8. Those ETFs' 
VIIV, considering their limited investment strategies, addressed the 
Commission's concerns regarding the traditional IIV. See id.
    \203\ Section 2(a)(41)(B) of the Act defines ``value'' as: ``(i) 
with respect to securities for which market quotations are readily 
available, the market value of such securities; and (ii) with 
respect to other securities and assets, fair value as determined in 
good faith by the board of directors.'' This definition also is used 
in rule 2a-4 under the Act as the required basis for computing a 
fund's current NAV per share. With daily portfolio disclosure, 
market participants can estimate fair value on their own for the 
ETF's current holdings. 15 U.S.C. 80a-2(a)(41)(B).
    \204\ An ETF's current portfolio value changes every time the 
value of any underlying component of the ETF changes. The IIV for an 
ETF that includes a more frequently traded component security might 
not reflect the most recent trading information for that underlying 
security.
---------------------------------------------------------------------------

    In addition, we understand that market makers and authorized 
participants no longer use IIV to evaluate arbitrage opportunities for 
ETFs that provide full portfolio transparency.\205\ These market 
participants typically calculate their own intraday value of an ETF's 
portfolio with proprietary algorithms that use an ETF's daily portfolio 
disclosure and available pricing information about the assets held in 
the ETF's portfolio and generally use the IIV as a secondary or 
tertiary check on the value that their proprietary algorithms generate.
---------------------------------------------------------------------------

    \205\ See ETF Handbook, supra footnote 25.
---------------------------------------------------------------------------

    The majority of commenters that addressed IIV requirements 
supported our proposed approach. For example, commenters agreed that 
authorized participants and other market participants calculate their 
own intraday values based on other sources of information such as an 
ETF's published baskets and portfolio holdings.\206\ Some of these 
commenters stated, therefore, that the proposed rule's conditions 
regarding daily portfolio holdings information would provide more 
useful information to market participants than IIV.\207\ Commenters 
also agreed that IIV can have significant limitations depending on the 
types of securities the ETF holds. For example, one commenter stated 
that these limitations for ETFs holding fixed income securities are the 
result of market structure issues and that increasing the frequency of 
the IIV publication would not change these limitations.\208\
---------------------------------------------------------------------------

    \206\ See, e.g., Jane Street Comment Letter; Invesco Comment 
Letter; WisdomTree Comment Letter; Vanguard Comment Letter (``These 
other sources of data include the ETF's published basket, its last 
published portfolio holdings list, the index tracked by the ETF, and 
data from third party vendors'').
    \207\ See Comment Letter of Legg Mason, Inc. (Oct. 1, 2018) 
(``Legg Mason Comment Letter''); Cboe Comment Letter. See also SSGA 
Comment Letter I (``[t]o the extent there is market demand for 
information similar to the IIV by market participants absent a 
regulatory mandate, we expect industry-led solutions will be 
available, perhaps as part of a broader discussion around market 
price validation.'').
    \208\ See Legg Mason Comment Letter (noting, for example, that 
fixed-income securities are predominantly traded by dealers and not 
on exchanges). See also ICI Comment Letter.
---------------------------------------------------------------------------

    Commenters also noted that under current regulatory requirements, 
IIV can be confusing or misleading to market participants. For example, 
one commenter stated that current requirements for IIV actually reduce 
ETF transparency, because the IIV does not reflect the true value of an 
ETF due to dissemination delays, stale pricing for underlying holdings, 
and inconsistent calculation methodologies.\209\ One commenter opined 
that IIV is inaccurate for 80% of all ETFs and the rule should not 
require its dissemination.\210\ Another commenter stated that ``[IIV] 
is, at best, slow and likely stale and, at worst confusing, inaccurate, 
and misleading.'' \211\ In addition, several of these commenters stated 
that the IIV requirements across regulatory regimes applicable to ETFs 
should be harmonized.\212\ Specifically, these commenters noted that, 
even if rule 6c-11 were to omit an IIV requirement, existing relief 
under the Exchange Act

[[Page 57180]]

and certain exchange listing requirements would require ETFs to 
continue disseminating IIV. They encouraged the Commission to work with 
the exchanges to remove these listing requirements.
---------------------------------------------------------------------------

    \209\ See SSGA Comment Letter I.
    \210\ Comment Letter of ETF.com (Aug. 28, 2018) (``ETF.com 
Comment Letter'') (stating that ``the idea of contemporaneous 
measure of fair value is enticing'' but IIV ``is not accurate enough 
for authorized participants to use in arbitrage analysis.'').
    \211\ Cboe Comment Letter.
    \212\ See, e.g., Invesco Comment Letter; SIFMA AMG Comment 
Letter I; WisdomTree Comment Letter; SSGA Comment Letter I; ETF.com 
Comment Letter.
---------------------------------------------------------------------------

    Some commenters disagreed with this aspect of the proposal and 
encouraged the Commission to require ETFs to disseminate IIV as a 
requirement of the rule. These commenters generally asserted that IIV--
despite its limitations--can be useful to retail investors.\213\ One 
such commenter stated that IIV is important for informed trading of 
ETFs (and other ETPs) by retail investors because it is an ``important 
signal of the value of the underlying portfolio.'' \214\ One commenter 
stated that IIV allows investors to screen for significant price 
deviations that could signal breakdowns in the market maker arbitrage 
process.\215\
---------------------------------------------------------------------------

    \213\ See, e.g., Angel Comment Letter; Nasdaq Comment Letter; 
IDS Comment Letter.
    \214\ See Angel Comment Letter.
    \215\ See Nasdaq Comment Letter.
---------------------------------------------------------------------------

    Some of these commenters noted that an ETF's IIV may be the only 
source of pricing information publicly available to retail 
investors.\216\ Another commenter asserted that the rule should include 
an IIV requirement, but that market participants, particularly retail 
investors, also would benefit from an explanation of the potential 
limitations of IIV.\217\ Many of the commenters who recommended that 
the Commission retain an IIV requirement also recommended that the 
Commission standardize and otherwise improve the IIV calculation.\218\
---------------------------------------------------------------------------

    \216\ See IDS Comment Letter. See also CFA Comment Letter; Eaton 
Vance Comment Letter.
    \217\ See FIMSAC Comment Letter.
    \218\ See, e.g., NYSE Comment Letter; IDS Comment Letter; Nasdaq 
Comment Letter; Eaton Vance Comment Letter. See also Angel Comment 
Letter (recommending dissemination on standard CQS and UTP feeds, 
one-second updates, and standardization of IIV suffixes).
---------------------------------------------------------------------------

    After considering these comments, we continue to believe that rule 
6c-11 should not require ETFs to disseminate IIV as IIV is not 
necessary to support the arbitrage mechanism for ETFs that provide 
daily portfolio holdings disclosure. Instead, rule 6c-11's portfolio 
holdings disclosure will provide market participants with the relevant 
data to input into their internal algorithms and thus allow them to 
determine if arbitrage opportunities exist.
    We also do not believe that IIV will provide a reliable metric for 
retail investors to assess all ETFs relying on rule 6c-11 given the 
breadth of asset classes that ETFs may hold (and the particular 
shortcomings of IIV when an ETF holds assets that do not trade 
contemporaneously with the ETF or are traded less frequently). 
Furthermore, retail investors do not have easy access to IIV through 
free, publicly available websites today even for those asset classes 
where an IIV may be more reliable. A staff review of the websites for 
the ten largest ETFs by assets under management found that none 
provides a real-time IIV on its website. Some of these ETFs disclose a 
specific ticker symbol for the ETF's IIV (as opposed to the ticker 
symbol for the ETF itself) on their websites, others provide the IIV 
with a delay of up to 45 minutes, while others provide no information 
about the ETF's IIV at all.\219\ A review of several publicly 
available, free financial websites also found that not all of these 
websites provide an ETF's IIV.\220\ Where these websites did provide 
the IIV, it was delayed by at least 15 minutes.\221\ We believe this 
raises a significant risk that retail investors using these websites 
may be receiving stale IIVs for ETFs. We have noted, and commenters 
agreed, that even the 15-second interval for dissemination of an ETF's 
IIV required under the exchange listing standards may be too infrequent 
to effectively reflect the full trading activity for component 
securities, and therefore to reflect the actual value of the ETF. 
Therefore, we do not believe that adopting rule 6c-11 without an IIV 
requirement would remove information from the market that retail 
investors could reliably use when making investment decisions.
---------------------------------------------------------------------------

    \219\ Fewer than half of the ETFs included in the review use a 
specific ticker symbol that allows an investor to locate the ETF's 
IIV (e.g., the ETF's ticker symbol followed by ``.iv'' or ``-iv'').
    \220\ When input into a free financial website, the IIV was 
provided with a delay of at least 15 minutes.
    \221\ See, e.g., https://finance.yahoo.com/quote/%5ESPY-IV/; 
https://www.morningstar.com/etfs/arcx/spy/betaquote.html.
---------------------------------------------------------------------------

    We considered whether to require an ETF to publicly disseminate a 
modified IIV on its website on a real time basis as a condition to rule 
6c-11, requiring ETFs to calculate IIVs more frequently and in a more 
accessible manner. We also considered creating a methodology that takes 
into account circumstances when market prices for underlying assets are 
not available or should not be used to reflect the ETF's intraday 
value. However, we believe that these modifications are not necessary 
given that an ETF operating in reliance on rule 6c-11 will provide full 
portfolio transparency on its website.
    We recognize that intraday information accurately reflecting the 
current value of an ETF's shares can be important to retail investors 
and encourage the ETF industry to undertake efforts to develop intraday 
value metrics targeted at these investors.\222\ We believe that ETFs 
are in a position to consider and develop tailored metrics for ETFs 
holding different asset classes in a format that is useful for retail 
investors. As one commenter noted, rule 6c-11's portfolio holdings 
disclosure requirements may promote a market-based solution to today's 
IIV shortcomings by making the information required to calculate 
intraday values broadly available in a standardized, 
user[hyphen]friendly format, which could ``encourage pricing services 
and other potential providers to develop commercial ETF intraday 
valuation services that would compete in the market on the basis of 
timeliness, accuracy, reliability and price.'' \223\
---------------------------------------------------------------------------

    \222\ One commenter noted that a lack of disclosure regarding 
potential intraday deviations could, in some circumstances, be 
misleading. See Comment Letter of Henry Hu and John Morley, Yale Law 
School (Aug, 27, 2018) ``(Hu and Morley Comment Letter'') 
(incorporating article by Henry T. C. Hu, University of Texas Law 
School and John D. Morley, A Regulatory Framework for Exchange-
Traded Funds, 91 S. Cal. Law Review 839-941 (July 2018) at 920, 
which describes a particular ETF that ``suffered extraordinary 
[intraday] departures from NAV on August 24, 2015'' and noting how 
``[in looking] only at the close and not intra-day performance, the 
result was an emphatically reassuring picture being presented to 
investors. As a result, an investor may have a misleading sense as 
to the true risks and returns of the ETF.'').
    \223\ See Eaton Vance Comment Letter.
---------------------------------------------------------------------------

4. Portfolio Holdings Disclosure
    Since the first exemptive order for an ETF, the Commission has 
relied on the existence of an arbitrage mechanism to keep market prices 
of ETF shares at or close to the NAV per share of the ETF. One 
mechanism that facilitates the arbitrage mechanism is daily portfolio 
transparency.\224\ Portfolio transparency provides authorized 
participants and other market participants with a tool to facilitate 
valuing the ETF's portfolio on an intraday basis, which, in turn, 
enables them to identify arbitrage opportunities and to effectively 
hedge their positions. Accordingly, as proposed, rule 6c-11 will 
require an ETF to disclose prominently on its website, publicly 
available and free of charge, the portfolio holdings that will

[[Page 57181]]

form the basis for each calculation of NAV per share.\225\
---------------------------------------------------------------------------

    \224\ Our exemptive orders for actively managed ETFs and recent 
orders for self-indexed ETFs have required full portfolio 
transparency. Exemptive orders for index-based ETFs with an 
unaffiliated index provider have required publication of the ETF's 
baskets. We understand, however, that all ETFs that can rely on rule 
6c-11 currently provide full transparency as a matter of industry 
practice.
    \225\ Rule 6c-11(c)(1)(i). For purposes of this requirement, as 
well as other requirements to disclose information on a publicly 
available website under rule 6c-11, an ETF should not establish 
restrictive terms of use that would effectively make the disclosures 
unavailable to the public or otherwise difficult to locate. For 
example, the required website disclosure should be easily accessible 
on the website, presented without encumbrance by user name, 
password, or other access constraints, and should not be subject to 
usage restrictions on access, retrieval, distribution or reuse. 
However, this requirement does not preclude the ETF from making 
other, unrelated sections of its website private or password 
protected. We also encourage ETFs to consider whether there are 
technological means to make the disclosures more accessible. For 
example, today, ETFs could include the portfolio holdings 
information in a downloadable or machine-readable format, such as 
comma-delimited or similar format.
---------------------------------------------------------------------------

    We received numerous comments on this aspect of the proposal. Many 
commenters generally supported requiring full, daily portfolio holdings 
disclosure on the ETF's website as a condition for reliance on rule 6c-
11.\226\ These commenters agreed with our view that portfolio 
transparency supports an efficient arbitrage mechanism and thus helps 
maintain the close tie between the market price of an ETF's shares and 
the value of its portfolio. One commenter stated that portfolio 
transparency is important to individual investors because it allows 
them to better discern differences between ETFs that purport to track 
similar indexes or have similar investment objectives.\227\
---------------------------------------------------------------------------

    \226\ See, e.g., Comment Letter of Stuart Cary (July 3, 2018) 
(``Cary Comment Letter''); ETF.com Comment Letter; Comment Letter of 
Jack Reagan (July 12, 2018) (``Reagan Comment Letter''); BlackRock 
Comment Letter; Cboe Comment Letter; BNY Mellon Comment Letter; 
Fidelity Comment Letter; SIFMA AMG Comment Letter I; CSIM Comment 
Letter; Virtu Comment Letter; Eaton Vance Comment Letter.
    \227\ See CSIM Comment Letter.
---------------------------------------------------------------------------

    On the other hand, one commenter did not support daily disclosure 
of an ETF's full portfolio, opining that an effective arbitrage 
mechanism is sufficiently supported by disclosure of well-constructed 
baskets with performance that closely tracks the performance of both 
the fund and its index.\228\ This commenter further asserted that daily 
portfolio transparency may harm ETF investors by permitting market 
participants to front-run index funds, which could negatively impact 
the prices at which the ETF trades portfolio holdings and thus reduce 
investors' returns. This commenter recommended, as an alternative to 
the proposed requirement, that the Commission require ETFs to provide 
daily disclosure of portfolio holdings, with an exception for the 
portion of holdings that are ``subject to sensitive trading 
strategies,'' such as those related to index changes.\229\
---------------------------------------------------------------------------

    \228\ Vanguard Comment Letter.
    \229\ Id. (recommending that the rule permit ETFs to disseminate 
a list of index securities that, when combined with disclosed 
portfolio holdings, would be reasonably designed to track the ETF's 
(and the index's) performance).
---------------------------------------------------------------------------

    One commenter supported requiring daily portfolio transparency for 
index-based ETFs, but opposed requiring it for actively managed ETFs, 
due to the risk of market participants using the portfolio holdings 
disclosures to front-run or piggyback on actively managed 
strategies.\230\ Similarly, another commenter asserted that daily 
portfolio transparency is not a necessary condition for effective 
arbitrage, and noted that the risks of front-running and ``free 
riding'' that arise from portfolio transparency were preventing it from 
offering more actively managed ETFs.\231\
---------------------------------------------------------------------------

    \230\ See Invesco Comment Letter (recommending that the rule 
permit actively managed ETFs to delay disclosure of portfolio 
holdings at least two days).
    \231\ See JPMAM Comment Letter. See also Dechert Comment Letter 
(urging the Commission to consider moving to a more uniform, 
standardized approach in determining whether to grant exemptive 
relief for non-fully transparent ETFs).
---------------------------------------------------------------------------

    We continue to believe ETFs relying on rule 6c-11 should provide 
full daily portfolio transparency in order to facilitate an efficient 
arbitrage process. Notably, we believe it is likely that all current 
ETFs that may rely on the rule already provide full portfolio 
transparency as a matter of market practice and this approach will 
eliminate regulatory distinctions between index-based and actively 
managed ETFs that rely on rule 6c-11. Moreover, although we recognize 
there are alternative approaches to facilitate efficient arbitrage, the 
Commission has limited experience with such approaches, which are new 
and continuing to evolve and we therefore believe that these 
alternatives should be considered within our exemptive applications 
process.
    Accordingly, rule 6c-11 will require full, daily portfolio holdings 
disclosure for ETFs relying on the rule. As discussed below, however, 
the portfolio transparency requirement we are adopting includes several 
modifications from the proposed rule, including modifications regarding 
the required timing and presentation of the portfolio holdings 
disclosure.
a. Timing of Portfolio Holdings Disclosure
    Rule 6c-11 will require website disclosure of an ETF's portfolio 
holdings on each business day before the opening of regular trading on 
the primary listing exchange of the ETF's shares.\232\ Our proposal 
also would have required an ETF to disclose its portfolio holdings 
before the ETF starts accepting orders for the purchase or redemption 
of creation units.\233\ The proposed rule's timing requirements were 
designed to prevent an ETF from disclosing its portfolio holdings only 
after the beginning of trading or after the ETF has begun accepting 
orders for the next business day.\234\
---------------------------------------------------------------------------

    \232\ Rule 6c-11(c)(1)(i).
    \233\ See proposed rule 6c-11(c)(1)(i).
    \234\ See 2018 Proposing Release, supra footnote 7, at n.209 and 
accompanying text.
---------------------------------------------------------------------------

    We received several comments on this aspect of the proposal, 
particularly on the proposed requirement that an ETF disclose its 
portfolio holdings before the ETF starts accepting orders on a given 
business day. Several commenters opposed the proposed timing 
requirement because it could prevent certain ETFs from accepting 
creation and redemption orders shortly after the US market closes (``T-
1 orders'').\235\ These commenters explained that T-1 orders allow 
ETFs, authorized participants, and other market participants to place 
orders for the purchase and sale of portfolio securities in non-U.S. 
markets with hours that do not overlap (or have limited overlap) with 
U.S. market hours when those markets are open.\236\ An ETF that holds 
Japanese equities, for example, may permit authorized participants to 
submit T-1 orders (between 4:00 p.m. ET and 5:00 p.m. ET) to allow for 
trading in the underlying Japanese securities before the Japanese 
market closes (2:00 a.m. ET).\237\ Some commenters explained that the 
operational steps necessary to disclose an ETF's portfolio holdings 
would take 2-3 hours after NAV calculation (typically 4:00 p.m. ET) and 
the requirement to disclose portfolio holdings before accepting orders 
therefore would eliminate the T-1 order window.\238\
---------------------------------------------------------------------------

    \235\ See, e.g., ICI Comment Letter; BlackRock Comment Letter.
    \236\ See, e.g., Invesco Comment Letter.
    \237\ See ICI Comment Letter.
    \238\ See Invesco Comment Letter.
---------------------------------------------------------------------------

    Several commenters discussed the benefits of permitting ETFs to 
accept T-1 orders. Commenters stated that T-1 orders allow market 
participants to align the execution time of underlying securities 
transactions with the NAV calculation of the order, and thus minimize 
costs and support effective arbitrage.\239\ Some commenters stated

[[Page 57182]]

that eliminating the T-1 order window may lead to wider bid-ask 
spreads, larger premiums/discounts, and greater tracking differences 
for these ETFs.\240\ One commenter stated that, without T-1 orders, an 
ETF may have uninvested cash for longer periods of time (leading to 
increased tracking error) and authorized participants may need to hedge 
their exposures for longer than usual due to the delay between when the 
creation order is placed and when the ETF acquires the portfolio 
securities (leading to wider bid-ask spreads).\241\ Another commenter 
noted that moving the T-1 order window later into the evening to allow 
the ETF to calculate and disclose its portfolio holdings before 
accepting T-1 orders would require an additional staffing shift, and 
thus would impose additional staffing costs on sponsors, custodians, 
and other market participants.\242\
---------------------------------------------------------------------------

    \239\ See, e.g., ICI Comment Letter (discussing the importance 
to authorized participants of the ability to trade or hedge the 
underlying exposures at the same time the ETF strikes its NAV); 
BlackRock Comment Letter; Jane Street Comment Letter (stating that 
``market participants have found that that benefits of agreeing to 
an order shortly after market close outweighs] the costs imposed by 
lack of certainty'').
    \240\ See, e.g., ICI Comment Letter (asserting that inability to 
trade at T-1 could introduce slippage, which in turn may lead to 
wider bid-ask spreads and larger premium/discounts); CSIM Comment 
Letter; Comment Letter of OppenheimerFunds (Oct. 1, 2018) 
(``OppenheimerFunds Comment Letter''). See also BlackRock Comment 
Letter (``Many ETFs in the marketplace currently take orders prior 
to publication of basket or portfolio holdings information and 
operate efficiently and with tight spreads.'').
    \241\ See Dechert Comment Letter.
    \242\ See Invesco Comment Letter.
---------------------------------------------------------------------------

    Commenters recommended alternatives to the proposed rule's timing 
requirements. Several commenters suggested we require portfolio 
holdings disclosure only before the opening of regular trading on the 
primary listing exchange.\243\ These commenters asserted that 
authorized participants placing purchase or redemption orders on a T-1 
basis are able to assess and hedge market risk associated with 
transacting in underlying foreign securities prior to regular trading 
in U.S. equity markets. Other alternatives suggested by commenters 
included: (i) Carving out ETFs investing in foreign markets from the 
proposed timing requirements; \244\ and (ii) permitting ETFs to accept 
T-1 orders provided that they first share certain standardized 
information with authorized participants.\245\
---------------------------------------------------------------------------

    \243\ See NYSE Comment Letter; CSIM Comment Letter; WisdomTree 
Comment Letter.
    \244\ See Nasdaq Comment Letter.
    \245\ See Invesco Comment Letter (suggesting that, as a 
condition for accepting T-1 orders, ETFs be required to provide APs 
with (1) the last-published portfolio holdings, (2) applicable 
corporate action information, (3) data relating to index changes, 
and (4) an updated basket file).
---------------------------------------------------------------------------

    After considering these comments, we are not adopting the proposed 
requirement that an ETF disclose its portfolio holdings before it 
starts accepting orders for the purchase or redemption of creation 
units. Instead, rule 6c-11 will require an ETF to disclose the 
portfolio holdings that will form the basis for the ETF's next 
calculation of NAV per share each business day before the opening of 
regular trading on the primary listing exchange of the exchange-traded 
fund shares.\246\ This will accommodate T-1 orders, as requested by 
commenters, and is consistent with our existing exemptive orders.\247\
---------------------------------------------------------------------------

    \246\ For these purposes, ``business day'' is defined as any day 
the ETF is open for business, including any day when it satisfies 
redemption requests as required by section 22(e) of the Act. See 
rule 6c-11(a)(1).
    \247\ See, e.g., Salt Financial, LLC, et al., Investment Company 
Act Release Nos. 32974 (Jan. 23, 2018) [83 FR 4097 (Jan. 29, 2018)] 
(notice) and 33007 (Feb. 21, 2018) (order), and related application 
(``Salt Financial'') (requiring disclosure of portfolio holdings 
before commencement of trading on the exchange).
---------------------------------------------------------------------------

    The goal of our proposed timing requirement was to facilitate 
effective arbitrage by providing authorized participants and other 
market participants buying and selling ETF shares with portfolio 
holdings information at the time of the transaction. We believe that 
accommodating T-1 orders, but requiring disclosure before the opening 
of regular trading on the primary listing exchange of the ETF's shares, 
will nonetheless allow for effective arbitrage. Commenters stated that 
ETFs utilizing T-1 orders have shown relatively narrow bid-ask spreads 
and small premiums and discounts, and stated that precluding T-1 orders 
could have the unintended effect of actually widening bid-ask spreads 
and disrupting existing market practices.\248\ Moreover, staff review 
of the websites of several ETFs that disclose that they use T-1 orders 
indicates that these ETFs' bid-ask spreads and premiums and discounts 
fall approximately within the same range as ETFs that do not use T-1 
orders.
---------------------------------------------------------------------------

    \248\ See, e.g., Jane Street Comment Letter; ICI comment Letter; 
BlackRock Comment Letter; SIFMA AMG Comment Letter I.
---------------------------------------------------------------------------

    We considered whether to impose other conditions for the acceptance 
of T-1 orders, such as disclosure of the last published portfolio 
holdings. However, given the information already available to market 
participants and the data demonstrating that existing market practices 
have led to effective arbitrage, we do not believe additional 
conditions are currently necessary to facilitate arbitrage for these 
orders.
b. Presentation of Portfolio Holdings Disclosure
    Rule 6c-11 will require an ETF to disclose standardized information 
regarding each portfolio holding.\249\ The rule, however, will not 
require this information to be presented and contain information in the 
manner prescribed within Article 12 of Regulation S-X as proposed.\250\ 
In response to concerns and suggestions of commenters, we have modified 
this condition to require ETFs to disclose a limited set of information 
for each portfolio holding.\251\
---------------------------------------------------------------------------

    \249\ Rule 6c-11(c)(1)(i). As proposed, the term ``portfolio 
holdings'' is defined to mean an ETF's securities, assets, or other 
positions. See rule 6c-11(a)(1). As a result, ETFs relying on rule 
6c-11 are required to disclose securities, their cash holdings, as 
well as holdings that are not securities or assets, including short 
positions or written options. For example, an ETF will have to 
disclose that it entered into a written call option, under which it 
would sacrifice potential gains that would result from the price of 
the reference asset increasing above the price at which the call may 
be exercised (i.e., the strike price). Unless the ETF discloses the 
presence of these and similar liabilities, authorized participants 
and other investors may not be able to fully evaluate the 
portfolio's exposure. We did not receive any comments on this 
definition.
    \250\ See 2018 ETF Proposing Release, supra footnote 7, at 
nn.220-221 (noting that a staff review of ETF websites found little 
consistency in how portfolio holdings information was presented, 
particularly with respect to derivatives, which could lead to 
investor confusion).
    \251\ See infra footnotes 257-260 and accompanying text.
---------------------------------------------------------------------------

    Commenters on this aspect of the proposal agreed that there 
currently is little consistency in the presentation of holdings 
information by ETFs,\252\ and generally agreed this disclosure should 
be standardized.\253\ Several commenters, however, stated that the 
specific presentation standard included in the proposed rule (i.e., 
Article 12 of Regulation S-X) is not an appropriate framework for daily 
portfolio holdings disclosures by ETFs.\254\ Commenters

[[Page 57183]]

asserted that certain of the Article 12 requirements are overly 
burdensome for daily disclosure or unnecessary to achieve the 
Commission's goal of facilitating effective arbitrage.\255\
---------------------------------------------------------------------------

    \252\ See, e.g., Cary Comment Letter; ETF.com Comment Letter.
    \253\ See, e.g., BlackRock Comment Letter; BNY Mellon Comment 
Letter; Fidelity Comment Letter.
    \254\ See, e.g., Fidelity Comment Letter; ICI Comment Letter. 
The proposed Article 12 presentation requirements would have 
required an ETF to include the name of issuer and title of issue (as 
prescribed within the S-X schedules including any related footnotes 
on the description columns), balance held at close of period, number 
of shares, principal amount of bonds, and value of each item at 
close of period for the ETF's investments in securities, securities 
sold short, and other investments. For derivatives, Article 12 would 
require disclosure that includes the description (as prescribed 
within the S-X schedules including any related footnotes), number of 
contracts, value, expiration date (as applicable), unrealized 
appreciation/depreciation (as applicable), and amount and 
description of currency to be purchased and to be sold (as 
applicable). See 17 CFR 210.12-12; 210.12-12A; 210.12-13; 210.12-
13A; 210.12-13B; 210.12-13C; and 210.12-13D.
    \255\ See, e.g., WisdomTree Comment Letter (explaining that 
Article 12 requires detailed categorization of investments by 
investment type, industry, and country or geographic region and also 
requires identification of fair valued and non-income producing 
securities); SIFMA AMG Comment Letter I (stating that information 
such as appreciation and depreciation for derivatives, as required 
under Article 12, would be difficult and impractical to calculate 
and disseminate on a daily basis); Comment Letter of Franklin 
Resources, Inc. (Oct. 1, 2018) (``Franklin Templeton Comment 
Letter'') (noting that certain data required under Article 12 is 
updated only on a quarterly basis and would not be easily accessible 
on a daily basis); BlackRock Comment Letter; ICI Comment Letter.
---------------------------------------------------------------------------

    Some commenters recommended alternative approaches. Several 
commenters, for example, suggested using disclosure requirements based 
on the generic listing standards for actively managed ETFs.\256\ One of 
these commenters stated that using the generic listing standards would 
provide ``more streamlined portfolio holdings disclosure that includes 
a subset of the items required by Article 12 that is most relevant and 
useful for investors.'' \257\ Other commenters stated that the 
Commission should consider a more limited set of requirements, such as: 
(i) The name of the security; (ii) the size of the position; (iii) the 
percentage exposure to such security; and (iv) the security's 
value.\258\ Some commenters also recommended that, in addition to 
website disclosure, rule 6c-11 require ETFs to file portfolio holdings 
information in a central public location, such as EDGAR.\259\
---------------------------------------------------------------------------

    \256\ See, e.g., BlackRock Comment Letter; Fidelity Comment 
Letter; Eaton Vance Comment Letter. See also ICI Comment Letter 
(noting that standardizing ``the presentation formats based on 
exchange listing requirements would obviate the need for two 
separate schedules, a costly and largely redundant exercise with no 
additional benefit''). The listing exchanges' current generic 
listing standards for actively managed ETFs require disclosure of 
ticker symbol; CUSIP or other identifier; description of the 
holding; identity of the asset upon which the derivative is based; 
strike price for any options; quantity of each security or other 
asset held as measured by (i) par value, (ii) notional value, (iii) 
number of shares, (iv) number of contracts, and (v) number of units; 
maturity date; coupon rate; effective date; market value; and 
percentage weight of the holding in the portfolio. See, e.g., NYSE 
Arca Rule 8.600-E(c)(2); Nasdaq Rule 5735(c)(2); Cboe BZX Rule 
14.11(i)(3)(B).
    \257\ See BlackRock Comment Letter.
    \258\ See, e.g., WisdomTree Comment Letter. See also CSIM 
Comment Letter (suggesting that Commission adopt an ETF holdings 
disclosure requirement similar to what money market funds report on 
fund websites); Cary Comment Letter (recommending disclosure of the 
portfolio holding's ticker symbol and weighting in the portfolio as 
minimum requirements); Comment Letter of ICE Data Services, 
Intercontinental Exchange (Oct. 1, 2018) (``IDS Comment Letter'') 
(stating that Commission should consider a standardized nomenclature 
for ETFs' description of derivative holdings).
    \259\ See, e.g., Reagan Comment Letter. See also Morningstar 
Comment Letter (recommending that the Commission also require ETFs 
to disclose the information and other website disclosure 
requirements in structured format for analysis and comparison 
purposes); FIMSAC Comment Letter (recommending the rule require ETFs 
to file certain website disclosures on EDGAR or another public, 
centralized database).
---------------------------------------------------------------------------

    We proposed the Article 12 framework because ETFs are already 
required to comply with Article 12 for periodic financial reporting 
purposes and therefore we believed that it would provide an efficient 
way to standardize daily portfolio holdings disclosure. After 
considering comments, however, we believe that a more streamlined 
requirement will provide standardized portfolio holdings disclosure in 
a more efficient, less costly, and less burdensome format, while still 
providing market participants with relevant information. Accordingly, 
rule 6c-11 will require an ETF to post a subset of the information 
required by the listing exchanges' current generic listing standards 
for actively managed ETFs. Rule 6c-11 will require ETFs to disclose the 
following information for each portfolio holding on a daily basis: (1) 
Ticker symbol; (2) CUSIP or other identifier; (3) description of 
holding; (4) quantity of each security or other asset held; and (5) 
percentage weight of the holding in the portfolio.\260\ We believe that 
this framework will provide market participants with the information 
necessary to support an effective arbitrage mechanism and eliminate 
potential investor confusion due to a lack of standardization.
---------------------------------------------------------------------------

    \260\ Article 12 of Regulation S-X also generally requires 
disclosure of these items, but does not require a ticker, CUSIP, or 
other identifier for a holding. See, e.g., 17 CFR 210.12-12, 210.12-
12A (requiring disclosure of name of issuer and title of issue). We 
believe that such identifiers can allow market participants to 
efficiently identify the asset or security held, and thus we 
included this requirement, which is required under the current 
generic listing standards for actively managed ETFs.
---------------------------------------------------------------------------

    As commenters suggested, to arbitrage an ETF's holdings, market 
participants generally must be able to identify the security or asset 
held, the quantity held, and percentage weighting of the holding in the 
ETF's portfolio.\261\ To enable market participants to identify the 
investment held, we are requiring the ETF to disclose the ticker, CUSIP 
or other identifier (where applicable) of the holding, and to provide a 
description of the holding. Because certain investments may not have 
been assigned a common securities identifier, we are requiring the ETF 
to provide a brief description of the investment to allow an investor 
to effectively hedge the ETF.\262\ For example, ETFs holding debt 
securities should include the security's name, maturity date, coupon 
rate, and effective date, where applicable, to assist investors in 
identifying the specific security held.\263\ To indicate the quantity 
of a security or other asset held, the ETF generally should use the 
measure typically associated with quantifying that class of security, 
such as number of shares for equity securities, par value for debt 
securities, number of units for securities, such as UITs, that are 
measured in units, and dollar value for cash. With respect to 
derivatives, the ETF generally should provide both the notional value 
of the derivative and number of contracts, as well as a general 
description of the investment, which should include the type of 
derivative (i.e., swap, option, forward). ETFs also may want to 
consider several of the other reporting fields in Form N-PORT, for 
example, depending on the type of investment the ETF holds, in order to 
provide investors with the necessary information.
---------------------------------------------------------------------------

    \261\ See, e.g., WisdomTree Comment Letter.
    \262\ See, e.g., Investment Company Reporting Modernization 
Adopting Release, Investment Company Act Release No. 32314 (Oct. 13, 
2016) [81 FR 81870 (Nov. 18, 2016)] (``Reporting Modernization 
Adopting Release''), at section II.A.4.g.i. (discussing use of 
unique securities identifiers for portfolio holdings and observing 
that some holdings lack such identifiers).
    \263\ Based on our experience with structured portfolio 
reporting, such as Form N-PORT, we believe that this information 
will provide a sufficient amount of data for a market participant to 
understand the payment profile of the investment and therefore 
arbitrage the ETF's portfolio holdings. See id., at section 
II.A.4.g.ii.
---------------------------------------------------------------------------

    We continue to believe that the ETF's website is the most effective 
location for the disclosure of portfolio holdings information. By 
posting the portfolio information on its website, free of charge, the 
ETF makes the information available to a broad range of investors, 
including retail investors, and other market participants.\264\ We 
further believe, and commenters agreed, that requiring ETFs to file 
their portfolio holdings information on EDGAR would impose additional 
costs on ETFs that are not justified in light of other available 
disclosure methods.\265\ Moreover, the purpose of this requirement is 
to allow ETF investors to understand and potentially arbitrage the 
ETF's holdings. We therefore do not believe that requiring ETFs to file 
daily portfolio

[[Page 57184]]

holding disclosure on EDGAR or other centralized location in order to 
provide potentially greater comparability across ETFs is justified in 
light of current market practices and the additional costs associated 
with such a requirement.\266\ In addition, other documents, such as 
reports on Form N-PORT or Form N-CEN, registration statements on Form 
N-1A, and consolidated structured datasets derived from those 
submissions, provide centralized, structured information, including 
information about portfolio holdings, that can be analyzed and compared 
across ETFs, albeit on a less frequent basis.\267\
---------------------------------------------------------------------------

    \264\ See 2018 ETF Proposing Release, supra footnote 7, at n.271 
and accompanying text (discussing advantages of website posting over 
use of National Securities Clearing Corporation (``NSCC'') portfolio 
composition file).
    \265\ See, e.g., Invesco Comment Letter (stating that additional 
dissemination requirements, such as EDGAR, would be costly).
    \266\ As stated above, however, we encourage ETFs to consider 
whether there are technological means, such as including portfolio 
holdings information in a machine-readable format, to make these 
disclosures more accessible. See supra footnote 226.
    \267\ See, e.g., Part C of Form N-PORT.
---------------------------------------------------------------------------

c. Portfolio Holdings That Will Form the Basis for the ETF's NAV 
Calculation
    As proposed, rule 6c-11 will require the portfolio holdings that 
form the basis for the ETF's NAV calculation to be the ETF's portfolio 
holdings as of the close of business on the prior business day.\268\ 
Changes in an ETF's holdings of portfolio securities would therefore be 
reflected on a T+1 basis. We did not receive any comments on this 
proposed condition, which is consistent with current ETF practices. We 
continue to believe that requiring an ETF to disclose the portfolio 
that will form the basis for the next NAV calculation at the beginning 
of the business day will help to facilitate the efficient functioning 
of the arbitrage process while protecting against potential front-
running of the ETF's trades.
---------------------------------------------------------------------------

    \268\ See rule 6c-11(c)(1)(i). See also 2018 Proposing Release, 
supra footnote 7, at nn.210-211 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, rule 6c-11 will not require ETFs to disclose intraday 
changes in portfolio holdings because these changes would not affect 
the portfolio composition serving as a basis for NAV calculation until 
the next business day.\269\ We continue to believe that the selective 
disclosure of nonpublic information regarding intraday changes in 
portfolio holdings (or any advance disclosure of portfolio trades) 
could result in the front-running of an ETF's trades, causing the ETF 
to pay more to obtain a security.\270\ We have stated that registered 
investment companies' compliance policies and procedures required by 
rule 38a-1 under the Act should address potential misuses of nonpublic 
information, including the disclosure to third parties of material 
information about a fund's portfolio, its trading strategies, or 
pending transactions, and the purchase or sale of fund shares by 
advisory personnel based on material, nonpublic information about the 
fund's portfolio.\271\ ETFs also are required to describe their 
policies and procedures on portfolio security disclosure in the 
Statement of Additional Information and post such policies and 
procedures on their websites.\272\
---------------------------------------------------------------------------

    \269\ See 2018 ETF Proposing Release, supra footnote 7, at note 
222 and accompanying text.
    \270\ We also requested comment in the proposal on whether we 
should amend Regulation FD to apply to ETFs. Regulation FD prohibits 
the selective disclosure of material information by publicly traded 
companies and other issuers. See 2018 ETF Proposing Release, supra 
footnote 7, at n.228. We received two comments stating that ETFs 
should be subject to Regulation FD. See Eaton Vance Comment Letter; 
Jane Street Comment Letter. However, we are not amending Regulation 
FD at this time in order to further explore certain aspects of 
applying Regulation FD to ETFs, which unlike other entities subject 
to this regulation, are continuously offered.
    \271\ Rule 38a-1 Adopting Release, supra footnote 134. Pursuant 
to rule 6c-11, ETFs are required to disclose portfolio holdings 
information with greater frequency than other open-end funds, which 
are generally required to publicly disclose holdings on a quarterly 
basis. However, we have previously noted that a fund or investment 
adviser that discloses the fund's portfolio securities may only do 
so consistent with the antifraud provisions of the federal 
securities laws and the adviser's fiduciary duties. See Disclosure 
Regarding Market Timing and Selective Disclosure of Portfolio 
Holdings, Investment Company Act Release No. 26418 (Apr. 20, 2004) 
[69 FR 22299 (Apr. 23, 2004)] (``Disclosure of Portfolio Holdings 
Release''), at section II.C. Moreover, divulging nonpublic portfolio 
holdings to selected third parties is permissible only when the fund 
has legitimate business purposes for doing so and the recipients are 
subject to a duty of confidentiality, including a duty not to trade 
on the nonpublic information. Id.
    \272\ See Items 9(d) and 16(f) of Form N-1A; see also Disclosure 
of Portfolio Holdings Release, supra footnote 272, at section II.C.
---------------------------------------------------------------------------

5. Baskets
    As proposed, rule 6c-11 will require an ETF relying on the rule to 
adopt and implement written policies and procedures governing the 
construction of baskets and the process that the ETF will use for the 
acceptance of baskets.\273\ In addition, as proposed, the rule will 
provide an ETF with flexibility to use ``custom baskets'' if the ETF 
has adopted written policies and procedures that: (i) Set forth 
detailed parameters for the construction and acceptance of custom 
baskets that are in the best interests of the ETF and its shareholders, 
including the process for any revisions to, or deviations from, those 
parameters; and (ii) specify the titles or roles of employees of the 
ETF's investment adviser who are required to review each custom basket 
for compliance with those parameters (``custom basket policies and 
procedures'').\274\
---------------------------------------------------------------------------

    \273\ See rule 6c-11(c)(3). The rule will define ``basket'' to 
mean the securities, assets or other positions in exchange for which 
an ETF issues (or in return for which it redeems) creation units. 
See rule 6c-11(a)(1).
    \274\ See rule 6c-11(c)(3); see also infra footnote 299 and 
accompanying text.
---------------------------------------------------------------------------

a. Basket Policies and Procedures
    When an ETF uses in-kind creations and redemptions, the composition 
of the basket is an important aspect of the efficient functioning of 
the arbitrage mechanism. Basket composition affects the costs of 
assembling and delivering the baskets exchanged for creation units as 
well as the costs of liquidating basket securities when redeeming 
creation units.\275\ Basket composition also is important to ETF 
portfolio management, as each in-kind creation or redemption increases 
or decreases positions in the ETF's portfolio, and allows portfolio 
managers to add or remove certain portfolio holdings. This can be an 
efficient way for a portfolio manager to execute changes in the ETF's 
portfolio because the manager can make the changes without incurring 
the additional expenses of trades in the market. When an ETF does not 
have flexibility to manage basket composition, however, undesired 
changes to the portfolio may result, such as the loss of desirable 
bonds when paying redemptions in kind.
---------------------------------------------------------------------------

    \275\ For example, the number of positions included in a basket, 
as well as the difficulty and cost of trading those positions, will 
affect the cost of basket transactions.
---------------------------------------------------------------------------

    The exemptive relief relating to baskets evolved over time. Early 
orders for ETFs organized as open-end funds included few explicit 
restrictions on baskets, and these orders did not expressly limit ETFs' 
baskets to a pro rata representation of the ETF's portfolio 
holdings.\276\ Since approximately 2006, however, our orders placed 
tighter restrictions on an open-end ETF's composition of baskets.\277\ 
These orders expressly require that an ETF's basket generally 
correspond pro rata to its portfolio holdings, while identifying 
certain limited circumstances under which an ETF may use a non-pro rata 
basket.\278\
---------------------------------------------------------------------------

    \276\ See WEBs Index Fund, Inc., et al., Investment Company Act 
Release Nos. 23860 (June 7, 1999) [64 FR 31658 (June 11, 1999)] 
(notice) and 23890 (July 6, 1999) (order) and related application. 
Our earliest ETF orders for ETFs organized as UITs provide that in-
kind purchases of creation units were to be made using a basket of 
securities substantially similar to the composition and weighting of 
the ETF's underlying index. Given the unmanaged nature of the UIT 
structure, a UIT ETF's basket generally reflected a pro rata 
representation of the ETF's portfolio. See SPDR, supra footnote 51.
    \277\ See, e.g., 2006 WisdomTree Investments, supra footnote 
201.
    \278\ See id.; see also 2018 ETF Proposing Release, supra 
footnote 7, at nn. 238-242 and accompanying text (describing the 
circumstances when a basket could deviate from a pro rata 
representation of the ETF's portfolio under recent exemptive 
orders).

---------------------------------------------------------------------------

[[Page 57185]]

    The requirement that baskets correspond pro rata to the ETF's 
portfolio holdings, and the increasingly limited exceptions to the pro 
rata requirement, were designed to address the risk that an authorized 
participant could take advantage of its relationship with the ETF and 
pressure the ETF to construct a basket that favors an authorized 
participant to the detriment of the ETF's shareholders. For example, 
because ETFs rely on authorized participants to maintain the secondary 
market by promoting an effective arbitrage mechanism, an authorized 
participant holding less liquid or less desirable securities 
potentially could pressure an ETF into accepting those securities in 
its basket in exchange for liquid ETF shares (i.e., dumping). An 
authorized participant also could pressure the ETF into including in 
its basket certain desirable securities in exchange for ETF shares 
tendered for redemption (i.e., cherry-picking). In either case, the 
ETF's other investors would be disadvantaged and would be left holding 
shares of an ETF with a less liquid or less desirable portfolio of 
securities.\279\
---------------------------------------------------------------------------

    \279\ These abuses also could occur when a liquidity provider or 
other market participant engages in primary market transactions with 
the ETF by using an authorized participant as an agent.
---------------------------------------------------------------------------

    Based on our experience with ETFs, however, we believe there are 
many circumstances, in addition to the specific circumstances 
enumerated in our orders, where allowing basket assets to differ from a 
pro rata representation or allowing the use of different baskets could 
benefit the ETF and its shareholders. For instance, ETFs without basket 
flexibility typically are required to include a greater number of 
individual securities within their basket when transacting in kind, 
making it more difficult and costly for authorized participants and 
other market participants to assemble or liquidate baskets. This could 
result in wider bid-ask spreads and potentially less efficient 
arbitrage. In such circumstances, these ETFs may be at a competitive 
disadvantage to ETFs with greater flexibility. As a result, these 
differing conditions and requirements for basket composition in our 
exemptive orders may have created a disadvantage for newer ETFs that 
are subject to our later, more stringent restrictions on baskets.
    Moreover, certain exceptions to a pro rata basket requirement may 
help ETFs operate more efficiently. For example, ETFs, particularly 
fixed-income ETFs, that do not have basket flexibility may satisfy 
redemption requests entirely in cash in order to avoid losing hard-to-
find securities and to preserve the ETF's ability to achieve its 
investment objectives.\280\ ETFs that meet redemptions in cash may 
maintain larger cash positions to meet redemption obligations, 
potentially resulting in cash drag on the ETF's performance. The use of 
cash baskets also may be less tax-efficient than using in-kind baskets 
to satisfy redemptions, and may result in additional transaction costs 
for the purchase and sale of portfolio holdings.\281\
---------------------------------------------------------------------------

    \280\ Many ETFs, including fixed-income ETFs, are permitted 
under their exemptive orders to satisfy redemptions entirely in cash 
where the ETF holds thinly traded securities, among other 
circumstances. See, e.g., Pacific Investment Management Company 
LLCP, et al., Investment Company Act Release Nos. 28723 (May 11, 
2009) [74 FR 22772 (May 14, 2009)] (notice) and 28752 (June 1, 2009) 
(order) and related application.
    \281\ In-kind redemptions allow ETFs to avoid taxable events and 
certain transaction costs that arise when selling securities for 
cash within the ETF. See, e.g., Prudential Investments LLC, et al., 
Investment Company Act Release Nos. 32351 (Nov. 1, 2016) (notice) 
[81 FR 78228 (Nov. 7, 2016)] and 32374 (Nov. 30, 2016) (order) and 
related application (stating that cash redemptions may result in 
adverse tax consequences and higher transaction costs, such as 
brokerage costs, than in-kind redemptions). Additionally, based upon 
Form N-CEN data through September 5, 2019, the median transaction 
fee charged to an authorized participant for the use of an in-kind 
basket to satisfy a redemption was approximately $350.00, while the 
median transaction fee for the use of a basket that was partially or 
fully composed of cash was approximately $375.00, when charged on a 
per-creation-unit basis.
---------------------------------------------------------------------------

    We therefore proposed to provide additional basket flexibility, 
subject to conditions designed to address concerns regarding the 
potential risk of overreaching. Specifically we proposed to require 
ETFs to adopt: (i) Policies and procedures governing the construction 
of baskets and the process that would be used for the acceptance of 
baskets generally; and (ii) heightened process requirements for ETFs 
using custom baskets, including policies and procedures specifically 
covering the use of custom baskets.\282\
---------------------------------------------------------------------------

    \282\ See 2018 ETF Proposing Release, supra footnote 7, at 
section II.5.a.
---------------------------------------------------------------------------

    Commenters generally supported requiring ETFs to adopt policies and 
procedures governing the construction of baskets.\283\ One commenter 
stated, for example, that this requirement is consistent with other 
investment and portfolio management processes that require guidelines, 
oversight and recordkeeping.\284\ Commenters also generally supported 
our proposal to permit ETFs relying on the rule to use custom baskets 
provided they adopt certain heightened process requirements.\285\ These 
commenters agreed that providing ETFs with the flexibility to use 
custom baskets potentially could benefit ETF investors through more 
effective arbitrage and more efficient portfolio management.\286\ One 
commenter provided the results of an analysis it performed indicating 
that fixed-income ETFs with basket flexibility had narrower bid-ask 
spreads, had lower tracking differentials (i.e., the difference between 
the ETF's daily return and the daily return of its benchmark), and 
traded at smaller discounts than fixed-income ETFs without basket 
flexibility.\287\
---------------------------------------------------------------------------

    \283\ See, e.g., ICI Comment Letter; BlackRock Comment Letter; 
SIFMA AMG Comment Letter I.
    \284\ See SIFMA AMG Comment Letter I.
    \285\ See, e.g., ICI Comment Letter; BlackRock Comment Letter; 
Invesco Comment Letter; BNY Mellon Comment Letter; IDC Comment 
Letter; Fidelity Comment Letter.
    \286\ See, e.g., BlackRock Comment Letter.
    \287\ See ICI Comment Letter. See also infra footnotes 574-575 
and accompanying text.
---------------------------------------------------------------------------

    One commenter, however, asserted that the rule should not afford 
custom basket flexibility to all ETFs relying on it.\288\ Rather, this 
commenter opined that the rule should require fixed-income ETFs to make 
in-kind, pro rata redemptions upon shareholder request (with limited 
substitutions for holdings that cannot be settled or transferred) 
because, under certain market conditions, custom baskets can lead to 
greater price volatility and dislocation from NAV for these ETFs.
---------------------------------------------------------------------------

    \288\ See Bluefin Comment Letter.
---------------------------------------------------------------------------

    Some commenters, although generally supporting custom basket 
flexibility and the proposed heightened process requirements, requested 
that we modify or clarify certain aspects of the proposed 
condition.\289\ For example, one commenter did not support requiring 
``detailed parameters'' for the construction and acceptance of custom 
baskets, stating that the rule should permit ETF sponsors to develop 
broad policies and procedures to cover the wide range of circumstances 
that may arise relating to custom baskets.\290\ Another commenter 
stated that the Commission should explicitly set forth the appropriate 
considerations for custom basket policies and procedures, such as 
periodic monitoring and testing and oversight of the custom basket 
process.\291\ This commenter also stated that the Commission should 
clarify that an ETF has discretion to tailor its custom basket policies 
and procedures to address different risks, considerations, and 
requirements for

[[Page 57186]]

different types of custom baskets, particularly those involving cash 
substitutions.
---------------------------------------------------------------------------

    \289\ See, e.g., ICI Comment Letter; BlackRock Comment Letter; 
Invesco Comment Letter; BNY Mellon Comment Letter; IDC Comment 
Letter; Fidelity Comment Letter; Dechert Comment Letter.
    \290\ See Invesco Comment Letter.
    \291\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    We are adopting the basket conditions under rule 6c-11 as proposed. 
Rule 6c-11 therefore will require an ETF to adopt and implement written 
policies and procedures that govern the construction of baskets and the 
process that will be used for the acceptance of baskets as 
proposed.\292\ These policies and procedures must cover the methodology 
that the ETF will use to construct baskets. For example, the policies 
and procedures should detail the circumstances under which the basket 
may omit positions that are not operationally feasible to transfer in 
kind. The policies and procedures also should detail when the ETF would 
use representative sampling of its portfolio to create its basket, and 
how the ETF would sample in those circumstances. The policies and 
procedures also should detail how the ETF would replicate changes in 
the ETF's portfolio holdings as a result of the rebalancing or 
reconstitution of the ETF's underlying securities market index, if 
applicable. We believe this policies and procedures requirement will 
protect against overreaching and other abusive practices in 
circumstances where an ETF uses a basket that does not reflect a pro 
rata slice of the ETF's portfolio holdings, but does not meet the 
definition of custom basket.
---------------------------------------------------------------------------

    \292\ See rule 6c-11(c)(3).
---------------------------------------------------------------------------

    Rule 6c-11 also will require the policies and procedures to (i) set 
forth detailed parameters for the construction and acceptance of custom 
baskets that are in the best interests of the ETF and its shareholders, 
including the process for any revisions to, or deviations from, those 
parameters; and (ii) specify the titles or roles of the employees of 
the ETF's investment adviser who are required to review each custom 
basket for compliance with those parameters.\293\ We continue to 
believe that an ETF and its shareholders may benefit from custom 
baskets and that the heightened process requirements for custom baskets 
in rule 6c-11 serve to protect the ETF and its shareholders from the 
risks that custom baskets may present.
---------------------------------------------------------------------------

    \293\ Rule 6c-11(c)(3)(i) and (ii).
---------------------------------------------------------------------------

    Effective custom basket policies and procedures should provide 
specific parameters regarding the methodology and process that the ETF 
would use to construct or accept each custom basket. They also should 
describe the ETF's approach for testing compliance with the custom 
basket policies and procedures and assessing (including through back 
testing or other periodic reviews) whether the parameters continue to 
result in custom baskets that are in the best interests of the ETF and 
its shareholders. An ETF should consistently apply the custom basket 
policies and procedures and must establish a process that the ETF will 
adhere to if it wishes to make any revisions to, or deviate from, the 
parameters. In addition, an ETF's custom basket policies and procedures 
should include reasonable controls designed to prevent inappropriate 
differential treatment among authorized participants.
    We do not believe that the requirement for ``detailed parameters'' 
would prevent an ETF sponsor from developing policies and procedures to 
cover the wide range of circumstances that may arise relating to custom 
baskets.\294\ ETFs may tailor their custom basket policies and 
procedures to address different risks and requirements for different 
types of custom baskets. For example, an ETF could develop tailored 
procedures when it uses cash substitutions that differ from the 
procedures it uses when substituting securities and other positions. An 
ETF's custom basket policies and procedures also could address the 
differing considerations for custom baskets depending on the direction 
of the trade (i.e., whether the custom basket is being used for a 
creation or a redemption).\295\ This condition provides ETFs with 
flexibility to cover operational circumstances that make the inclusion 
of certain portfolio securities and other positions in a basket 
operationally difficult (or impossible), while facilitating portfolio 
management changes in a cost- and tax-efficient manner.
---------------------------------------------------------------------------

    \294\ See Invesco Comment Letter.
    \295\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    Although one commenter opined that fixed-income ETFs present unique 
concerns, we believe that requiring fixed-income ETFs to establish 
detailed parameters for the construction and acceptance of custom 
baskets that are in the best interests of the ETF and its shareholders 
will address the risks associated with custom baskets. As discussed 
above, we also believe that fixed-income ETFs (and their shareholders) 
may experience the most pronounced benefits from basket 
flexibility.\296\ As a result, all ETFs that comply with the conditions 
in rule 6c-11 will have basket flexibility.
---------------------------------------------------------------------------

    \296\ See supra footnotes 281-282 and accompanying text and 
footnote 288 and accompanying text.
---------------------------------------------------------------------------

    One commenter stated that the Commission should confirm that the 
``best interests of the ETF and its shareholders'' standard included in 
rule 6c-11(c)(3)(i) includes the ETF's shareholders generally rather 
than individually, on the basis that the adviser to an ETF owes a 
fiduciary duty only to the ETF, and that ETFs cannot evaluate the 
interests of individual shareholders.\297\ The ``best interests of the 
ETF and its shareholders'' in this context is not intended to apply to 
each ETF shareholder individually, but rather to the ETF's shareholders 
generally. This formulation is consistent with other Commission 
rules.\298\
---------------------------------------------------------------------------

    \297\ See SIFMA AMG Comment Letter I.
    \298\ See, e.g., 17 CFR 270.12b-1 (rule 12b-1 under the Act) 
(providing that fund board may approve distribution plan under rule 
12b-1 only if, among other things, the board concludes ``that there 
is a reasonable likelihood that the plan will benefit the company 
and its shareholders''); 17 CFR 270.2a-7 (rule 2a-7 under the Act) 
(providing that board of a money market fund, in order to use 
certain share price calculation methods, must determine ``that it is 
in the best interests of the fund and its shareholders'' to maintain 
a stable net asset value per share).
---------------------------------------------------------------------------

    As proposed, rule 6c-11 also will require an ETF, as part of its 
custom basket policies and procedures, to specify the titles or roles 
of employees of the ETF's investment adviser who are required to review 
each custom basket for compliance with the parameters set forth in 
those policies and procedures. Several commenters did not support this 
requirement as proposed.\299\ One of these commenters stated that the 
rule should require ETFs to identify only the employees that are 
responsible for approving custom baskets that deviate from the 
parameters set forth in the policies and procedures.\300\ Another 
commenter stated that the review requirement is overly prescriptive and 
could cause operational challenges when an ETF is sub-advised.\301\
---------------------------------------------------------------------------

    \299\ See, e.g., SIFMA AMG Comment Letter I; WisdomTree Comment 
Letter I.
    \300\ See SIFMA AMG Comment Letter I.
    \301\ See WisdomTree Comment Letter.
---------------------------------------------------------------------------

    In addition, several commenters did not support the statement in 
the 2018 ETF Proposing Release that an ETF may want to consider whether 
employees outside of portfolio management should review the components 
of custom baskets before approving a creation or redemption.\302\ 
Commenters stated that approval of custom baskets is a typical 
portfolio management function, and that requiring non-investment 
personnel to review custom baskets before approving a creation or 
redemption would be

[[Page 57187]]

impractical, burdensome, and would detract from the flexibility custom 
baskets provide.\303\ One commenter requested that the Commission 
clarify that the requirement to approve custom baskets applies only to 
employees with discretionary or direct supervisory authority over 
custom baskets, and not to employees responsible for governance, back-
testing, or periodic reviews.\304\
---------------------------------------------------------------------------

    \302\ See, e.g., Dechert Comment Letter; Fidelity Comment 
Letter; JPMAM Comment Letter; SIFMA AMG Comment Letter I; Invesco 
Comment Letter; CSIM Comment Letter; SSGA Comment Letter I.
    \303\ See, e.g., Dechert Comment Letter; Fidelity Comment 
Letter; JPMAM Comment Letter; Invesco Comment Letter; CSIM Comment 
Letter.
    \304\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that the ETF's investment adviser is in the 
best position to design and administer the custom basket policies and 
procedures and to establish parameters that are in the best interests 
of the ETF and its shareholders.\305\ We also believe that the adviser 
is in the best position to determine which employee (or employees) are 
responsible for determining whether an ETF's custom baskets comply with 
the custom basket policies and procedures depending on its own 
structure, strategy, and other relevant circumstances (including 
whether the ETF is sub-advised). The ETF's adviser (and personnel) are 
familiar with the ETF's portfolio holdings and are able to assess 
whether the process and methodology used to construct or accept a 
custom basket is in the best interests of the ETF and its shareholders 
and whether a particular custom basket complies with the parameters set 
forth in the custom basket policies and procedures. We believe that 
these requirements will allow an ETF to establish a tailored framework 
for the use of custom baskets, while also requiring the ETF to put into 
place safeguards against abusive practices related to basket 
composition.
---------------------------------------------------------------------------

    \305\ An investment adviser has a fiduciary duty to act in the 
best interests of a fund it advises. See section 36(a) under the 
Act. See also, e.g., Rosenfeld v. Black, 445 F.2d 1337 (2d Cir. 
1971); Brown v. Bullock, 194 F. Supp. 207, 229, 234 (S.D.N.Y.), 
aff'd, 294 F.2d 415 (2d Cir. 1961); In re Provident Management 
Corp., Securities Act Release No. 5155 (Dec. 1, 1970), at text 
accompanying n.12; Rule 38a-1 Adopting Release, supra footnote 64, 
at n.68. See also supra footnote 64 (discussing certain other 
obligations for registered investment advisers).
---------------------------------------------------------------------------

    To the extent that a particular ETF's investment adviser determines 
that its portfolio management employees are the appropriate employees 
to be responsible for compliance with the custom basket policies and 
procedures, we believe that the requirements of rule 38a-1 under the 
Act provide appropriate safeguards to address possible conflicts of 
interest that could arise from such an arrangement. For example, ETFs 
currently are required by rule 38a-1 under the Act to adopt, implement, 
and periodically review written policies and procedures reasonably 
designed to prevent violations of the federal securities laws.\306\ An 
ETF's compliance policies and procedures should be appropriately 
tailored to reflect its particular compliance risks. An ETF's basket 
policies and procedures (including its custom basket policies and 
procedures), therefore, should be covered by the ETF's compliance 
program and other requirements under rule 38a-1.\307\ For example, an 
ETF would be required to preserve the basket policies and procedures 
pursuant to the requirements of rule 38a-1(d)(1). Also, we believe that 
the ETF's board of directors' oversight of the ETF's compliance 
policies and procedures, as well as their general oversight of the ETF, 
would provide an additional layer of protection for an ETF's use of 
custom baskets.\308\
---------------------------------------------------------------------------

    \306\ See Rule 38a-1 Adopting Release, supra footnote 134. Among 
other things, rule 38a-1 requires a fund's chief compliance officer 
to provide a written report to the fund's board of directors, no 
less frequently than annually, that addresses, among other things, 
the operation of the fund's compliance policies and procedures and 
any material changes made to those policies and procedures since the 
date of the last report and any material changes to the policies and 
procedures recommended as a result of the annual review of the 
policies and procedures. See rule 38a-1(a)(4)(iii)(A).
    \307\ The compliance policies and procedures could require, for 
example, the ETF's chief compliance officer or other compliance 
professionals to conduct a post hoc, periodic review of a sample of 
custom baskets used by the ETF.
    \308\ Several commenters expressed support for the description 
in the 2018 ETF Proposing Release of the oversight role of ETF 
boards, including with respect to custom basket policies and 
procedures. See ETF.com Comment Letter; IDC Comment Letter; Nasdaq 
Comment Letter.
---------------------------------------------------------------------------

b. Definition of Custom Baskets
    As proposed, rule 6c-11 will define ``custom baskets'' to include 
two categories of baskets. First, a basket containing a non-
representative selection of the ETF's portfolio holdings would 
constitute a custom basket.\309\ These types of custom baskets include, 
but are not limited to, baskets that do not reflect: (i) A pro rata 
representation of the ETF's portfolio holdings; (ii) a representative 
sampling of the ETF's portfolio holdings; or (iii) changes due to a 
rebalancing or reconstitution of the ETF's securities market index, if 
applicable.\310\
---------------------------------------------------------------------------

    \309\ Rule 6c-11(a)(1).
    \310\ A basket that is a pro rata representation of the ETF's 
portfolio holdings, except for minor deviations when it is not 
operationally feasible to include a particular instrument within the 
basket, generally would not be considered a ``custom basket'' except 
to the extent different baskets are used in transactions on the same 
business day.
---------------------------------------------------------------------------

    Second, if different baskets are used in transactions on the same 
business day, each basket after the initial basket would constitute a 
custom basket. For example, if an ETF exchanges a basket with either 
the same or another authorized participant that reflects a 
representative sampling that differs from the initial basket, that 
basket (and any such subsequent baskets) would be a custom basket.\311\ 
Similarly, if an ETF substitutes cash in lieu of a portion of basket 
assets for a single authorized participant, that basket would be a 
custom basket.
---------------------------------------------------------------------------

    \311\ When making the best interest determination for such 
custom baskets, the ETF should consider how this change in sampling 
affects the ETF's portfolio.
---------------------------------------------------------------------------

    We received a number of comments on the proposed definition of 
custom basket. Several commenters asserted that baskets including cash 
substitutions should not be subject to the heightened policies and 
procedures requirement for custom baskets, and thus should be excluded 
from the definition of custom baskets.\312\ These commenters asserted 
that baskets with cash substitutions do not raise the same concerns 
about conflicts or overreach as securities substitutions.\313\ 
Commenters also contended that the use of cash substitutions as part of 
standard (i.e., non-custom) baskets is a routine portfolio management 
matter that is necessary for the efficient operation of ETFs.\314\ One 
commenter suggested several technical changes to the proposed 
definition of custom basket in rule 6c-11 to treat cash substitutions 
as part of a non-custom, pro rata basket under certain enumerated 
circumstances.\315\
---------------------------------------------------------------------------

    \312\ See, e.g., ICI Comment Letter; BlackRock Comment Letter; 
Fidelity Comment Letter; Dechert Comment Letter; SIFMA AMG Comment 
Letter I; SSGA Comment Letter I.
    \313\ See, e.g., Fidelity Comment Letter (``Purchasing or 
redeeming using a cash basket does not create opportunities for 
`cherry picking,' `dumping' or other abuses . . . and therefore does 
not give rise to the risk of overreaching that the proposed custom 
basket policies and procedures were designed to prevent.''); ICI 
Comment Letter; BlackRock Comment Letter; SIFMA AMG Comment Letter 
I; JPMAM Comment Letter.
    \314\ See, e.g., SIFMA AMG Comment Letter I (asserting that 
``the use of cash is driven by restrictions applicable to authorized 
participants, restrictions on in-kind transactions in certain 
markets, or authorized participants' inability to access individual 
securities.''); JPMAM Comment Letter. See also CSIM Comment Letter 
(recommending that the standard basket policies and procedures, 
rather than the custom basket policies and procedures, cover cash 
substitutions).
    \315\ See BlackRock Comment Letter (recommending that we deem a 
basket to be pro rata if it: (1) Substitutes cash for odd lot 
positions or as a result of minimum trade sizes; (2) substitutes 
cash due to security specific restrictions, such as corporate 
actions or regulatory reasons; (3) substitutes cash for positions or 
other instruments that cannot be delivered in-kind (e.g., 
derivatives, to-be-announced (or ``TBA'') transactions); or (4) is 
otherwise representative of the ETF).

---------------------------------------------------------------------------

[[Page 57188]]

    After consideration of these comments, we are adopting the 
definition of ``custom basket'' as proposed. While we generally agree 
with commenters that cash substitutions may not raise the same concerns 
as securities substitutions, an ETF's use of cash substitutions may 
raise concerns regarding the potential for an authorized participant to 
overreach, particularly in connection with redemptions. For example, 
during periods of market stress, an authorized participant may demand 
cash from the ETF instead of less liquid securities in exchange for ETF 
shares, impacting the liquidity of the ETF's portfolio and the ability 
of the ETF to satisfy additional cash redemption requests from 
authorized participants.\316\
---------------------------------------------------------------------------

    \316\ See generally LRM Adopting Release, supra footnote 123.
---------------------------------------------------------------------------

    We also considered excluding certain types of cash substitutions 
from the definition of custom baskets where authorized participant 
overreach is unlikely, consistent with the approach taken in our recent 
exemptive orders.\317\ However, we are concerned that such an approach 
may fail to effectively capture all circumstances in which an ETF may 
substitute cash. We believe that the policies and procedures 
requirements for custom baskets will provide ETFs with sufficient 
flexibility to design custom basket policies and procedures that are 
tailored to address the different risks that cash substitutions and 
securities substitutions may present. An ETF could, for example, design 
custom basket policies and procedures with more streamlined 
requirements for certain cash substitutions that present lower 
risks.\318\
---------------------------------------------------------------------------

    \317\ For example, authorized participant overreach is unlikely 
where the ETF substitutes cash for odd lot positions or as a result 
of minimum trade sizes.
    \318\ See BlackRock Comment Letter.
---------------------------------------------------------------------------

c. Basket Publication Requirement
    Proposed rule 6c-11 would have required an ETF to post information 
regarding one basket that it would exchange for orders to purchase or 
redeem creation units to be priced based on the ETF's next calculation 
of NAV per share (a ``published basket'') on its website each business 
day.\319\ This proposed disclosure requirement was designed to: (i) 
Facilitate arbitrage by providing authorized participants and other 
market participants with timely information regarding the contents of a 
basket that the ETF will accept each day; and (ii) allow market 
participants that do not have access to an ETF's daily portfolio 
composition file to compare the ETF's basket with its portfolio 
holdings, assist in building intraday hedges, and estimate the cash 
balancing amount. After considering comments, however, the Commission 
is not including a basket publication requirement in rule 6c-11.
---------------------------------------------------------------------------

    \319\ See proposed rule 6c-11(c)(1)(i).
---------------------------------------------------------------------------

    Commenters generally did not support requiring disclosure of a 
published basket on the ETF's website.\320\ For example, one commenter 
asserted that the proposed published basket was ``speculative,'' and 
had little value, particularly for certain types of fixed-income 
ETFs.\321\ Several commenters contended that the contents of an ETF's 
basket are irrelevant for secondary market investors and publication of 
an ETF's basket could result in confusion, particularly if the basket 
is mistaken for portfolio holdings information.\322\ Other commenters 
stated that the publication requirement could delay the process by 
which the ETF and an authorized participant negotiate the contents of a 
custom creation or redemption basket.\323\ Another commenter stated 
that we should require an ETF to provide its published basket through 
the NSCC, rather than through its website, because the market 
participants that would use the published basket currently are able to 
access it either directly through the NSCC or through 
intermediaries.\324\
---------------------------------------------------------------------------

    \320\ See, e.g., SIFMA AMG Comment Letter I; Invesco Comment 
Letter I; Nasdaq Comment Letter; CSIM Comment Letter.
    \321\ See, e.g., SIFMA AMG Comment Letter I; see also CSIM 
Comment Letter (``CSIM does not believe that disclosure of one 
standard basket for orders to create or redeem creation units on an 
ETF's website would be useful disclosure to either individual 
investors or authorized participants as proposed.'').
    \322\ See, e.g., CSIM Comment Letter; ICI Comment Letter. One 
commenter also noted that the proposed amendments to Form N-1A 
eliminated other disclosure that were relevant only to authorized 
participants and potentially confusing to secondary market 
investors. See ICI Comment Letter.
    \323\ See, e.g., Invesco Comment Letter; Nasdaq Comment Letter.
    \324\ See OppenheimerFunds Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, the Commission is not including 
in rule 6c-11 a requirement that an ETF post information regarding one 
published basket that it would exchange for orders to purchase or 
redeem creation units. We proposed this condition, in part, because we 
were concerned that certain market participants that needed access to 
basket information for arbitrage purposes would not have access to ETF 
portfolio composition files.\325\ However, we understand from 
commenters that market participants that use basket information, 
including those seeking to hedge exposure to an ETF, currently have 
access to this information through the NSCC, an intermediary, or the 
ETF itself. We are, however, requiring ETFs to provide daily website 
disclosure of portfolio holdings, which we believe will provide market 
participants with the necessary tools to determine if an arbitrage 
opportunity exists and to hedge the ETF's portfolio.\326\ As a result, 
we believe that the publication of a single published basket would 
provide little additional value to market participants assessing the 
existence of arbitrage opportunities. We also agree with commenters' 
concerns that some investors may confuse the published basket 
information with an ETF's portfolio holdings information.
---------------------------------------------------------------------------

    \325\ See 2018 ETF Proposing Release, supra footnote 7, at 
section II.5.b.
    \326\ See rule 6c-11(c)(1); see also 2018 ETF Proposing Release, 
supra footnote 7, at section II.C.4. (stating that without the 
ability to hedge, market makers may widen spreads or be reluctant to 
make markets because doing so may require taking on greater market 
risk than the firm is willing to bear).
---------------------------------------------------------------------------

    We requested comment on whether we should require an ETF to publish 
certain information regarding each basket used by the ETF to ameliorate 
some of the limitations associated with publication of a single basket 
each day and to serve as an additional check against overreaching by 
authorized participants.\327\ However, commenters stated that such a 
requirement would be costly to implement and unnecessarily burdensome, 
particularly because basket composition information is not used by 
secondary market investors.\328\ In addition, commenters asserted that 
publication of each basket could raise the risk that market 
participants front-run trades in basket securities or attempt to 
replicate authorized participants' or other market makers' trading 
strategies, particularly for those ETFs that have more frequent primary 
market transactions.\329\ Rule 6c-11 as adopted instead will require 
ETFs to maintain certain information regarding each basket exchanged 
with an authorized participant.\330\ We believe that this record 
keeping requirement is a more efficient way to ensure compliance with 
the rule, while

[[Page 57189]]

mitigating concerns regarding potential overreaching by authorized 
participants.
---------------------------------------------------------------------------

    \327\ See 2018 ETF Proposing Release, supra footnote 7, text 
following nn.269 and 272.
    \328\ See, e.g., ICI Comment Letter; SSGA Comment Letter I; 
Vanguard Comment Letter.
    \329\ See, e.g., ICI Comment Letter; SSGA Comment Letter I; 
SIFMA Comment Letter; Vanguard Comment Letter (also opining that 
publication of each custom basket could confuse investors); but see 
Morningstar Comment Letter (advocating for disclosure of all baskets 
in a structured format).
    \330\ See infra section II.D.
---------------------------------------------------------------------------

6. Website Disclosure
    There has been a significant increase in the use of the internet as 
a tool for disseminating information, and many investors obtain 
information regarding ETFs on ETF websites.\331\ Rule 6c-11 therefore 
will require ETFs to disclose certain information on their websites as 
a condition to the rule.\332\ The website disclosure requirements are 
designed to provide investors with key metrics to evaluate their 
investment and trading decisions in a format that is easily accessible 
and frequently updated.
---------------------------------------------------------------------------

    \331\ See, e.g., Reporting Modernization Adopting Release supra 
footnote 263.
    \332\ Rule 6c-11(c)(1).
---------------------------------------------------------------------------

    Specifically, under rule 6c-11 the following information must be 
disclosed publicly and prominently on the ETF's website: \333\
---------------------------------------------------------------------------

    \333\ See rule 6c-11(c)(1); see also supra footnote 226.
---------------------------------------------------------------------------

     NAV per share, market price, and premium or discount, each 
as of the end of the prior business day;
     A table and chart showing the number of days the ETF's 
shares traded at a premium or discount during the most recently 
completed calendar year and calendar quarters of the current year; 
\334\
---------------------------------------------------------------------------

    \334\ This requirement is similar to a current requirement in 
Item 11(g)(2) of Form N-1A, which requires disclosed percentages to 
be rounded to the nearest hundredth of one percent. See Current 
Instruction 2 to Item 11(g)(2) of Form N-1A. ETFs may similarly 
round percentages disclosed in response to this provision of rule 
6c-11.
---------------------------------------------------------------------------

     For ETFs whose premium or discount was greater than 2% for 
more than seven consecutive trading days, disclosure that the premium 
or discount was greater than 2%, along with a discussion of the factors 
that are reasonably believed to have materially contributed to the 
premium or discount; and
     Median bid-ask spread over the most recent thirty calendar 
days.
a. Disclosure of Prior Business Day's NAV, Market Price, and Premium or 
Discount
    As proposed, rule 6c-11 will require an ETF to post on its website 
the ETF's current NAV per share, market price, and premium or discount, 
each as of the end of the prior business day.\335\ This disclosure 
provides investors with a ``snapshot'' view of the difference between 
an ETF's NAV per share and market price on a daily basis.
---------------------------------------------------------------------------

    \335\ Rule 6c-11(c)(1)(ii); 2018 ETF Proposing Release, supra 
footnote 7, at section II.C.6. Proposed rule 6c-11 would have 
required this information ``as of the prior business day.'' Proposed 
rule 6c-11(c)(1)(ii). For clarity, the final rule will specify that 
the information be provided ``as of the end of the prior business 
day.'' Rule 6c-11(c)(1)(ii). This is consistent with our existing 
exemptive orders.
---------------------------------------------------------------------------

    Commenters generally supported this requirement, observing that the 
investors should have easy access to the required information.\336\ 
Some commenters, however, questioned the benefits of the premium or 
discount disclosure requirement. One such commenter stated that premium 
and discount disclosures do not provide the same benefit to 
shareholders as NAV per share and market price.\337\ Another commenter, 
while not objecting to the posting of daily premiums or discounts, 
opined that emphasizing this information would be unnecessary and--to 
the extent that a discount might be understood by prospective investors 
as a bargain--potentially misleading.\338\
---------------------------------------------------------------------------

    \336\ See ETF.com Comment Letter; ICI Comment Letter (stating 
that the commenter does ``not object to'' the requirement); NYSE 
Comment Letter (stating that the website disclosure requirements in 
rule 6c-11 ``sufficiently address Commission concerns about 
investors' better understanding trading costs''); Virtu Comment 
Letter; CSIM Comment Letter.
    \337\ See Invesco Comment Letter.
    \338\ See SSGA Comment Letter I (``Similarly, investors may 
choose not to buy ETF shares because of a premium, when in fact the 
NAV is based on stale prices from an earlier close.''). One 
commenter recommended that we also require footnote disclosure when 
premium or discount information is known to include inaccurate data 
due to exchange-hours overlap issues (i.e., when the ETF does not 
trade contemporaneously with its underlying holdings). See ETF.com 
Comment Letter. Rule 6c-11 as adopted will not require additional 
footnote disclosure in these circumstances because a majority of 
ETFs do not have this type of timing issue and the recommended 
disclosure may not capture other circumstances where an ETF's 
premium or discount reflects inaccurate data. ETFs may include this 
context alongside the premium/discount disclosures on their websites 
as applicable.
---------------------------------------------------------------------------

    We continue to believe that daily website disclosure of NAV per 
share and market price will promote transparency and alert investors to 
the relationship between NAV per share and market price. We also 
believe that this information will help investors better understand the 
risk that an ETF's market price may be higher or lower than the ETF's 
NAV per share and compare this information across ETFs. Daily premium/
discount disclosures also will provide investors with useful 
information regarding ETFs that frequently trade at a premium or 
discount to NAV per share.\339\ We believe that ETF investors use this 
information today.\340\
---------------------------------------------------------------------------

    \339\ Some ETFs have frequent deviations between closing market 
price and NAV per share. These ETFs typically hold non-U.S. 
securities and trade during hours when the markets for their non-
U.S. holdings are closed, allowing the trading price of ETF shares 
to reflect expected changes in the next opening price of the non-
U.S. holdings (i.e., to help ``discover'' the price of the 
holdings). ETFs also may have greater premiums and discounts to the 
extent that there are greater transaction costs associated with 
assembling baskets. In addition, an ETF with less liquid portfolio 
holdings also may show a deviation between closing market price and 
NAV per share, and an ETF with a less efficient arbitrage mechanism 
may frequently show this type of end of day deviation.
    \340\ One commenter suggested that investors are more likely to 
look for information on the website of the entity with which they 
interact, such as a broker-dealer. See JPMAM Comment Letter. 
However, we believe that ETF issuers, as the entities that are the 
subject of this rule's relief, should provide investors with this 
information to assist those shareholders who visit the ETF's website 
in the first instance. Moreover, another commenter stated that 
smaller investors rely predominantly on website disclosures for 
their investment analysis. See ETF.com Comment Letter.
---------------------------------------------------------------------------

    These disclosures are consistent with our exemptive orders except 
that rule 6c-11 includes a definition of ``market price'' that differs 
from the definition applicable to those orders. Rule 6c-11 defines 
``market price'' as: (A) The official closing price of an ETF share; or 
(B) if it more accurately reflects the market value of an ETF share at 
the time as of which the ETF calculates current NAV per share, the 
price that is the midpoint of the national best bid and national best 
offer (``NBBO'') as of that time.\341\
---------------------------------------------------------------------------

    \341\ See rule 6c-11(a)(1).
---------------------------------------------------------------------------

    One commenter addressed our proposed definition of ``market price'' 
and asserted that the rule should permit ETFs to use the midpoint of 
the NBBO without evaluating whether it more accurately reflects the 
market value of the ETF's shares.\342\ We continue to believe, however, 
that using the ``official closing price'' provides a more precise 
measurement of an ETF's market price than other alternatives, including 
during disruptive market events.\343\ Requiring use of the midpoint of 
the NBBO only if it more accurately reflects market value also provides 
an appropriate degree of flexibility to an ETF when its closing price 
may be stale or otherwise does not reflect the ETF share's market 
value, while at the same time providing a consistent and verifiable 
methodology for how ETFs determine market

[[Page 57190]]

price.\344\ Therefore, we have determined to adopt the definition of 
``market price'' for purposes of this website disclosure requirement as 
proposed.
---------------------------------------------------------------------------

    \342\ See WisdomTree Comment Letter. An ETF uses the market 
price of an ETF share in calculating premiums and discounts. See 
rule 6c-11(a)(1) (defining ``premium or discount'' to mean the 
positive or negative difference between the market price of an ETF 
share and the ETF's current NAV per share, expressed as a percentage 
of the ETF's current NAV per share).
    \343\ See 2018 ETF Proposing Release, supra footnote 7, at n.281 
and accompanying text. We believe that using the ``official closing 
price'' is a better measure than, for example, only the last price 
at which ETF shares traded on their principal U.S. trading market 
during a regular trading session, particularly in situations where 
the last trade of the day was not reflective of the actual market 
price (e.g., due to an erroneous order). Exchanges have detailed 
rules regarding the determination of the official closing price of a 
security.
    \344\ Use of the midpoint of the NBBO, for example, mitigates 
the potential for gaming practices that could inaccurately minimize 
a deviation between market price and NAV per share when showing 
premiums and discounts. Because security information processors 
calculate NBBO continuously during the trading day, NBBO has the 
benefit of being a verifiable third-party quote.
---------------------------------------------------------------------------

b. Disclosure of Table and Line Graphs of the ETF's Premiums and 
Discounts
    As proposed, rule 6c-11 will require an ETF to post on its website 
both a table and line graph showing the ETF's premiums and discounts 
for the most recently completed calendar year and the most recently 
completed calendar quarters of the current year.\345\ For new ETFs that 
do not yet have this information, the rule will require the ETF to post 
this information for the life of the fund.\346\ We believe that 
presenting the data as both a table and a line graph will provide 
investors with useful information in formats that are easy to view and 
understand, depending on the investor's preference.\347\ This 
disclosure is similar to current requirements that allow an ETF to omit 
certain premium/discount disclosures from its prospectus and annual 
report if the ETF posts on its website a table showing the number of 
trading days the ETF traded at a premium and the number of days it 
traded at a discount.\348\
---------------------------------------------------------------------------

    \345\ Rule 6c-11(c)(1)(iii)-(iv).
    \346\ For example, an ETF that has been in existence for 4 
months should provide this disclosure for its first quarter of 
operations.
    \347\ While past performance cannot predict how an ETF will 
trade in the future, it is important that investors, and 
particularly retail investors, understand that certain classes of 
ETFs could have a larger and more persistent deviation from NAV, 
which could result in a higher cost to investors and a potential 
drag on returns.
    \348\ See 2018 ETF Proposing Release, supra footnote 7, at n.300 
and accompanying text; see also infra section II.H.2.c. (discussing 
the elimination of this requirement in Form N-1A for funds relying 
on rule 6c-11).
---------------------------------------------------------------------------

    Commenters were generally supportive of this requirement.\349\ 
However, some commenters recommended that the rule require only one of 
the two presentations.\350\ We recognize, as commenters observed, that 
the same information underlies both presentations. However, each 
presentation highlights different information, as illustrated in Figure 
1 and Table 1 below. The tabular disclosure shows investors how often 
the ETF traded at a premium or discount. The graphic disclosure shows 
investors the degree of those deviations, particularly during periods 
of market stress, and could assist some investors with understanding 
how the arbitrage mechanism performs for an ETF under various market 
conditions.\351\ Different audiences also may find one presentation 
more effective.\352\ Therefore, we continue to believe that the rule 
should require both disclosures, and are adopting this aspect of the 
rule as proposed.
---------------------------------------------------------------------------

    \349\ See, e.g., JPMAM Comment Letter; ETF.com Comment Letter; 
ICI Comment Letter (does not object to requirements).
    \350\ John Hancock Comment Letter (recommending elimination of 
the proposed line graph requirement as it would result in disclosure 
duplicative of the table); WisdomTree Comment Letter (stating the 
line graph requirement would be adequate and that the required table 
would be too detailed).
    \351\ For example, two ETFs may have traded at a discount for 
the same number of days. One ETF's daily deviations could have been 
small with little effect on investors trading on those days, whereas 
the other ETF could have had significant discounts. These 
distinctions would not be apparent based on the required tabular 
disclosure, but would be observable with the graphic disclosure.
    \352\ Another commenter recommended that we require ETFs to 
provide a separate line graph showing an ETF's market price and NAV 
per share over the most recently completed calendar year and 
quarters. See JPMAM Comment Letter. While we agree that this context 
could be informative, we believe that the rule as proposed 
appropriately balances the usefulness of the line graph disclosure 
with the costs of preparation. Of course, ETFs may include this 
context alongside the required disclosures on their websites, so 
long as the information is not misleading.
[GRAPHIC] [TIFF OMITTED] TR24OC19.018


[[Page 57191]]



               Table 1--Sample Premium and Discount Table
------------------------------------------------------------------------
                                           Calendar year   First quarter
                                               2018           of 2019
------------------------------------------------------------------------
Days traded at premium..................             202              59
Days traded at discount.................              47               2
------------------------------------------------------------------------

    The rule will require historical premium/discount information for 
the most recently completed calendar year and the most recently 
completed calendar quarters of the current year as proposed. Some 
commenters recommended that we require ETFs to update this information 
on a daily basis or require ETFs to present intra-day premiums or 
discounts in certain circumstances.\353\ However, after considering the 
usefulness of timely information for investors and other data users and 
the costs of more frequent collection and publication of the 
information, we continue to believe the rule should require disclosure 
of this information only on a quarterly basis. First, this period is 
consistent with existing prospectus disclosure requirements, and we 
believe the time period will allow investors to readily observe the 
extent and frequency of deviations from NAV per share in a graphic 
format. Second, as discussed above, although the trailing historical 
data is subject to a less frequent quarterly updating requirement, the 
current premium or discount is required to be disclosed daily.
---------------------------------------------------------------------------

    \353\ See CFA Comment Letter; Eaton Vance Comment Letter; 
Comment Letter of Hagens Berman (Oct. 1, 2018) (``Hagens Berman 
Comment Letter''). (``[T]he new rule should require disclosure of 
the gross discount spreads that have reoccurred during times of high 
volatility or lack of liquidity.'').
---------------------------------------------------------------------------

c. Disclosure of ETF Premiums or Discounts Greater Than 2%
    As proposed, rule 6c-11 will require an ETF whose premium or 
discount was greater than 2% for more than seven consecutive trading 
days to post that information on its website,\354\ along with a 
discussion of the factors that are reasonably believed to have 
materially contributed to the premium or discount.\355\ We continue to 
believe that disclosure of such periods will promote transparency about 
the significance and persistence of deviations between market price and 
NAV per share, and may help investors to make more informed investment 
decisions.\356\
---------------------------------------------------------------------------

    \354\ We have modified the proposed rule text to further clarify 
that an ETF must post a statement that the ETF's premium or 
discount, as applicable, was greater than 2%--and not only the 
factors reasonably believed to have materially contributed to the 
premium or discount. See rule 6c-11(c)(1)(vi).
    \355\ Rule 6c-11(c)(1)(vi). The rule will require ETFs to post 
this information on their websites on the trading day immediately 
following the day on which the ETF's premium or discount triggered 
this provision (i.e., on the trading day immediately following the 
eighth consecutive trading day on which the ETF had a premium or 
discount greater than 2%) and maintain it on their websites for at 
least one year following the first day it was posted.
    \356\ 2018 ETF Proposing Release, supra footnote 7, at text 
preceding n.307 (stating that the proposed information also may 
provide the market (and the Commission) with information regarding 
the efficiency of an ETF's arbitrage mechanism).
---------------------------------------------------------------------------

    One commenter supported this requirement, stating that daily 
premium and discount information is an important metric for 
investors.\357\ This commenter stated that its internal metrics suggest 
that it would be unusual for ETFs to trigger the proposed disclosure 
requirement, and therefore the disclosure ``would not be burdensome'' 
for ETFs. Other commenters, however, opposed the proposed requirement, 
expressing concern that ETFs holding certain asset classes are more 
likely to trigger the requirement than others, and that disclosure by 
ETFs that frequently trigger the requirement could become 
inappropriately repetitive.\358\
---------------------------------------------------------------------------

    \357\ See Invesco Comment Letter.
    \358\ See, e.g., ICI Comment Letter; Nasdaq Comment Letter; 
WisdomTree Comment Letter.
---------------------------------------------------------------------------

    We recognize that this disclosure requirement may affect certain 
categories of ETFs more than others. An ETF that invests in foreign 
securities, for example, may be more likely to experience a persistent 
deviation between market price and NAV per share given that many 
foreign markets are closed during the U.S. trading day. Such deviations 
may be pronounced if the market on which the ETF's underlying 
securities trade is closed for an extended period of time. We believe 
that this information could help to inform investors about the nature 
of these ETFs and the potential for frequent deviations.
    However, we believe this requirement will affect a broader range of 
ETFs than just those investing in certain foreign markets. For example, 
we estimate that, out of a total 2,046 ETFs, 11 alternative ETFs, 20 
international equity ETFs, 2 sector equity ETFs, 1 taxable bond ETF, 
and 15 U.S. equity ETFs would have triggered the 2% premium or discount 
disclosure requirement in 2018.\359\ In addition, during the period 
from 2008 to 2018, we estimate that the percentage of ETFs that would 
have triggered the reporting requirement at least once varied from 1.5% 
to 10%.\360\ Even if certain ETFs make the disclosure more frequently 
or predictably than others because of this variation, we believe that 
the requirement will promote transparency regarding the significance 
and persistence of deviations between market price and NAV per share, 
and thus may permit investors to make more informed investment 
decisions. Moreover, we believe that this disclosure helps inform 
investors that certain types of ETFs are more likely to experience 
persistent premiums or discounts than others.
---------------------------------------------------------------------------

    \359\ These figures are based on Bloomberg and Morningstar data 
for calendar year 2018 and estimate the number of ETFs with at least 
one instance that would have triggered the 2% premium or discount 
reporting requirement. As discussed in detail below, on a percentage 
basis, we estimate that 0.3% of taxable bond ETFs, 0.6% of sector 
equity ETFs, 3.1% of U.S. equity ETFs, 4.2% of international equity 
ETFs, and 4.8% of alternative ETFs would have triggered this 
disclosure requirement in 2018.
    \360\ See infra footnote 598 and accompanying text.
---------------------------------------------------------------------------

    Other commenters expressed concern with the requirement that an ETF 
include a discussion of the factors that are reasonably believed to 
have contributed to the premium or discount.\361\ These commenters 
stated that an ETF may have difficulty identifying these factors before 
it makes the required disclosure. Although the required information 
will be subjective in some cases, we believe that this requirement can 
provide secondary market investors with useful context for the 
disclosed deviations. For example, the identification of factors that 
are reasonably believed to contribute to the premium or discount at 
that time may inform ETF investors and other market participants about 
factors potentially contributing to the premium or discount, even if 
additional contributing factors may later be identified. Such disclosed 
factors might include, for example, that many of an ETF's portfolio 
securities are traded on foreign markets that are closed during the 
U.S. trading day or that the markets on

[[Page 57192]]

which the ETF's underlying securities are traded were closed due to 
extended holidays or for other reasons. Because the requirement to 
disclose these factors will continue to apply while the premium or 
discount persists, the disclosure may change and become better 
developed over time as the ETF refines its analysis of what it 
reasonably believes is causing the persistent premium or discount. As a 
result, such a disclosure also could inform ETF investors and other 
market participants about the premium's or discount's persistence.
---------------------------------------------------------------------------

    \361\ See ICI Comment Letter; SSGA Comment Letter I.
---------------------------------------------------------------------------

    Another commenter recommended that we shorten the time an ETF is 
required to maintain the disclosure on its website (to, e.g., 45 days), 
asserting that the required information is likely to be most useful 
when it is most recent and grows less important over time.\362\ Rule 
6c-11, however, will require ETFs to maintain the disclosure on their 
website for at least one year following the first day it was posted to 
help investors identify ETFs that historically have had persistent 
deviations between market price and NAV per share. Additionally, 
although we are requiring maintenance of this disclosure for at least 
one year, the requirement to post the information will continue to 
apply as the premium or discount persists--that is, the one-year 
maintenance requirements will not obviate the need for an ETF to post 
more current information if otherwise required.\363\ Thus, the 
continued availability of the posted information over the required one-
year period will not substitute for or prevent more current and timely 
disclosure.
---------------------------------------------------------------------------

    \362\ CSIM Comment Letter.
    \363\ Rule 6c-11(c)(1)(vi).
---------------------------------------------------------------------------

    Finally, some commenters expressed concerns with the 2% 
threshold.\364\ For example, one commenter recommended a materiality 
standard instead of a 2% threshold.\365\ Another commenter recommended 
raising the threshold to 5 or 10% and shortening the period over which 
it is measured.\366\ As discussed above, in the Commission's 
experience, the deviation between the market price of ETFs and NAV per 
share, averaged across broad categories of ETF investment strategies 
and over time periods of several months, has been relatively 
small.\367\ We therefore believe that limiting this disclosure to ETFs 
that have a premium or discount of greater than 2% for more than seven 
consecutive trading days will serve to highlight potentially unusual 
circumstances of an ETF with a persistent premium or discount. In Table 
2 below, we summarize the effect that different variations on the 
proposed threshold recommended by the commenter would have had on the 
number of ETFs that would have triggered the requirement in 2018.
---------------------------------------------------------------------------

    \364\ See John Hancock Comment Letter; Nasdaq Comment Letter; 
WisdomTree Comment Letter (asserting that the proposed threshold was 
``arbitrary'').
    \365\ See John Hancock Comment Letter.
    \366\ See Nasdaq Comment Letter.
    \367\ See supra footnote 360 and accompanying text; 2018 ETF 
Proposing Release, supra footnote 7, at nn.119-120, 307 and 
accompanying text (discussing the relatively small size of historic 
deviations between ETF market prices and NAV per share in the 
context of calibrating the threshold).

                                        Table 2--Number of ETFs That Would Have Triggered the Requirement in 2018
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           3-Day period                                    7-Day period
                        Category                         -----------------------------------------------------------------------------------------------
                                                                2%              5%              10%             2%              5%              10%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation..............................................               2  ..............  ..............  ..............  ..............  ..............
Alternative.............................................              15               2  ..............              11  ..............  ..............
Commodities.............................................  ..............  ..............  ..............  ..............  ..............  ..............
International Equity....................................              48               4  ..............              20               1  ..............
Municipal Bond..........................................  ..............  ..............  ..............  ..............  ..............  ..............
Sector Equity...........................................              10               1  ..............               2               1  ..............
Taxable Bond............................................               3  ..............  ..............               1  ..............  ..............
U.S. Equity.............................................              29               5  ..............              15               3  ..............
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................             107              12            None              49               5            None
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As shown above, a 10% threshold would not have required any ETFs to 
provide this information in 2018, and a 5% threshold, even over just a 
three-day period, would have only required disclosure by 12 ETFs. After 
considering the commenter's recommended modifications to the threshold, 
we believe that the proposed threshold of 2% over more than seven 
consecutive trading days will more effectively highlight those patterns 
of sustained premiums or discounts that will be informative to 
investors than will the recommended alternatives. We also believe that 
in this circumstance the objective 2% threshold will result in more 
consistent application of the disclosure requirement than would a more 
subjective materiality standard. Furthermore, deviations that do not 
meet the objective 2% threshold, but that would be material to an 
investment decision, must be disclosed.\368\
---------------------------------------------------------------------------

    \368\ See rule 10b-5 under the Exchange Act [17 CFR 240.10b-5]; 
see also section 34(b) of the Act [15 U.S.C. 80a-33].
---------------------------------------------------------------------------

d. Median Bid-Ask Spread
    Rule 6c-11 will require daily website disclosure of the ETF's 
median bid-ask spread calculated over the most recent 30-day 
period.\369\ The bid-ask spread information is designed to inform 
investors that they may bear bid-ask spread costs when trading ETFs on 
the secondary market, which ultimately could impact the overall cost of 
the investment. We have modified this requirement from our proposal, 
which would have required an ETF to disclose the median bid-ask spread 
for the ETF's most recent fiscal year on its website and in its 
prospectus.\370\
---------------------------------------------------------------------------

    \369\ Rule 6c-11(c)(1)(v). In calculating the median bid-ask 
spread, an ETF would be required to: (i) Identify the ETF's NBBO as 
of the end of each 10 second interval during each trading day of the 
last 30 calendar days; (ii) divide the difference between each such 
bid and offer by the midpoint of the NBBO; and (iii) identify the 
median of those values.
    \370\ Although we proposed these bid-ask spread disclosure 
requirements as amendments to Forms N-1A and N-8B-2, rule 6c-11 will 
require ETFs relying on it to provide median bid-ask spread 
disclosure on its website as a condition to the rule. Our amendments 
to Form N-1A will provide an ETF that does not rely on rule 6c-11 
with the option of providing the information required by rule 6c-11 
on its website or the median bid-ask spread over the ETF's most 
recent fiscal year in its prospectus. See infra section II.H.2.b.
---------------------------------------------------------------------------

    Comments on the proposed website disclosure of an ETF's bid-ask 
spread were mixed. Many commenters opposed this requirement, asserting 
that the proposed disclosures would require ETFs to bear costs and 
liability for data

[[Page 57193]]

collected by third parties,\371\ and that other sources (e.g., 
financial intermediaries, the Commission) were in a better position to 
provide bid-ask spread information.\372\ Some commenters noted that the 
bid-ask spread information may be misleading to investors if the 
historical information is not representative of current execution costs 
or if the bid-ask spread information is overemphasized.\373\ Others 
expressed concern that there is no uniform method for computing bid-ask 
spread, which could make bid-ask spreads difficult to compare across 
different investment options.\374\ Still others supported it as an 
alternative to the parallel proposed prospectus disclosure 
requirements.\375\ For example, some commenters stated that providing 
more recent bid-ask spread data on an ETF's website alongside other ETF 
trading data would give investors more useful and timely 
information.\376\ Commenters also expressed concern about potential 
liability under section 11 of the Securities Act for bid-ask spread 
data included in the prospectus if an investor's actual bid-ask spread 
costs differ materially from the bid-ask spread disclosed in the 
prospectus.\377\
---------------------------------------------------------------------------

    \371\ See, e.g., BNY Mellon Comment Letter; John Hancock Comment 
Letter.
    \372\ See, e.g., IDC Comment Letter; Invesco Comment Letter; 
SSGA Comment Letter I.
    \373\ See, e.g., John Hancock Comment Letter; CSIM Comment 
Letter.
    \374\ See, e.g., IDC Comment Letter; John Hancock Comment 
Letter.
    \375\ See, e.g., Fidelity Comment Letter (expressing support for 
website disclosure with a rolling 30-day median calculation 
methodology); Dechert Comment Letter; Thomson Hine Comment Letter.
    \376\ See, e.g., OppenheimerFunds Comment Letter; SIFMA AMG 
Comment Letter I.
    \377\ See, e.g., ABA Comment Letter; CSIM Comment Letter; 
Dechert Comment Letter; 15 U.S.C. 77k.
---------------------------------------------------------------------------

    While we recognize the costs for ETFs to collect and publish this 
bid-ask spread data, we believe that quantitative information regarding 
median bid-ask spreads will provide ETF investors with greater 
understanding of the costs associated with investing in ETFs. This will 
help investors make more informed investment decisions. We acknowledge 
that historical bid-ask spread data may reflect differences that result 
from varying methods of computing bid-ask spread. However, we have 
modified the proposal in several respects, such as using NBBO for 
computing the bid-ask spread, to make the computation more uniform. We 
therefore do not believe that the variance will be large enough to 
outweigh the importance of giving investors a greater understanding of 
these potential trading costs. We similarly understand that bid-ask 
spread may not reflect an individual investor's actual spread, as an 
individual's spread may depend on the execution strategies employed by 
an intermediary (such as mid-point pricing), the size of a particular 
order, or other factors. We nonetheless believe that the bid-ask spread 
is a helpful tool for investors making better informed trading 
decisions and that website disclosure can provide that information in a 
format that is easily accessible and relied upon by investors.
    Based on comments we received, however, we are modifying certain of 
the bid-ask spread requirements to make the disclosure more cost-
effective for ETFs, while maintaining or enhancing the utility for 
investors. First, the rule will require an ETF to disclose its median 
bid-ask spread only on its website, instead of requiring disclosure 
both on an ETF's website and in its prospectus as proposed.\378\ ETFs 
will present the median bid-ask spread disclosure alongside other ETF-
specific disclosures, such as premium and discount and market price, 
which should mitigate some commenters' concerns relating to the 
overemphasis of bid-ask spread data.
---------------------------------------------------------------------------

    \378\ See infra section II.H.3. (discussing our determination 
not to adopt certain prospectus disclosure requirements that we 
proposed).
---------------------------------------------------------------------------

    Second, some commenters suggested shortening the look-back period 
for calculating the bid-ask spread metric, such as to a 30- or 45-day 
rolling period.\379\ One commenter noted that a shorter look-back 
period may show a more representative spread level, particularly for a 
newly launched ETF, as spreads are likely to tighten as the ETF 
matures.\380\ Several commenters also suggested that the Commission 
require ETFs to provide a time-weighted average bid-ask spread rather 
than the proposed median bid-ask spread.\381\ These commenters stated 
that a time-weighted average is more helpful for investors because it 
represents a ``typical'' bid-ask spread.
---------------------------------------------------------------------------

    \379\ See, e.g., BlackRock Comment Letter (30-day period); BNY 
Mellon Comment Letter (30-day period); Cboe Comment Letter (45-day 
period); ETF.com Comment Letter (45-day period).
    \380\ See BlackRock Comment Letter (providing an example showing 
an ETF that saw its spread improve from 35 basis points at inception 
in January 2016 to 4.03 basis points in July 2018, and observing 
that its median bid-ask spread over the prior fiscal year ending 
July 31, 2018 was 6.34 basis points, while its median bid-ask spread 
over the prior month was 4.03 basis points).
    \381\ See, e.g., Fidelity Comment Letter; JPMAM Comment Letter.
---------------------------------------------------------------------------

    We agree that a bid-ask spread metric based on the more recent 
inputs from the last 30 days may provide a better representation of the 
costs that an investor may incur when trading ETF shares. Accordingly, 
we are shortening the look-back period for calculating the bid-ask 
spread from the most recent fiscal year to the most recent 30-day 
period on a rolling basis.\382\ We think the 30-day look-back period 
strikes an appropriate balance between reflecting only very short term 
fluctuations and reflecting information that is no longer 
representative of current execution costs. We do not think it is 
necessary to require a time-weighted average rather than the proposed 
median, however, because rule 6c-11 requires an ETF to determine the 
median by first identifying the exchange-traded fund's national best 
bid and national best offer as of the end of each 10 second interval 
during each trading day. This methodology (and the resulting number of 
data points) has the same effect as time-weighting. In addition, 
requiring an ETF to disclose the median of bid-ask spreads is less 
likely to give disproportionate effect to outlier values than a time-
weighted average.
---------------------------------------------------------------------------

    \382\ Rule 6c-11(c)(1)(v).
---------------------------------------------------------------------------

    Finally, we are modifying the proposal to require that an ETF use 
the NBBO in calculating median bid-ask spreads.\383\ While the proposal 
did not specify that the NBBO must be used, after considering comments 
recommending more uniformity regarding bid-ask spread disclosures,\384\ 
we believe that requiring ETFs to use the NBBO when calculating the 
median will increase consistency and comparability of the resulting 
disclosure across ETFs.\385\ In addition, we believe that requiring use 
of NBBO will help to reduce costs associated with obtaining the 
required information, because the NBBO also is an input to the market 
price disclosure requirement.
---------------------------------------------------------------------------

    \383\ Rule 6c-11(c)(1)(v)(A)-(B).
    \384\ See supra footnote 375 and accompanying text.
    \385\ The NBBO also is used in the definition of market price in 
rule 6c-11. Rule 6c-11(a)(1); see also supra section II.C.6.a. 
Requiring NBBO is likely to result in more uniform and comparable 
calculations across funds.
---------------------------------------------------------------------------

    We also proposed related amendments to Form N-1A that would have 
required an ETF to provide: (i) Examples in the ETF's prospectus 
showing how bid-ask spreads impact the return on a hypothetical 
investment for both buy-and-hold and frequent traders; and (ii) an 
interactive calculator in a clear and prominent format on the ETF's 
website that would allow an investor to customize the hypothetical bid-
ask spread calculations to its specific investing situation.\386\ These

[[Page 57194]]

requirements were designed to allow secondary market investors to see 
the impact that bid-ask spreads can have on the investor's trading 
expenses and ultimately the return on investment.
---------------------------------------------------------------------------

    \386\ See proposed amendment to Item 3 of Form N-1A. The 
proposed spread costs example would demonstrate the hypothetical 
impact of the ETF's bid-ask spread for one $10,000 ``round-trip'' 
trade (i.e., one buy and sell transaction) and, to illustrate that 
more frequent trading can significantly increase costs, it would 
demonstrate the costs associated with 25 $10,000 round-trip trades 
(50 total trades). 2018 ETF Proposing Release, supra footnote 7, at 
section II.H.2.
---------------------------------------------------------------------------

    Commenters generally opposed requiring bid-ask spread examples in 
the summary prospectus or summary section. For example, some commenters 
expressed concerns regarding the costs of obtaining the underlying bid-
ask spread data from third parties.\387\ Some commenters also noted 
that the historical bid-ask spread data, which ETFs would use to 
calculate the examples, is not representative of current trading costs 
and could mislead investors if disclosures overemphasize this 
information.\388\ Other commenters suggested alternatives to the 
proposed examples such as using hypothetical brokerage commissions and 
bid-ask spreads, rather than using actual historical bid-ask 
spreads.\389\ However one commenter supported this aspect of the 
proposal, stating that it would yield ``relevant and helpful'' 
information.\390\
---------------------------------------------------------------------------

    \387\ See, e.g., BNY Mellon Comment Letter; ICI Comment Letter; 
John Hancock Comment Letter; OppenheimerFunds Comment Letter.
    \388\ See, e.g., Vanguard Comment Letter (noting that in the 
second quarter of 2018, Vanguard's retail brokerage clients paid 
less than 5% of the bid-ask spread when trading Vanguard ETFs with 
an effective spread/quoted spread of 1.89%, and approximately 97% of 
those market orders were executed inside the NBBO, with 94% of those 
orders at midpoint or better). See also ABA Comment Letter; 
BlackRock Comment Letter; CSIM Comment Letter.
    \389\ See, e.g., SIFMA AMG Comment Letter II.
    \390\ See FIMSAC Comment Letter.
---------------------------------------------------------------------------

    Many commenters raised similar concerns regarding the proposed 
interactive calculator, including that varying data sources and 
calculation methodologies may result in an inconsistent investor 
experience across ETFs.\391\ Other commenters noted that the 
interactive calculator was limited to bid-ask spread data, which placed 
undue emphasis on spreads as a component of an ETF investor's trading 
costs.\392\ Commenters also noted that the proposed requirement may 
result in additional vendor and licensing costs.\393\
---------------------------------------------------------------------------

    \391\ Fidelity Comment Letter; Invesco Comment Letter; SIFMA 
Comment Letter I; Vanguard Comment Letter.
    \392\ See, e.g., Vanguard Comment Letter. See also Eaton Vance 
Comment Letter (recommending replacing the proposed interactive 
calculator with new requirements for website trading information).
    \393\ See, e.g.; ICI Comment Letter; JPMAM Comment Letter. See 
also WisdomTree Comment Letter (stating that broker-dealers are 
better suited to provide the information required by the proposed 
interactive calculator).
---------------------------------------------------------------------------

    After considering comments, we are not adopting the proposed bid-
ask spread examples or interactive calculator requirements. We are 
instead requiring ETFs relying on rule 6c-11 to provide more recent 
bid-ask spread information on their website. We believe that 
streamlining the required bid-ask spread disclosures will mitigate 
commenters' concerns that investors may fail to understand the 
relevance of the bid-ask spread information or the potential impact of 
bid-ask spreads on their specific trading situations. We are also 
persuaded by commenters that an interactive calculator focused solely 
on bid-ask spread costs may overemphasize those costs and thereby 
obscure the effect of other costs of investing in ETFs.
7. Marketing
    As proposed, rule 6c-11 will not include certain requirements 
related to ETF marketing, which were included in our exemptive orders. 
Specifically, rule 6c-11 will not require an ETF to: (i) Identify 
itself in its sales literature as an ETF that does not sell or redeem 
individual shares, and (ii) explain that investors may purchase or sell 
individual ETF shares through a broker via a national securities 
exchange.\394\ Our exemptive orders included a condition requiring this 
information to help prevent investors, particularly retail investors, 
from confusing ETFs with mutual funds, at a time when ETFs were not a 
well-known investment product.
---------------------------------------------------------------------------

    \394\ See 2018 ETF Proposing Release, supra footnote 7.
---------------------------------------------------------------------------

    The comments on this aspect of the proposal were mixed. Commenters 
who supported the proposal generally agreed that the market has 
developed a familiarity with ETFs and that retail investors generally 
understand that, unlike mutual funds, individual ETF shares may be 
purchased and sold only on secondary markets.\395\ One commenter 
disagreed, asserting that many investors do not understand the 
distinctions between ETFs and mutual funds.\396\ This commenter 
suggested that the rule require an ETF to include a statement in its 
sales literature noting that buyers of ETF shares may pay more than the 
shares' current value and that sellers of ETF shares may receive less 
than current value. Another commenter noted that requiring this type of 
disclosure in ETF sales literature would help put investors on notice 
that the ETF pricing mechanism works differently than that of mutual 
funds.\397\
---------------------------------------------------------------------------

    \395\ See, e.g., Invesco Comment Letter; ICI Comment Letter.
    \396\ Eaton Vance Comment Letter.
    \397\ CFA Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that ETF investors have grown familiar with 
ETFs and the fundamental distinctions between ETFs and mutual funds, 
and that this disclosure is now unnecessary. The disclosure 
requirements we are adopting also should provide ETF investors, 
including retail investors, with useful information regarding the 
exchange-traded nature of ETFs and ETF pricing, including the potential 
for market price to deviate from NAV per share.\398\
---------------------------------------------------------------------------

    \398\ The website disclosure requirements are described in 
section II.C.6 and the amendments to Form N-1A are described in 
section II.H.
---------------------------------------------------------------------------

8. ETF and ETP Nomenclature
    We requested comment on whether the Commission should address 
possible investor confusion arising from the nomenclature that has 
developed for identifying ETPs, including confusion between ETFs and 
other types of ETPs that are not registered under the Act.\399\ We 
asked, for example, whether the Commission should consider proposing to 
require a naming convention or other identification scheme to assist 
investors in distinguishing ETFs from other ETPs in a future 
rulemaking. We also asked whether we could address investor confusion 
by restricting certain sales practices, such as by proposing 
restrictions on how intermediaries communicate with retail investors 
about ETPs unless they disclose certain information designed to clearly 
differentiate ETPs that are not subject to the Act from ETFs that are 
registered investment companies.
---------------------------------------------------------------------------

    \399\ See 2018 ETF Proposing Release, supra footnote 7, at 
section II.C.7. See also supra footnote 16 (describing differences 
between ETFs and other types of ETPs, such as exchange-traded notes 
and commodity pools).
---------------------------------------------------------------------------

    Several commenters generally supported a classification system for 
ETPs to assist investors in distinguishing among these different 
products.\400\ One commenter stated that leveraged/inverse ETFs, 
commodity pools, and exchange-traded notes have differences that 
investors should understand prior to making investment decisions.\401\ 
Commenters expressed varying views, however, regarding

[[Page 57195]]

which types of ETPs should call themselves ETFs under an ETP 
classification system. One commenter asserted that the Commission 
should permit only ETFs that fall squarely within proposed rule 6c-11 
to call themselves ETFs.\402\ Two commenters provided examples of 
comprehensive classification systems for ETPs that would not permit 
``exchange-traded notes,'' ``exchange-traded commodities,'' or 
``exchange-traded instruments'' (including leveraged/inverse ETFs) to 
refer to themselves as ETFs.\403\ One commenter opined that the 
Commission should not preclude leveraged/inverse ETFs from calling 
themselves ETFs, as that would ``confuse investors and muddle both the 
existing regulatory framework applicable to ETFs and fund naming 
conventions.'' \404\ Another commenter asserted that UITs and other 
ETFs that fall outside the scope of the rule should nonetheless be 
permitted to call themselves ETFs.\405\
---------------------------------------------------------------------------

    \400\ See, e.g., BlackRock Comment Letter; Invesco Comment 
Letter; Cboe Comment Letter; FIMSAC Comment Letter; Hu and Morely 
Comment Letter (incorporating article by comment letter's authors 
suggesting that ETFs can be categorized into three groups, 
``Investment Company ETFs,'' ``Commodity Pool ETFs,'' and 
``Operating Company ETFs,'' based on the applicable regulatory 
framework, but not suggesting a related nomenclature system).
    \401\ See Invesco Comment Letter. See also BlackRock Comment 
Letter.
    \402\ See Invesco Comment Letter.
    \403\ See BlackRock Comment Letter; FIMSAC Comment Letter.
    \404\ See ProShares Comment Letter.
    \405\ See SIFMA AMG Comment Letter I.
---------------------------------------------------------------------------

    One commenter asserted that Commission action relating to ETP 
naming is premature at the present time.\406\ This commenter encouraged 
ETF market participants to engage in a dialogue ``around refining 
existing ETP disclosures, adding new elements as useful to investors, 
and developing an industry-led standard ETP disclosure approach 
beneficial to investors and all market participants.''
---------------------------------------------------------------------------

    \406\ See Comment Letter of State Street Global Advisors (Feb. 
4, 2019).
---------------------------------------------------------------------------

    We agree that these issues need to be examined and discussed in 
more depth before the implementation of an ETP naming system. We will 
continue to consider the comments we received and, if appropriate, will 
take steps to address investor confusion relating to ETF and ETP 
nomenclature. At present, we believe that the term ``ETF'' is generally 
associated with ETPs regulated under the Investment Company Act. 
Leveraged/inverse ETFs, for example, are regulated under the Act and 
are structurally and operationally similar to ETFs that will rely on 
rule 6c-11. As a result, we do not believe it is appropriate to require 
leveraged/inverse ETFs to use a naming convention that does not include 
the term ``ETF.'' Similarly, because UIT ETFs are subject to a 
substantially similar regulatory regime as ETFs structured as open-end 
funds (and subject to similar regulatory safeguards), we do not find it 
appropriate to require UIT ETFs to utilize a naming convention that 
does not include the term ``ETF.'' We encourage ETP market participants 
to continue engaging with their investors, with each other, and with 
the Commission on these issues.

D. Recordkeeping

    We are adopting, as proposed, an express requirement that ETFs 
relying on rule 6c-11 preserve and maintain copies of all written 
agreements between an authorized participant and the ETF (or one of the 
ETF's service providers) that allow the authorized participant to 
purchase or redeem creation units (``authorized participant 
agreements'').\407\ One commenter supported this aspect of the 
proposal.\408\ Another commenter, however, stated that this requirement 
is unnecessary because ETFs already generally implement robust 
recordkeeping programs pursuant to their policies and procedures.\409\
---------------------------------------------------------------------------

    \407\ See rule 6c-11(d)(1). For example, an authorized 
participant and the ETF's principal underwriter may enter into the 
authorized participant agreement.
    \408\ See ICI Comment Letter.
    \409\ See Invesco Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we believe it is appropriate for 
rule 6c-11 to specifically require that ETFs preserve and maintain 
authorized participant agreements. Authorized participants play a 
central role in the proper functioning of the ETF marketplace and 
authorized participant agreements are critical to understanding the 
relationship between an authorized participant and an ETF. Requiring 
the preservation of authorized participant agreements is designed to 
provide our examination staff with a basis to determine whether the 
relationship between the ETF and the authorized participant is in 
compliance with the requirements of rule 6c-11 and other provisions of 
the Act and rules thereunder, based on the specific terms of their 
written agreement. While we believe that most ETFs are currently 
preserving copies of their written authorized participant agreements 
pursuant to our current recordkeeping rules, for avoidance of doubt, we 
believe it is appropriate to expressly require that ETFs relying on 
rule 6c-11 preserve and maintain copies of all such agreements.
    We also are adopting, largely as proposed, a requirement that ETFs 
maintain information regarding the baskets exchanged with authorized 
participants. Rule 6c-11 will require an ETF to maintain records 
setting forth the following information for each basket exchanged with 
an authorized participant: (i) Ticker symbol, CUSIP or other 
identifier, description of holding, quantity of each holding, and 
percentage weight of each holding composing the basket exchanged for 
creation units; \410\ (ii) if applicable, an identification of the 
basket as a ``custom basket'' and a record stating that the custom 
basket complies with the ETF's custom basket policies and procedures; 
(iii) cash balancing amounts (if any); and (iv) the identity of the 
authorized participant conducting the transaction.\411\
---------------------------------------------------------------------------

    \410\ As discussed below, proposed rule 6c-11 would have 
required ETFs to maintain the ``names and quantities of the 
positions composing the basket'' exchanged for creation units and 
did not require additional information about the ticker symbol, 
CUSIP or other identifier, or a description of the holding. See 
proposed rule 6c-11(d)(2).
    \411\ See rule 6c-11(d)(2).
---------------------------------------------------------------------------

    Commenters generally supported requiring ETFs to maintain records 
regarding baskets.\412\ One commenter stated that clear, auditable 
records would help Commission staff monitor custom basket usage and its 
impact on the ETF arbitrage process.\413\ Another agreed that the 
records would provide Commission staff with a basis to understand how 
baskets are being used by ETFs and to evaluate compliance with the rule 
and other requirements.\414\ As noted above, one commenter stated that 
it is unnecessary for the rule to contain any recordkeeping 
provisions.\415\
---------------------------------------------------------------------------

    \412\ See ICI Comment Letter; Nasdaq Comment Letter; SIFMA AMG 
Comment Letter I.
    \413\ See SIFMA AMG Comment Letter I.
    \414\ See ICI Comment Letter.
    \415\ See Invesco Comment Letter.
---------------------------------------------------------------------------

    After considering these comments, we believe that requiring ETFs to 
maintain records regarding each basket exchanged with authorized 
participants will provide our examination staff with a basis to 
understand how baskets are being used by ETFs, particularly with 
respect to custom baskets. In order to provide our examination staff 
with detailed information regarding basket composition, however, we 
have modified rule 6c-11 to require the ticker symbol, CUSIP or other 
identifier, description of holding, quantity of each holding, and 
percentage weight of each holding composing the basket exchanged for 
creation units as part of the basket records, instead of the name and 
quantities of each position as proposed.\416\ We believe that this 
additional information will better enable our examination staff to 
evaluate compliance with the rule and other applicable provisions of 
the federal securities laws. Moreover, we do not believe that requiring 
ETFs to maintain

[[Page 57196]]

detailed information regarding basket composition will create 
operational challenges or unduly burden ETFs because rule 6c-11 already 
requires ETFs to disclose the same information for each portfolio 
holding as part of the portfolio transparency requirements.\417\
---------------------------------------------------------------------------

    \416\ See proposed rule 6c-11(d)(2).
    \417\ This modification aligns the rule's recordkeeping 
requirements in paragraph (d) with the information the ETF must 
already collect and disclose as part of the portfolio transparency 
requirements. Proposed rule 6c-11 would have required an ETF to post 
on its website information regarding a published basket at the 
beginning of each business day and to present the description, 
amount, value and unrealized gain/loss in the manner prescribed by 
Article 12 of Regulation S-X for each basket asset. As discussed 
above, we are not adopting a basket publication requirement as part 
of rule 6c-11, and therefore the rule does not set forth 
recordkeeping requirements relating to the proposed basket 
publication requirement. See supra section II.C.5.c.
---------------------------------------------------------------------------

    As proposed, the rule will require ETFs to maintain these records 
for at least five years, the first two years in an easily accessible 
place. The retention period is consistent with the period provided in 
rules 22e-4 and 38a-1(d) under the Act. Funds currently have compliance 
program-related recordkeeping procedures in place that incorporate this 
type of retention period and we believe consistency with that period 
will minimize any compliance burdens to ETFs subject to rule 6c-11. The 
commenter that addressed this aspect of the recordkeeping requirement 
supported the proposed retention period.\418\
---------------------------------------------------------------------------

    \418\ See Invesco Comment Letter (agreeing with the five-year 
retention timeline despite generally objecting to the rule's 
recordkeeping requirements).
---------------------------------------------------------------------------

E. Share Class ETFs

    As proposed, rule 6c-11 does not provide relief from sections 
18(f)(1) or 18(i) of the Act or expand the scope of 17 CFR 270.18f-3 
(rule 18f-3) (the multiple class rule).\419\ Sections 18(f) and (i) of 
the Act were intended, in large part, to protect investors from certain 
abuses associated with complex investment company capital structures, 
including conflicts of interest among a fund's share classes.\420\ 
These provisions also were designed to address certain inequitable and 
discriminatory shareholder voting provisions that were associated with 
many investment company securities before the enactment of the 
Act.\421\ Rule 18f-3 created a limited exception from sections 18(f)(1) 
and 18(i) for certain funds but requires, among other things, that each 
share class of a fund have the same rights and obligations as each 
other class.\422\ An ETF cannot rely on rule 18f-3 to operate as a 
share class within a fund, however, because the rights and obligations 
of the ETF shareholders would differ from those of investors in the 
fund's mutual fund share classes.\423\ Therefore, absent any separate 
relief from sections 18(f)(1) or 18(i) of the Act, an ETF structured as 
a share class of a fund that issues multiple classes of shares 
representing interests in the same portfolio cannot operate in reliance 
on rule 6c-11.
---------------------------------------------------------------------------

    \419\ See 15 U.S.C. 80a-18(f)(1) and (i). Section 18(f)(1) of 
the Act generally prohibits a registered open-end company from 
issuing a class of ``senior security,'' which is defined in section 
18(g) to include any stock of a class having priority over any other 
class as to distribution of assets or payment of dividends. See 15 
U.S.C. 80a-18(g). Section 18(i) of the Act provides that all shares 
of stock issued by a registered management company must have equal 
voting rights.
    \420\ See Exemption for Open-End Management Investment Companies 
Issuing Multiple Classes of Shares, Investment Company Act Release 
No. 19955 (Dec. 15, 1993) [58 FR 68074 (Dec. 23, 1993)] (proposing 
release), at nn.20 and 21 and accompanying text.
    \421\ See id.
    \422\ See 17 CFR 270.18f-3(a)(4); Exemption for Open-End 
Management Companies Issuing Multiple Classes of Shares, Investment 
Company Act Release No. 20915 (Feb. 23, 1995) [60 FR 11876 (Mar. 2, 
1995)] (adopting release) (``Multiple Class Adopting Release''), at 
n.8 and accompanying text.
    \423\ For example, ETF shares would be redeemable only in 
creation units, while the investors in the fund's mutual fund share 
classes would be individually redeemable. Similarly, ETF shares are 
tradeable on the secondary market, whereas mutual fund shares 
classes would not be traded.
---------------------------------------------------------------------------

    We recognize that the Commission has previously granted ETFs 
exemptive relief from the provisions of section 18 of the Act in the 
past, subject to various conditions.\424\ However, relief from section 
18 raises policy considerations that are different from those we are 
seeking to address in this rule. For example, an ETF share class that 
transacts with authorized participants on an in-kind basis and a mutual 
fund share class that transacts with shareholders on a cash basis may 
give rise to differing costs to the portfolio. As a result, while 
certain of these costs may result from the features of one share class 
or another, all shareholders would generally bear these portfolio 
costs.\425\
---------------------------------------------------------------------------

    \424\ See Vanguard Index Funds, et al., Investment Company Act 
Release Nos. 24680 (Oct. 6, 2000) [65 FR 61005 (Oct. 13, 2000)] 
(notice) and 24789 (Dec. 12, 2000) (order) and related application; 
Vanguard Index Funds, et al., Investment Company Act Release Nos. 
26282 (Dec. 2, 2003) [68 FR 68430 (Dec. 8, 2003)] (notice) and 26317 
(Dec. 29, 2003) (order) and related application; Vanguard 
International Equity Index Funds, et al., Investment Company Act 
Release Nos. 26246 (Nov. 3, 2003) [68 FR 63135 (Nov. 7, 2003)] 
(notice) and 26281 (Dec. 1, 2003) (order) and related application; 
Vanguard Bond Index Funds, et. al., Investment Company Act Release 
Nos. 27750 (Mar. 9, 2007) [72 FR 12227 (Mar. 15, 2007)] (notice) and 
27773 (Apr. 25, 2007) (order) and related application (collectively, 
the ``Vanguard orders'').
    \425\ These costs can include brokerage and other costs 
associated with buying and selling portfolio securities in response 
to mutual fund share class cash inflows and outflows, cash drag 
associated with holding the cash necessary to satisfy mutual fund 
share class redemptions, and distributable capital gains associated 
with portfolio transactions.
---------------------------------------------------------------------------

    Three commenters stated that it was unnecessary for rule 6c-11 to 
provide relief for share class ETFs.\426\ One commenter, a sponsor of 
share class ETFs, stated that it is unnecessary for the rule to 
encompass share class ETFs because it is currently uncommon for ETF 
issuers to seek the exemptive relief necessary for such ETFs.\427\ 
Another stated that our proposed treatment is appropriate given the 
nuances associated with those products, \428\ and the third similarly 
indicated that share class ETFs present issues that would be more 
appropriately addressed through means other than rule 6c-11.\429\
---------------------------------------------------------------------------

    \426\ See Vanguard Comment Letter; Invesco Comment Letter; SSGA 
Comment Letter I.
    \427\ See Vanguard Comment Letter.
    \428\ See Invesco Comment Letter.
    \429\ See SSGA Comment Letter I.
---------------------------------------------------------------------------

    Two other commenters, however, opined that rule 6c-11 (or a 
separate future rule) should provide relief for share class ETFs in 
order to create a more level ETF playing field.\430\ Additional 
commenters echoed the importance of leveling the ETF playing field 
without specifically addressing share class ETFs.\431\ Another 
commenter urged the Commission to explore granting relief from the 
relevant provisions of section 18 broadly to the fund industry.\432\
---------------------------------------------------------------------------

    \430\ See BNY Mellon Comment Letter; OppenheimerFunds Comment 
Letter.
    \431\ See ETF.com Comment Letter (stating that the disclosure 
requirements of any final rule should apply to all ETFs, regardless 
of whether the ETFs rely on the final rule); Invesco Comment Letter 
(indicating that the Commission should generally abstain from 
regulatory actions that allow only certain market participants to 
benefit from innovation).
    \432\ See MFDF Comment Letter.
---------------------------------------------------------------------------

    Leveling the ETF playing field is a goal for rule 6c-11, and we 
acknowledge that our approach will result in there being a segment of 
ETF assets that are unable to rely on the rule. At the same time, we 
continue to believe that share class ETFs raise policy considerations 
that are different from those we seek to address in the rule. With such 
concerns unresolved, we do not believe it is appropriate to broadly 
grant relief from sections 18(f)(1) and 18(i) of the Act for share 
class ETFs at this time. Share class ETFs are structurally and 
operationally different from the other types of ETFs within the scope 
of rule 6c-11.\433\ We

[[Page 57197]]

therefore continue to believe it is appropriate for share class ETFs to 
request relief from sections 18(f)(1) and 18(i) of the Act through our 
exemptive application process, and for the Commission to continue to 
assess all relevant policy considerations in the context of the facts 
and circumstances of each particular applicant. We are not rescinding 
exemptive relief previously granted to share class ETFs.
---------------------------------------------------------------------------

    \433\ For example, when an ETF is structured as a share class of 
an open-end fund, the open-end fund has other share classes 
representing interests in the same portfolio. These interests (and 
the cash flows associated with the other share classes) can impact 
the fund's portfolio. In addition, share class ETFs do not provide 
daily portfolio transparency. See Vanguard orders, supra footnote 
425.
---------------------------------------------------------------------------

    We also are adopting amendments to Form N-1A that will require 
share class ETFs to provide certain additional disclosures regarding 
ETF trading costs. As discussed in more detail below in section II.H., 
these disclosure amendments are designed to help ensure consistent 
disclosures to investors between ETFs relying on proposed rule 6c-11 
and share class ETFs operating pursuant to individualized exemptive 
relief. The rule and form amendments require all ETFs that are subject 
to the Investment Company Act to provide similar disclosures in order 
to help investors compare products.

F. Master-Feeder ETFs

    Many of our recent ETF orders allow ETFs to operate as feeder funds 
in a master-feeder structure.\434\ In general, an ETF that operates as 
a feeder fund in a master-feeder structure functions like any other 
ETF. An authorized participant deposits a basket with the ETF and 
receives a creation unit of ETF shares in return for those assets. 
Conversely, an authorized participant that redeems a creation unit of 
ETF shares receives a basket from the ETF. In a master-feeder 
arrangement, however, the feeder ETF then also enters into a 
corresponding transaction with its master fund. The ETF may use the 
basket assets it receives from an authorized participant to purchase 
additional shares of the master fund, or it may redeem shares of the 
master fund in order to obtain basket assets and satisfy a redemption 
request.
---------------------------------------------------------------------------

    \434\ See, e.g., T. Rowe Price Associates, Inc., et al., 
Investment Company Act Release Nos. 30299 (Dec. 7, 2012) [77 FR 
74237 (Dec. 13, 2012)] (notice) and 30336 (Jan. 2, 2013) (order) and 
related application; SSgA Funds Management, Inc., et al., Investment 
Company Act Release Nos. 29499 (Nov. 17, 2010) [75 FR 71753 (Nov. 
24, 2010)] (notice) and 29524 (Dec. 13, 2010) (order) and related 
application (``SSgA'').
---------------------------------------------------------------------------

    Because the feeder ETF may, in the course of these transactions, 
temporarily hold the basket assets, it would not be able to rely on 
section 12(d)(1)(E) of the Act, which requires that a feeder fund hold 
no investment securities other than securities of the master fund.\435\ 
To accommodate the unique operational characteristics of these ETFs, 
our recent exemptive orders have allowed a feeder ETF to rely on 
section 12(d)(1)(E) without complying with section 12(d)(1)(E)(ii) of 
the Act to the extent that the ETF temporarily holds investment 
securities other than the master fund's shares for use as basket 
assets. These orders also provided the feeder ETF and its master fund 
with relief from sections 17(a)(1) and 17(a)(2) of the Act, with regard 
to the deposit by the feeder ETF with the master fund and the receipt 
by the feeder ETF from the master fund of basket assets in connection 
with the issuance or redemption of creation units,\436\ and section 
22(e) of the Act if the feeder ETF includes a foreign security in its 
basket assets and a foreign holiday (or a series of consecutive 
holidays) prevents timely delivery of the foreign security.\437\
---------------------------------------------------------------------------

    \435\ Section 12(d)(1) of the Act limits the ability of a fund 
to invest substantially in shares of another fund. See sections 
12(d)(1)(A)-(C) of the Act. Section 12(d)(1)(E) of the Act allows an 
investment company to invest all of its assets in one other fund so 
that the acquiring fund is, in effect, a conduit through which 
investors may access the acquired fund. See section 12(d)(1)(E)(ii) 
of the Act.
    \436\ Relief from the affiliated transaction prohibitions in 
sections 17(a)(1) and 17(a)(2) of the Act is necessary because these 
sections would otherwise prohibit the feeder ETF and its master fund 
from selling to or buying from each other the basket assets in 
exchange for securities of the master fund. See 15 U.S.C. 80a-
17(a)(1)-(2).
    \437\ See 15 U.S.C. 80a-22(e) (generally requiring the 
satisfaction of redemptions within seven days). See also supra 
section II.B.4.
---------------------------------------------------------------------------

    The exemptive orders we have granted to master-feeder ETFs, 
however, do not include relief from section 18 under the Act inasmuch 
as investment by several feeder funds or by mutual fund and ETF feeder 
funds in the same class of securities issued by a master fund generally 
does not involve a senior security subject to section 18. We are 
concerned, as discussed above, that if an ETF feeder fund transacts 
with a master fund on an in-kind basis, but non-ETF feeder funds 
transact with the master fund on a cash basis, all feeder fund 
shareholders would bear costs associated with the cash 
transactions.\438\ Due to these concerns, and the lack of market 
interest in this structure, we proposed to rescind the master-feeder 
relief granted to ETFs that did not rely on the relief as of the date 
of the proposal (June 28, 2018). We also proposed to grandfather 
existing master-feeder arrangements involving ETF feeder funds, but 
prevent the formation of new ones, by amending relevant exemptive 
orders.
---------------------------------------------------------------------------

    \438\ See supra footnote 426 and accompanying text.
---------------------------------------------------------------------------

    One commenter stated that it did not object to preventing the 
formation of new master-feeder arrangements and rescinding master-
feeder relief (with the exception of master-feeder relief that funds 
actively relied on as of the date of the Proposing Release).\439\ Other 
commenters, however, indicated that the rule should provide relief for 
master-feeder structures \440\ or that the Commission should not 
rescind existing master-feeder relief.\441\ Some of these commenters 
indicated that failing to provide relief for master-feeder structures 
would cause an uneven playing field among ETFs but did not address the 
concerns discussed above.\442\
---------------------------------------------------------------------------

    \439\ See ICI Comment Letter.
    \440\ See ETF.com Comment Letter; BNY Mellon Comment Letter; 
Dechert Comment Letter.
    \441\ See Fidelity Comment Letter; Eaton Vance Comment Letter.
    \442\ See ETF.com Comment Letter; BNY Mellon Comment Letter.
---------------------------------------------------------------------------

    Other commenters set forth potential methods for mitigating such 
concerns. For example, one commenter indicated that the Commission 
could address its concerns regarding potential cross-subsidization by 
requiring master funds to impose certain transaction fees,\443\ while 
another indicated that the Commission should address these concerns by 
requiring each feeder fund in a master-feeder structure to transact 
with the master fund consistently (i.e., only in cash or only in 
kind).\444\ An additional commenter suggested that an ETF's board 
should evaluate whether a master-feeder structure's overall benefits 
outweigh its overall costs in order to address these concerns.\445\ 
Another commenter indicated that it has already invested resources 
exploring various approaches to an ETF master-feeder structure, 
including models that it believed would address the Commission's 
concerns.\446\
---------------------------------------------------------------------------

    \443\ See Eaton Vance Comment Letter.
    \444\ See Fidelity Comment Letter.
    \445\ See Dechert Comment Letter. This commenter also opposed 
excluding exemptive relief for master-feeder structures based on a 
lack of market interest because the ETF industry is dynamic and 
interest in master-feeder structures may develop in the future. Id.
    \446\ See Fidelity Comment Letter.
---------------------------------------------------------------------------

    As discussed in the context of share class ETFs, leveling the ETF 
playing field is a goal for rule 6c-11, and we acknowledge that our 
approach will result in there being a segment of ETF assets that are 
unable to rely on the rule. Like share class ETFs, however, we continue 
to believe that master-feeder funds raise policy considerations that 
are different from those we seek to

[[Page 57198]]

address in the rule and are structurally and operationally distinct 
from other ETFs within the scope of rule 6c-11. We do not believe it is 
appropriate to broadly grant exemptive relief for master-feeder funds. 
Instead, we continue to believe that the Commission should consider the 
special concerns presented by ETFs in master-feeder structures in the 
context of the facts and circumstances of each particular applicant 
through individualized exemptive applications. The Commission's 
exemptive relief process is well-suited for applicants to set forth 
novel methods of mitigating the Commission's concerns, such as the 
methods suggested above. The process allows applicants to experiment 
with many different approaches, and may eventually assist the 
Commission in identifying a particular solution that is appropriate for 
a broader rule. Any ETF that is exploring a particular approach is free 
to bring its methodology forward in an exemptive application, which 
should help mitigate commenters' concerns about future changes in the 
ETF industry and resources already committed to such research. As 
proposed, therefore, we will rescind the master-feeder relief granted 
to ETFs that did not rely on the relief as of the date of the proposal 
(June 28, 2018).\447\
---------------------------------------------------------------------------

    \447\ One commenter indicated that this date provided an 
insufficient notice period for ETFs interested in pursuing the 
master-feeder structure and recommended ``a sunset provision of at 
least 3 years from the effective date of the final rule to allow 
ETFs that have been developing this structure sufficient time to 
test and implement it.'' See id. Exemptive orders for existing ETF 
master-feeder structures that rely on the relief will not be 
rescinded, however, and ETFs interested in pursuing a master-feeder 
structure in the future may apply for individualized exemptive 
relief. We therefore believe that such a 3-year sunset provision is 
unnecessary.
---------------------------------------------------------------------------

    Only one fund complex had established as of June 28, 2018 master-
feeder arrangements involving ETF feeder funds, and each arrangement 
involves an ETF as the sole feeder fund. We understand that all but one 
of the complex's original ETF feeder funds has discontinued its use of 
a master-feeder structure.\448\ Because this arrangement involves only 
one ETF feeder fund for its master fund, we do not believe it will 
raise the policy concerns discussed above without new, additional 
feeders, and therefore do not believe it is necessary to require this 
structure to change its existing investment practices by rescinding the 
relief.\449\ Instead, as proposed, we are amending this fund complex's 
existing exemptive orders to prevent the complex from forming new 
master-feeder ETFs.\450\
---------------------------------------------------------------------------

    \448\ See, e.g., SSGA Active Trust Prospectus (Oct. 31, 2017), 
available at https://www.sec.gov/Archives/edgar/data/1516212/000119312518313788/d635918d497.htm.
    \449\ See 2018 ETF Proposing Release, supra footnote 7, at n.342 
(noting that rescinding the relief for existing master-feeder ETFs 
would require them to change the manner in which they invest).
    \450\ The amendment to the exemptive order will expressly 
provide that the complex cannot create new master-feeder structures 
as of June 28, 2018.
---------------------------------------------------------------------------

G. Effect of Rule 6c-11 on Prior Orders

    As proposed, we have determined to exercise our authority under the 
Act to amend and rescind the exemptive relief we have issued to ETFs 
that will be permitted to operate in reliance on rule 6c-11.\451\ 
Accordingly, one year following the effective date of rule 6c-11, we 
will rescind those portions of our prior ETF exemptive orders that 
grant relief related to the formation and operation of an ETF, 
including master-feeder relief except as described in section II.F. We 
will not rescind the exemptive orders of UIT ETFs, leveraged/inverse 
ETFs, share class ETFs, or non-transparent ETFs. We also are not 
rescinding the relief we have provided to ETFs from section 12(d)(1) 
and sections 17(a)(1) and (a)(2) under the Act related to fund of funds 
arrangements involving ETFs as discussed below.
---------------------------------------------------------------------------

    \451\ See section 38(a) of the Act, 15 U.S.C. 80a-37(a).
---------------------------------------------------------------------------

    Commenters generally supported the rescission of the exemptive 
relief granted to ETFs that fall within the scope of rule 6c-11,\452\ 
while permitting ETFs that could not rely on rule 6c-11 to continue to 
rely on their individual exemptive orders.\453\ One commenter stated 
that rescission of these orders will further the Commission's 
regulatory goal to create a consistent, transparent, and efficient 
regulatory framework for ETFs.\454\
---------------------------------------------------------------------------

    \452\ See, e.g., ABA Comment Letter; ICI Comment Letter.
    \453\ See, e.g., ICI Comment Letter; Eaton Vance Comment Letter. 
In addition, one commenter stated that, because the commenter has 
designed its ETFs around the basket flexibility afforded by its 
exemptive orders, it would oppose the rescission of prior orders if 
the final rule limits ETFs' ability to use custom baskets. See 
Invesco Comment Letter. As discussed above, rule 6c-11 will permit 
an ETF to use custom baskets if it meets certain conditions. See 
supra section II.C.5.b.
    \454\ See ABA Comment Letter. One commenter, a sponsor of ETMFs 
as well as ETFs, requested that the Commission amend the terms and 
conditions relating to custom baskets in the ETMF orders to 
correspond to the treatment of custom baskets in rule 6c-11. See 
Eaton Vance Comment Letter. We believe this request is beyond the 
scope of the proposal. However, the commenter may seek to amend its 
order as part of the exemptive application process.
---------------------------------------------------------------------------

    After reviewing comments, we continue to believe that rescinding 
ETF exemptive relief in connection with rule 6c-11 will result in a 
consistent, transparent, and efficient framework for ETFs that operate 
in reliance on rule 6c-11, as those ETFs would no longer be subject to 
differing and sometimes inconsistent provisions of their exemptive 
relief. Moreover, investment companies that seek to operate an ETF 
under conditions that differ from those in rule 6c-11 are able to 
request exemptive relief from the Commission.
    In addition, approximately 200 of our current ETF exemptive orders 
automatically expire on the effective date of any Commission rule that 
provides relief permitting the operation of ETFs.\455\ We have 
determined, as proposed, to amend those orders to provide that the ETF 
relief contained therein will terminate one year following the 
effective date of rule 6c-11 to allow time for these ETFs to make any 
adjustments necessary to rely on rule 6c-11.
---------------------------------------------------------------------------

    \455\ See 2018 ETF Proposing Release, supra footnote 7, at n.348 
and accompanying text (noting that the Commission began including a 
condition in its exemptive orders in 2008 stating that the relief 
permitting the operation of ETFs would expire on the effective date 
of any Commission rule that provides relief permitting the operation 
of ETFs).
---------------------------------------------------------------------------

    We continue to believe that the one-year period for the termination 
of our ETF exemptive relief is sufficient to give ETFs that are 
operating under exemptive orders time to bring their operations into 
conformity with the requirements of rule 6c-11. We did not receive any 
comments on this aspect of the proposal. We also did not receive any 
comments stating that the need to comply with the requirements of rule 
6c-11, as opposed to their exemptive relief, would significantly 
negatively affect the operations of existing ETFs.
    Finally, we did not propose to rescind the fund of funds exemptive 
relief included in our ETF exemptive orders.\456\ This relief permits 
an ETF to create fund of funds structures, subject to certain 
conditions set forth in the ETF's exemptive application, designed to 
prevent the abuses that led Congress to enact section 12(d)(1), 
including abuses associated with undue influence and control by 
acquiring fund shareholders, the payment of duplicative or excessive 
fees, and the creation of complex structures. The conditions for fund 
of funds relief for ETFs are substantially similar across our exemptive 
orders.
---------------------------------------------------------------------------

    \456\ See id. at n.344 and accompanying text.
---------------------------------------------------------------------------

    Commenters generally agreed that we should not rescind the fund of 
funds exemptive relief, but asserted that the Commission should include 
fund of funds relief in a final rule or provide such relief through 
other means.\457\

[[Page 57199]]

Some commenters stated that because fund of funds relief is part of 
standard ETF exemptive orders, the Commission also should permit new 
ETFs to rely on the terms and conditions of fund of funds relief 
previously granted to existing ETFs.\458\ These commenters stated that 
failing to provide this relief would frustrate the Commission's purpose 
of allowing new ETFs to enter the market without obtaining an exemptive 
order from the Commission.
---------------------------------------------------------------------------

    \457\ See, e.g., Dechert Comment Letter; ABA Comment Letter; 
MFDF Comment Letter; SSGA Comment Letter; WisdomTree Comment Letter; 
OppenheimerFunds Comment Letter. Commenters also suggested that the 
Commission should permit funds relying on sections 3(c)(l) and 
3(c)(7) under the Act to be acquiring funds under any future fund of 
funds relief. See Dechert Comment Letter; OppenheimerFunds Comment 
Letter. While the subject matter of these comments falls outside the 
scope of the proposal of rule 6c-11, this issue is addressed as part 
of the proposed fund of funds rules. See FOF Proposing Release, 
supra footnote 40.
    \458\ See, e.g., ABA Comment Letter; Dechert Comment Letter.
---------------------------------------------------------------------------

    In December 2018, we proposed new rule 12d1-4 under the Act to 
streamline and enhance the regulatory framework applicable to fund of 
funds arrangements for registered investment companies, including 
ETFs.\459\ In connection with that proposed rule, we also proposed to 
rescind our exemptive orders granting relief to certain fund of funds 
arrangements, including the relief from sections 12(d)(1)(A) and (B) 
that, as discussed above, has been included in our ETF exemptive 
orders. The Commission has not yet acted upon this proposal and is not 
rescinding the fund of funds relief in existing exemptive orders in 
connection with this rulemaking.
---------------------------------------------------------------------------

    \459\ See FOF Proposing Release, supra footnote 40, at nn.236-
237 and accompanying text.
---------------------------------------------------------------------------

    We agree with commenters, however, that new entrants to the ETF 
market would be at disadvantage to existing ETFs without fund of funds 
relief. Accordingly, ETFs relying on rule 6c-11 that do not have 
exemptive relief from sections 12(d)(1)(A) and (B) and section 17(a)(1) 
and (2) of the Act may enter into fund of funds arrangements as set 
forth in our recent ETF exemptive orders, provided that they satisfy 
the terms and conditions for fund of funds relief in those orders.\460\ 
This relief will be available only until the effective date of a new 
Commission rule permitting registered funds to acquire the securities 
of other registered funds in excess of the limits in section 12(d)(1), 
including rule 12d1-4 if adopted.\461\
---------------------------------------------------------------------------

    \460\ See Salt Financial, supra footnote 248. Our exemptive 
orders permitting ETFs to enter into fund of funds arrangements 
include relief from section 17(a) of the Act. Section 17(a) would 
prohibit an ETF that is an acquiring fund that holds 5% or more of 
an acquired fund's securities from making any additional investments 
in the acquired fund. In addition, fund of funds arrangements 
involving funds that are part of the same group of investment 
companies or that have the same investment adviser (or affiliated 
investment advisers) implicate section 17(a), regardless of whether 
an acquiring fund exceeds the 5% threshold. Furthermore, where an 
ETF is an acquired fund, section 17(a) would prohibit the delivery 
or deposit of basket assets on an in-kind basis by an affiliated 
fund (that is, by exchanging certain assets from the ETF's 
portfolio, rather than in cash). See FOF Proposing Release, supra 
footnote 40, at nn.60-64 and accompanying text. The relief we are 
providing from section 17(a) does not extend beyond the scope of the 
relief we have provided in our exemptive orders to ETFs. We are 
providing the relief from sections 12(d)(1)(A) and (B) and section 
17(a) in accordance with our authority under sections 6(c), 
12(d)(1)(J), and 17(b) of the Act. See 15 U.S.C. 80a-6(c), 15 U.S.C. 
80a-12(d)(1)(J), and 15 U.S.C. 80a-17(b).
    \461\ For the reasons discussed above, we find that this relief 
is necessary or appropriate in the public interest and consistent 
with the protection of investors and the purposes fairly intended by 
the policy and provisions of the Investment Company Act. See 15 
U.S.C. 80a-6(c). We similarly find that such an exemption is 
consistent with the public interest and the protection of investors. 
See 15 U.S.C. 80a-12(d)(1)(J).
---------------------------------------------------------------------------

H. Amendments to Form N-1A

    We are adopting several amendments to Form N-1A, the registration 
form used by open-end funds to register under the Act and to offer 
their securities under the Securities Act, that are designed to provide 
ETF investors with additional information regarding ETF trading and 
associated costs. Commenters generally supported providing additional 
information to investors regarding ETF trading, but many suggested 
specific modifications to the proposals.\462\ After considering these 
comments, we are adopting the following amendments to Form N-1A:
---------------------------------------------------------------------------

    \462\ We also received a comment requesting that we confirm the 
applicability of the civil liability provisions in sections 11 and 
12 of the Securities Act to investors that purchase ETF shares on 
the secondary markets. See Hagens Berman Comment Letter. This 
rulemaking is intended to codify existing relief for ETFs relating 
to the formation and operation of ETFs under the Investment Company 
Act. Accordingly, the applicability of those Securities Act 
provisions is beyond the scope of this rulemaking.
---------------------------------------------------------------------------

     Adding the term ``selling'' to current narrative 
disclosure requirements to clarify that the fees and expenses reflected 
in the expense table may be higher for investors if they buy, hold, and 
sell shares of the fund (Item 3);
     Streamlined narrative disclosures relating to ETF trading 
costs, including bid-ask spreads (Item 6);
     Requiring ETFs that do not rely on rule 6c-11 to disclose 
median bid-ask spread information on their websites or in their 
prospectus (Item 6);
     Excluding ETFs that provide premium/discount disclosures 
in accordance with rule 6c-11 from the premium and discount disclosure 
requirements in Form N-1A (Items 11 and 27); and
     Eliminating disclosures relating to creation unit size and 
disclosures applying only to ETFs with creation unit sizes of less than 
25,000 shares (Items 3, 6, 11 and 27).
1. Fee Disclosures for Mutual Funds and ETFs (Item 3)
    As proposed, we are adopting a narrative disclosure that will 
specify that the fees and expenses reflected in the Item 3 expense 
table also may be higher for investors if they sell shares of the 
fund.\463\ Currently, this item requires disclosure indicating only 
that the table describes fees and expenses investors may pay if they 
buy and hold shares of the fund. However, both mutual funds and ETF 
investors also may incur expenses other than redemption fees when 
selling fund shares.\464\ We are therefore amending this disclosure to 
specify that investors may pay the fees and expenses described in Item 
3 if they buy, hold, and sell shares of the fund.\465\ Commenters who 
addressed this proposed change supported it because it will help 
investors better understand that they may incur costs in addition to 
those in the fee table.\466\
---------------------------------------------------------------------------

    \463\ Item 3 of Form N-1A (requiring, for example, disclosure of 
sales loads, exchange fees, maximum account fees, and redemption 
fees that funds charge directly to shareholders). We also are 
amending Instruction 1(e) of Item 3, as proposed, to eliminate: (i) 
The requirement that ETFs modify the narrative explanation for the 
fee table to state that investors may pay brokerage commissions on 
their purchase and sale of ETF shares, which are not reflected in 
the example; and (ii) the instruction to exclude fees charged for 
the purchase and redemption of the fund's creation units if the fund 
issues or redeems shares in creation units of not less than 25,000 
shares. Thus, as proposed, an ETF may exclude from the fee table any 
fees charged for the purchase and redemption of the Fund's creation 
units regardless of the number of shares. See also Instruction 
1(e)(ii) to Item 27(d)(1) (adopting the same modification for the 
expense example in an ETF's annual and semi-annual reports).
    \464\ For example, an investor may incur a back-end sales load 
when selling a mutual fund share. Likewise, an investor may bear 
costs associated with bid-ask spreads when selling ETF shares.
    \465\ See Item 3 of Form N-1A.
    \466\ See, e.g., CSIM Comment Letter; FIMSAC Comment Letter; IDC 
Comment Letter.
---------------------------------------------------------------------------

    We also are adopting, as proposed, a requirement to include a 
statement that investors may be subject to other fees not reflected in 
the table, such as brokerage commissions and fees to financial 
intermediaries.\467\ Commenters who addressed this proposed requirement 
supported it.\468\ We continue to believe this is an appropriate 
disclosure for both ETFs

[[Page 57200]]

and mutual funds, as investors in ETFs and mutual funds alike may incur 
brokerage commissions and fees to financial intermediaries.
---------------------------------------------------------------------------

    \467\ Item 3 of Form N-1A.
    \468\ See, e.g., IDC Comment Letter; Invesco Comment Letter.
---------------------------------------------------------------------------

2. Disclosures Regarding ETF Trading and Associated Costs (Item 6)
    We are adopting amendments to Item 6 of Form N-1A that: (i) Will 
require an ETF to provide narrative disclosure identifying specific 
costs associated with buying and selling ETF shares and directing 
investors to its website for additional information; and (ii) allow an 
ETF that is not subject to rule 6c-11 the option to provide disclosure 
regarding the ETF's median bid-ask spread on its website or in its 
prospectus.\469\ These form amendments differ in several respects from 
our proposal, which would have required an ETF to disclose information 
regarding how ETF shares trade and the associated costs, including 
information regarding bid-ask spreads, as part of the fund's fee table 
disclosure.
---------------------------------------------------------------------------

    \469\ Rule 6c-11 will require an ETF to disclose its median bid-
ask spread for the last thirty calendar days on its website as a 
condition to the rule. Rule 6c-11(c)(1)(v). We also are amending the 
definition of ``Exchange-Traded Fund'' in Form N-1A to add a 
specific reference to rule 6c-11. See General Instruction A of Form 
N-1A (defining ``exchange-traded fund'' as a fund or class, the 
shares of which are listed and traded on a national securities 
exchange, and that has formed and operates under an exemptive order 
granted by the Commission or in reliance on rule 6c-11 under the 
Act). We are adopting this definition as proposed.
---------------------------------------------------------------------------

a. Narrative Disclosures
    Secondary market investors in ETF shares are subject to trading 
costs when purchasing and selling ETF shares that ETFs are not 
currently required to disclose in their prospectuses. Trading costs, 
like all costs and expenses, affect investors' returns on their 
investment.\470\ In addition, some investors use ETFs more heavily as 
trading vehicles compared to mutual funds and may thus incur 
substantial trading costs. We believe that investors could overlook 
these costs and that additional disclosure would help them better 
understand these costs when purchasing or selling ETF shares.
---------------------------------------------------------------------------

    \470\ See SEC Office of Investor Education and Advocacy, 
Investor Bulletin: How Fees and Expenses Affect Your Investment 
Portfolio (Feb. 2014), available at https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf, at 2 (``As with any fee, transaction 
fees will reduce the overall amount of your investment 
portfolio.''); see also Andrea Coombes, Calculating the Costs of an 
ETF, The Wall Street Journal (Oct. 23, 2012), available at https://www.wsj.com/articles/SB10000872396390444024204578044293008576204 .
---------------------------------------------------------------------------

    As a result, we proposed to require ETFs to include a series of 
questions and answers--or Q&As--in Item 3 that would have provided 
investors with narrative disclosure regarding ETF trading and 
associated costs, as well as quantitative disclosures regarding bid-ask 
spreads.\471\ Although many commenters supported providing information 
regarding trading costs to investors, commenters raised concerns 
regarding the quantitative aspects of the bid-ask spread 
disclosures.\472\ In addition, comments on the proposed Q&A format were 
mixed. Some commenters supported the format, stating that it provided a 
user-friendly method for identifying certain costs.\473\ Many others 
expressed concerns that this format would significantly lengthen the 
summary prospectus, potentially resulting in less investor-friendly 
formats or increased printing costs.\474\ Some commenters asserted that 
the proposed Q&A format may be more appropriate for inclusion in the 
statutory prospectus rather than the summary prospectus.\475\
---------------------------------------------------------------------------

    \471\ We also proposed to move certain disclosure regarding the 
purchase of ETF shares from Item 6 to Item 3, consolidating relevant 
disclosures regarding the fees and trading costs that an ETF 
investor may bear in one place. 2018 ETF Proposing Release, supra 
footnote 7, at text accompanying nn.391-394.
    \472\ See also supra section II.C.6.d. (discussing median bid-
ask spread disclosure requirements in rule 6c-11 and our 
determination not to adopt amendments that would have required an 
ETF to provide: (i) Hypothetical examples in its prospectus of how 
the bid-ask spread impacts return on investment; and (ii) an 
interactive calculator on its website to allow investors the ability 
to customize those hypothetical calculations).
    \473\ See, e.g., CFA Institute Comment Letter; FIMSAC Comment 
Letter.
    \474\ See, e.g., CSIM Comment Letter (stating the that proposed 
format would require ETFs to rethink the presentation of the 
summary); Fidelity Comment Letter (stating that the proposed format 
would subsume other more important information and that concise 
narrative disclosure would be preferable); Vanguard Comment Letter 
(stating the sponsors should be permitted to determine how best to 
present this information).
    \475\ BlackRock Comment Letter; CSIM Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that investors could overlook certain 
trading costs when buying or selling ETF shares and that additional 
disclosure will help them better understand these costs. However, we 
agree with commenters that the extent of trading cost disclosures we 
proposed to require in Item 3 could obscure other key information 
regarding other fees and expenses and potentially give bid-ask spread 
disclosures undue prominence. We also agree that ETFs and their 
investors may benefit from flexibility in the manner of presenting the 
required information, especially if the proposed format would unduly 
distract from other key information. We therefore are permitting ETFs 
to use formats other than Q&As to present this information.\476\ In 
addition, we are moving the narrative disclosures regarding trading 
costs to Item 6 of Form N-1A, which provides investors with information 
regarding the purchase and sale of fund shares to avoid overemphasizing 
these costs.
---------------------------------------------------------------------------

    \476\ See Item 6(c) of Form N-1A. An ETF must provide the 
required information using plain English principles under rule 
421(d) under the Securities Act. See General Instructions to Form N-
1A. The applicable standards provide ETFs and other funds with 
flexibility, for example, in determining whether to use headings in 
a question-and-answer format. Enhanced Disclosure and New Prospectus 
Delivery Option for Open-End Management Investment Companies, 
Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 
4546, 4549 n.39 (Jan. 26, 2009)] (``Summary Prospectus Adopting 
Release'').
---------------------------------------------------------------------------

    We also are streamlining several of the narrative disclosure 
requirements we proposed. First, we are adopting a requirement that the 
ETF's summary prospectus or summary section cross-reference the ETF's 
website.\477\ Rule 6c-11 will require daily website disclosure of 
several items, including the NAV per share, market price, premium or 
discount, and bid-ask spread information. Form N-1A also will permit 
ETFs to omit certain information from their registration statements if 
they satisfy certain of the rule's website disclosure conditions.\478\ 
This disclosure will inform investors how to access this information.
---------------------------------------------------------------------------

    \477\ Item 6(c)(4) of Form N-1A. The form amendments permit an 
ETF to combine the information required by this website cross-
reference requirement into the information required by Item 1(b)(1) 
of Form N-1A and 17 CFR 230.498(b)(1)(v) (rule 498(b)(1)(v)) in 
order to avoid duplicative references to the ETF's website. 
Instruction 4 to Item 6 of Form N-1A (referring to the website 
cross-reference disclosure requirements in the summary prospectus 
cover page and the statutory prospectus back cover page). However, 
by requiring a cross-reference to the ETF's website, the Commission 
does not intend for such information to be incorporated by reference 
into the prospectus.
    \478\ See, e.g., Instruction 1 to Item 6 of Form N-1A. Item 
11(g) currently requires an ETF to provide a website address in its 
prospectus if the ETF omits the historical premium/discount 
information from the prospectus and includes this information on its 
website instead. As a result, many ETFs already include a website 
address in their prospectus.
---------------------------------------------------------------------------

    Commenters did not specifically address this proposed requirement. 
However, in general, commenters expressed support for website 
disclosure requirements, including as a substitute for certain 
registration statement disclosure requirements.\479\ We believe a 
cross-reference in Form N-1A to the required website disclosures will 
enable investors to receive timely and granular information that could 
assist with making an investment decision and are therefore adopting 
the

[[Page 57201]]

requirement substantially as proposed in Item 6.
---------------------------------------------------------------------------

    \479\ See, e.g., SIFMA AMG Comment Letter I; Fidelity Comment 
Letter.
---------------------------------------------------------------------------

    We also are adopting a requirement to provide narrative disclosure 
regarding bid-ask spreads.\480\ As noted above, commenters generally 
did not address the substance of the disclosures, but raised concerns 
regarding the length of the disclosures. One commenter, however, 
asserted that the proposed requirement to disclose certain additional 
costs associated with buying and selling ETF shares would be redundant 
of information required by Item 3.\481\
---------------------------------------------------------------------------

    \480\ Our proposal would have required an ETF to: (i) Describe 
the bid-ask spread as the difference between the highest price a 
buyer is willing to pay to purchase shares of the ETF (bid) and the 
lowest price a seller is willing to accept for shares of the ETF 
(ask); (ii) explain that the bid-ask spread can change throughout 
the day due to the supply of or demand for ETF shares, the quantity 
of shares traded, and the time of day the trade is executed, among 
other factors; and (iii) identify a set of specific costs, including 
bid-ask spreads, associated with buying and selling ETF shares. See 
2018 ETF Proposing Release, supra footnote 7, at section II.H.2.
    \481\ See ABA Comment Letter.
---------------------------------------------------------------------------

    We continue to believe that narrative bid-ask spread disclosure 
will inform investors regarding the potential impact of spread costs 
and provide investors with additional context to understand that the 
costs attributable to the bid-ask spread may increase or decrease when 
certain market conditions exist or certain factors are present. 
However, streamlining this disclosure to provide investors with key 
information regarding bid-ask spreads will both aid investor 
understanding and eliminate some of the length associated with the 
proposed disclosure requirement. Accordingly, our amendments to Form N-
1A will require an ETF to state that an investor may incur costs 
attributable to the difference between the highest price a buyer is 
willing to pay to purchase shares of the ETF (bid) and the lowest price 
a seller is willing to accept for shares of the ETF (ask) when buying 
or selling shares in the secondary market (``the bid-ask 
spread'').\482\ This information, combined with the website cross-
reference requirement, will direct ETF investors to website disclosures 
regarding median bid-ask spreads.
---------------------------------------------------------------------------

    \482\ See Item 6(c)(3) of Form N-1A.
---------------------------------------------------------------------------

    Finally, Item 6 will continue to require ETFs to disclose: (i) That 
individual shares may only be purchased and sold on secondary markets 
through a broker-dealer; and (ii) the price of ETF shares is based on 
market price, and since ETFs trade at market prices rather than at net 
asset value, shares may trade at a price greater than net asset value 
(premium) or less than net asset value (discount).\483\
---------------------------------------------------------------------------

    \483\ Item 6(c) of Form N-1A. We proposed to move this 
disclosure to Item 3 to consolidate background information relating 
to ETF trading in one place. 2018 ETF Proposing Release, supra 
footnote 7, at section II.H.3. However, we are not adopting the 
proposed amendments to Item 3 and instead adding additional 
disclosures regarding ETF trading costs to Item 6. As proposed, 
amended Item 6 also will replace the current reference to ``national 
securities exchange'' with ``secondary markets'' because ETFs can 
also be bought and sold over the counter.
---------------------------------------------------------------------------

b. Median Bid-Ask Spread Requirement
    Rule 6c-11 will require an ETF to provide website disclosure of 
median bid-ask spreads.\484\ We believe that this disclosure will 
provide ETF investors with greater understanding of the costs 
associated with investing in ETFs. In order to provide similar 
disclosures to investors in ETFs that are outside the scope of rule 6c-
11, we are adopting amendments to Form N-1A requiring the disclosure of 
median bid-ask spreads.
---------------------------------------------------------------------------

    \484\ See rule 6(c)(1)(v).
---------------------------------------------------------------------------

    We proposed amendments to Form N-1A that would have required all 
open-end ETFs to disclose quantitative information about bid-ask 
spreads, both in an ETF's prospectus and on its website.\485\ As 
discussed above, some commenters expressed concerns with these 
requirements, and we have made several modifications to mitigate those 
concerns while maintaining or enhancing the usefulness of the required 
disclosures. Those modifications include not adopting the proposed 
requirement for hypothetical bid-ask spread examples in the ETF's 
prospectus and interactive calculator, and instead only requiring ETFs 
relying on rule 6c-11 to provide disclosure of median bid-ask spread on 
their website.\486\
---------------------------------------------------------------------------

    \485\ See 2018 ETF Proposing Release, supra footnote 7, at 
sections II.H.2.b and II.I.
    \486\ See supra section II.C.6.d.
---------------------------------------------------------------------------

    However, we continue to believe that all ETF investors should 
receive key information about bid-ask spread costs, and appreciate that 
ETFs that are not relying on rule 6c-11 may want the flexibility to 
provide more timely bid-ask spread information on their websites.\487\ 
We are therefore amending Form N-1A to require an ETF that is not 
subject to rule 6c-11 to: (i) Provide the ETF's median bid-ask spread 
for its most recent fiscal year in its prospectus; or (ii) comply with 
the bid-ask spread website disclosure requirements in rule 6c-
11(c)(1)(v).\488\ We believe that this disclosure requirement will 
provide all ETF investors with quantitative bid-ask spread information, 
while providing ETFs not subject to rule 6c-11 with the flexibility to 
provide either website or prospectus disclosure.\489\ This requirement 
also is consistent with our current approach to the disclosure of 
premiums and discounts in Form N-1A and, based on our experience with 
that disclosure, we believe most ETFs will opt to post bid-ask spread 
information on their websites as some ETFs do today on a voluntary 
basis.\490\
---------------------------------------------------------------------------

    \487\ See infra section II.I. (discussing similar changes for 
Form N-8B-2).
    \488\ See Item 6(c)(5) of Form N-1A (requiring disclosure of the 
median bid-ask spread for the ETF's most recent fiscal year in the 
summary prospectus or summary section of the prospectus); 
Instruction 1 to Item 6(c)(5) of Form N-1A (permitting an ETF to 
omit the information required if the ETF satisfies the requirements 
of paragraph (c)(1)(v) of rule 6c-11). As with the parallel website 
disclosure requirement, we are modifying the proposed methodology to 
clarify that the observations must be based on trades on the primary 
listing exchange and that the observations should be as of the end 
of each ten-second interval. Instruction 2 to Item 6(c)(5) of Form 
N-1A. We also are making similar amendments to Form N-8B-2 in order 
to extend this requirement to UIT ETFs. See infra section II.I.
    \489\ Item 6(c)(5) of Form N-1A. See 2018 ETF Proposing Release, 
supra footnote 7, at section II.H.2.b.
    \490\ See Items 11(g)(2) and 27(b)(7)(iv) of Form N-1A.
---------------------------------------------------------------------------

    Although rule 6c-11 contemplates more current website disclosure 
for ETFs relying on rule 6c-11, we are adopting a lookback period of 
the ETF's most recent fiscal year for the prospectus bid-ask spread 
disclosure requirement. We are adopting this period for consistency 
with other disclosures in Form N-1A and to avoid establishing a 
requirement that would require more frequent updating of an ETF's 
prospectus. ETFs that opt to provide this information on their website, 
however, will provide median bid-ask spread information for the most 
recent thirty-day period on a rolling basis. Finally, newly launched 
ETFs subject to this prospectus requirement with less than a year of 
trading data will be required to provide a brief statement to the 
effect that the ETF does not have sufficient trading history to report 
trading information and related costs as proposed.\491\
---------------------------------------------------------------------------

    \491\ Instruction 1 to Item 6(c) of Form N-1A. Newly launched 
ETFs seeking to satisfy the requirements of paragraph (c)(1)(v) of 
the rule should provide median bid-ask spread information for the 
most recent thirty-day period once the ETF has more than 30-days of 
trading data.information.
---------------------------------------------------------------------------

c. Historical Premium and Discount Disclosures (Items 11 and 27)
    Rule 6c-11 will require ETFs to provide certain disclosures 
regarding premiums and discounts on their websites.\492\ We believe 
premium/discount disclosure will help investors

[[Page 57202]]

better understand that an ETF's market price may be higher or lower 
than the ETF's NAV per share and will provide investors with useful 
information regarding ETFs that frequently trade at a premium or 
discount to NAV. We are adopting amendments to Form N-1A that will 
exclude only those ETFs that provide premium/discount disclosures in 
accordance with rule 6c-11 from the premium and discount disclosure 
requirements in Form N-1A.
---------------------------------------------------------------------------

    \492\ See rule 6c-11(c)(1).
---------------------------------------------------------------------------

    We proposed to eliminate existing disclosure requirements regarding 
premiums and discounts in Form N-1A since rule 6c-11 would require an 
ETF to provide more timely information on its website.\493\ One 
commenter supported this amendment, stating that information relevant 
to premiums and discounts is already disclosed on a timely basis on ETF 
websites and therefore a duplicative registration statement requirement 
is not necessary.\494\ Another commenter, however, stated that the 
Commission should apply disclosure requirements to all ETFs, including 
those that cannot rely on rule 6c-11, so that all ETF investors receive 
the same information.\495\
---------------------------------------------------------------------------

    \493\ Item 11(g)(2) of Form N-1A currently requires an ETF to 
provide a table showing the number of days the market price of the 
ETF's shares was greater than the ETF's NAV per share for certain 
time periods. Item 27(b)(7)(iv) of Form N-1A requires an ETF to 
include a table with premium/discount information in its annual 
reports for the five most recently completed fiscal years. ETFs 
currently are permitted to omit both disclosures by providing on 
their websites the premium/discount information required by Item 
11(g)(2).
    \494\ See Invesco Comment Letter.
    \495\ See ETF.com Comment Letter.
---------------------------------------------------------------------------

    After considering comments, we are eliminating the premium and 
discount requirements in Items 11(g)(2) and 27(b)(7)(iv) for ETFs 
relying on rule 6c-11.\496\ However, ETFs not relying on rule 6c-11 
must include premium and discount information in both the prospectus 
and annual report unless they choose to comply with the website 
disclosure requirements in rule 6c-11(c)(1)(ii)-(iv) and 
(c)(1)(vi).\497\ We agree that all ETF investors should receive similar 
premium/discount disclosure, regardless of the form of exemptive 
relief.
---------------------------------------------------------------------------

    \496\ Item 11(g)(2) of Form N-1A; Item 27(b)(7) of Form N-1A.
    \497\ Items 11(g)(2) and 27(g)(2) of Form N-1A.
---------------------------------------------------------------------------

    We acknowledge that the premium and discount disclosure 
requirements under rule 6c-11 are broader than what was required under 
Form N-1A.\498\ However, to ensure consistency of website disclosure 
across ETFs, we are amending Form N-1A to require that if an ETF not 
relying on rule 6c-11 chooses to disclose the premium and discount 
disclosures on its website to satisfy the Form N-1A requirement, it 
must conform with the requirements in rule 6c-11.\499\ Nonetheless, 
consistent with our experience with the current Form N-1A requirement, 
we believe that most ETFs not relying on rule 6c-11 will choose to 
comply with the website disclosure requirements in rule 6c-11.
---------------------------------------------------------------------------

    \498\ Unlike current Form N-1A, rule 6c-11 will require 
disclosure of a line graph showing exchange-traded fund share 
premiums or discounts for the most recently completed calendar year 
and the most recently completed calendar quarters since that year 
and disclosure regarding persistent premium or discount of greater 
than 2%, in addition to a table showing premiums and discounts, in 
order to omit the premium/discount disclosures in the ETF's 
prospectus and annual report.
    \499\ We also are retaining the definition of the term ``Market 
Price'' in Form N-1A and amending it to reference the market price 
definition in rule 6c-11 as a result of the premium/discount 
disclosure requirements in the form. See General Instruction A to 
Form N-1A. Harmonizing the definition of market price in Form N-1A 
and rule 6c-11 will reduce regulatory confusion and will result in a 
more uniform methodology for calculating premiums and discounts for 
ETFs that provide premium/discount disclosure in accordance with 
rule 6c-11 and ETFs that provide premium/discount disclosures in 
their prospectuses and annual reports pursuant to these disclosure 
requirements. See id.; rule 6c-11(a)(1). We are making similar 
amendments to Form N-8B-2 in order to extend the premium/discount 
disclosure requirements to UIT ETFs. See infra section II.I.
---------------------------------------------------------------------------

3. Eliminated Disclosures
    We are adopting the removal of certain disclosure requirements from 
Form N-1A relating to ETFs. We are removing the requirement that an ETF 
specify the number of shares it will issue or redeem in exchange for 
the deposit or delivery of basket assets.\500\ The number of shares the 
ETF issues or redeems in exchange for the deposit or delivery of 
baskets is largely duplicative of information provided in reports on 
Form N-CEN.\501\ Commenters did not address this aspect of the 
proposal, and we are adopting it as proposed.
---------------------------------------------------------------------------

    \500\ Item 6(c)(i) of current Form N-1A.
    \501\ See Item E.3.a of Form N-CEN.
---------------------------------------------------------------------------

    We also are eliminating several disclosure requirements in Items 6 
and 11 that applied only to ETFs that issue or redeem shares in 
creation units of less than 25,000 shares.\502\ When we adopted these 
requirements, we reasoned that individual investors may be more likely 
to indirectly transact in creation units through authorized 
participants if the creation unit size was less than 25,000 
shares.\503\ Based on staff experience, however, we believe that these 
disclosures are unnecessary as retail investors generally do not engage 
in primary transactions through authorized participants and the current 
flow of information about the purchase and redemption process is 
robust.\504\ One commenter supported eliminating these disclosure 
requirements, and we are eliminating these requirements as 
proposed.\505\
---------------------------------------------------------------------------

    \502\ Item 6(c)(ii) currently requires ETFs issuing shares in 
creation units of less than 25,000 to disclose the information 
required by Items 6(a) and (b). Items 6(a) and (b) require funds to: 
(i) Disclose the minimum initial or subsequent investment 
requirements; (ii) disclose that the shares are redeemable; and 
(iii) describe the procedures for redeeming shares. Item 11(g)(1) 
currently provides that an ETF may omit information required by 
Items 11(a)(2), (b) and (c) if the ETF issues or redeems shares in 
creation units of not less than 25,000 shares each. Item 11(a) 
requires a fund to disclose when calculations of NAV are made and 
that the price at which a purchase or redemption is effected is 
based on the next calculation of NAV after the order is placed. 
Items 11(b) and (c) require a fund to describe the procedures used 
when purchasing and redeeming the fund's shares.
    \503\ Summary Prospectus Adopting Release, supra footnote 477.
    \504\ We believe the parties who purchase or redeem shares from 
the ETF directly would either have the knowledge necessary to do so 
without additional procedural disclosure or the ability to request 
such information.
    \505\ See Invesco Comment Letter.
---------------------------------------------------------------------------

I. Amendments to Form N-8B-2

    Form N-8B-2 is the registration form under the Investment Company 
Act for UITs that are currently issuing securities, and it is used for 
registration of ETFs organized as UITs.\506\ Because Form S-6 requires 
UIT prospectuses to include disclosure required by specified provisions 
of Form N-8B-2, the disclosure requirements of Form N-8B-2 also apply 
to prospectuses on Form S-6. We are adopting several amendments to Form 
N-8B-2 that will mirror requirements we are adopting in Form N-1A.
---------------------------------------------------------------------------

    \506\ While open-end funds register with the Commission on Form 
N-1A, UITs must register on two forms: Form S-6, which is used for 
registering the offering of the UITs' units under the Securities 
Act, and Form N-8B-2, which is used for registration under the 
Investment Company Act. Form S-6, which must be filed with the 
Commission every 16 months, requires certain content, mainly by 
reference to the disclosure requirements in Form N-8B-2.
---------------------------------------------------------------------------

    Although we are not including UIT ETFs within the scope of rule 6c-
11, we believe that it is important for investors to receive consistent 
disclosures for ETF investments, regardless of the ETF's form of 
organization. Secondary market investors in UIT ETFs, like other ETFs, 
are subject to trading costs that unit holders could overlook. We 
believe that additional disclosure will help investors better 
understand the total costs of investing in a UIT ETF. We therefore 
proposed to amend Form N-8B-2 to require UIT ETFs to provide the same 
disclosures regarding ETF trading and the associated costs as ETFs 
organized

[[Page 57203]]

as open-end funds would disclose on Form N-1A.
    Commenters that addressed this proposed provision generally 
supported these changes,\507\ and we are amending Form N-8B-2 to mirror 
the amendments to Form N-1A with the modifications discussed 
above.\508\ As with other ETFs that are not within the scope of rule 
6c-11, these amendments will give UIT ETFs the option to forego certain 
disclosures relating to bid-ask spreads and premiums and discounts 
provided that the ETF conforms with rule 6c-11's corresponding website 
disclosure requirements.\509\
---------------------------------------------------------------------------

    \507\ See ICI Comment Letter (supporting mirroring proposed 
disclosure changes in Form N-1A, subject to comments regarding the 
amendments to Form N-1A).
    \508\ Items I.13(h) and (i) of Form N-8B-2. See also supra 
section II.H. (describing the ETF trading information and related 
costs disclosure requirements).
    \509\ Although UIT ETFs currently are not subject to website 
disclosure requirements regarding trading costs or other 
information, UIT ETFs generally disclose information regarding 
market price, NAV per share, premium and discounts, and spreads on 
their websites today.
---------------------------------------------------------------------------

    Below, Table 3 summarizes the amendments to Form N-8B-2 and the 
corresponding requirements in Form N-1A.
---------------------------------------------------------------------------

    \510\ The definition of the term ``exchange-traded fund'' in 
Form N-1A covers ETFs organized as open-end funds and includes ETFs 
relying on either exemptive orders or rule 6c-11 to operate. Form N-
8B-2, on the other hand, is for UITs, which cannot rely on rule 6c-
11 to operate. Accordingly, the definition of ``exchange-traded 
fund'' in Form N-8B-2 omits the reference to rule 6c-11.

                                 Table 3
------------------------------------------------------------------------
                                  Form N-1A ETF     Corresponding Form N-
      Disclosure topic             disclosure          8B-2 disclosure
                                   requirement           requirement
------------------------------------------------------------------------
Definitions for Exchange-     General Instructions  General Instructions
 Traded Fund and Market        Part A.               Definitions.\510\
 Price.
Information Concerning Fees   Item 3. Risk/Return   Item I.13(h).
 and Costs.                    Summary: Fee Table.
Information Concerning        Item 6(c). Purchase   Item I.13(i).
 Purchase and Sale of Fund     and Sale of Fund
 Shares.                       Shares.
Table Showing Premium and     Item 11(g)(2).......  Item I.13(j).
 Discount Information.
------------------------------------------------------------------------

J. Amendments to Form N-CEN

    Form N-CEN is a structured form that requires registered funds to 
provide census-type information to the Commission on an annual 
basis.\511\ As proposed, we are adopting a new requirement that will 
collect specific information on which ETFs are relying on rule 6c-
11.\512\ We believe that this requirement will allow us to better 
monitor reliance on rule 6c-11 and assist us with our accounting, 
auditing, and oversight functions, including compliance with the 
Paperwork Reduction Act.\513\
---------------------------------------------------------------------------

    \511\ See Reporting Modernization Adopting Release, supra 
footnote 263.
    \512\ Item C.7.k of Form N-CEN. Item C.7 of Form N-CEN requires 
management companies to report whether they relied on certain rules 
under the Investment Company Act during the reporting period. In 
addition, Item C.3.a.i of Form N-CEN already requires funds to 
report if they are an ETF.
    \513\ See Reporting Modernization Adopting Release, supra 
footnote 263.
---------------------------------------------------------------------------

    We also are changing the definition of ``authorized participant'' 
in Form N-CEN to conform the definition with rule 6c-11 by deleting a 
specific reference to an authorized participant's participation in 
DTC.\514\ In addition to reducing regulatory confusion by harmonizing 
the definition of ``authorized participant'' with rule 6c-11, this 
change also will obviate the need for future amendments if additional 
clearing agencies become registered with the Commission.\515\ 
Commenters that addressed the proposed amendments to Form N-CEN 
expressed support, and we have determined to adopt the amendments as 
proposed.
---------------------------------------------------------------------------

    \514\ Item E.2 of Form N-CEN.
    \515\ As proposed, the amendments to Form N-CEN will define the 
term ``authorized participant'' as ``a member or participant of a 
clearing agency registered with the Commission, which has a written 
agreement with the Exchange-Traded Fund or Exchange-Traded Managed 
Fund or one of its service providers that allows the authorized 
participant to place orders for the purchase and redemption of 
creation units.'' See Instruction to Item E.2 of Form N-CEN.
---------------------------------------------------------------------------

K. Technical and Conforming Amendments to Form N-1A, Form N-8B-2, Form 
N-CSR, Form N-PORT, and Regulation S-X

    In October 2016, the Commission adopted new rules and forms and 
amended other rules and forms under the Investment Company Act to 
modernize the reporting and disclosure of information by registered 
investment companies.\516\ In February 2019, the Commission adopted an 
interim final rule that amended the timing requirements for filing 
reports on Form N-PORT.\517\ We are making the following technical 
corrections as a result of these rulemakings, as well as correcting 
certain other outdated citations and instructions:
---------------------------------------------------------------------------

    \516\ See Reporting Modernization Adopting Release, supra 
footnote 263.
    \517\ See Amendments to the Timing Requirements for Filing 
Reports on Form N-PORT, Investment Company Act Release No. 33384 
(Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)] (``Interim Final Rule 
Release'').
---------------------------------------------------------------------------

     Correcting footnote 1 of 17 CFR 210.12-14 (rule 12-14 of 
Regulation S-X) by replacing a reference to Column E with a reference 
to Column F.\518\
---------------------------------------------------------------------------

    \518\ See rule 12-14, note 1.
---------------------------------------------------------------------------

     Amending General Instruction B.4.(a) of Form N-1A to 
update outdated citation references to 17 CFR 230.400 through 230.498 
(Regulation C) by replacing references to 17 CFR 230.497 (rule 497) 
with references to rule 498.\519\
---------------------------------------------------------------------------

    \519\ See General Instruction B.4.(a) of Form N-1A.
---------------------------------------------------------------------------

     Amending General Instruction B.4.(d) of Form N-1A to 
update outdated citation references to 17 CFR 232.10 through 232.903 
(Regulation S-T) by replacing references to rule 903 with references to 
rule 501.\520\
---------------------------------------------------------------------------

    \520\ See General Instruction B.4.(d) of Form N-1A.
---------------------------------------------------------------------------

     Amending Instruction 4(b) to Item 13 of Form N-1A by 
deleting outdated instructions regarding changes in methodology for 
determining the ratio of expenses to average net assets.\521\
---------------------------------------------------------------------------

    \521\ See Instruction 4(b) to Item 13.
---------------------------------------------------------------------------

     Amending Form N-1A to require money market funds to state 
in their annual and semi-annual reports that: (i) Their monthly 
portfolio holdings are available on Form N-MFP; (ii) the money market 
fund's reports on Form N-MFP are available on the Commission's website; 
and (iii) the money market fund makes portfolio holdings information 
available to shareholders on its website.\522\ This amendment will 
reflect the fact that money market funds report monthly portfolio 
holdings on Form N-MFP rather than reporting portfolio holdings for the 
first and third fiscal quarters on Form N-PORT.
---------------------------------------------------------------------------

    \522\ See Instruction to Item 27(d)(3) of Form N-1A.

---------------------------------------------------------------------------

[[Page 57204]]

     Amending Form N-CSR to correct references to item numbers 
in General Instruction D and in the instruction to Item 13.\523\
---------------------------------------------------------------------------

    \523\ See General Instruction D to Form N-CSR and Item 13 of 
Instruction 13 of Form N-CSR.
---------------------------------------------------------------------------

     Amending General Instruction F (Public Availability) of 
Form N-PORT to read ``With the exception of the non-public information 
discussed below, the information reported on Form N-PORT for the third 
month of each Fund's fiscal quarter will be made publicly available 
upon filing.'' \524\ This amendment will reflect the Commission's 
action making quarter-end reports on Form N-PORT public immediately 
upon filing, with the exception of the non-public fields identified in 
General Instruction F.\525\
---------------------------------------------------------------------------

    \524\ See Instruction F to Form N-PORT.
    \525\ See Interim Final Rule Release, supra footnote 518, at 
n.35 and accompanying text.
---------------------------------------------------------------------------

     Withdrawing Instruction 23 of Reporting Modernization 
Adopting Release, which would have amended 17 CFR 232.401 (rule 401 of 
Regulation S-T) to remove references to Form N-Q.\526\ The amendment is 
no longer necessary because rule 401 was rescinded by a subsequent 
rulemaking.\527\
---------------------------------------------------------------------------

    \526\ See Reporting Modernization Adopting Release, supra 
footnote 263; see also 17 CFR 232.401.
    \527\ See Inline XBRL Filing of Tagged Data, Investment Company 
Act Release No. 33139 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018)].
---------------------------------------------------------------------------

     Amending Item IX of Form N-8B-2 to clarify the required 
designation of exhibits and the use of incorporation by reference in 
order to conform to similar instructions in other Investment Company 
forms.\528\
---------------------------------------------------------------------------

    \528\ See, e.g., Item 28 of Form N-1A.; Item 26 of Form N-6.
---------------------------------------------------------------------------

L. Compliance Dates

    The Commission is providing for a transition period for the 
amendments to Forms N-1A, N-8B-2, and N-CEN. Specifically, we are 
adopting compliance dates for our amendments to Form N-1A, Form N-8B-2, 
and Form N-CEN of December 22, 2020, one year following the amendments' 
effective date. All registration statements, post-effective amendments, 
and reports on these forms filed on or after the compliance date must 
comply with the amendments. Based on the staff's experience, we believe 
that this will provide adequate time for ETFs and other funds to 
compile and review the information that must be disclosed.

III. Other Matters

    Pursuant to the Congressional Review Act,\529\ the Office of 
Information and Regulatory Affairs has designated this rule a ``major 
rule,'' as defined by 5 U.S.C. 804(2). If any of the provisions of 
these rules, or the application thereof to any person or circumstance, 
is held to be invalid, such invalidity shall not affect other 
provisions or application of such provisions to other persons or 
circumstances that can be given effect without the invalid provision or 
application.
---------------------------------------------------------------------------

    \529\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

    We are mindful of the costs imposed by, and the benefits obtained 
from, our rules. Section 2(c) of the Investment Company Act, section 
2(b) of the Securities Act, and section 3(f) of the Exchange Act state 
that when the Commission is engaging in rulmaking under such titles and 
is required to consider or determine whether the action is necessary or 
appropriate in (or, with respect to the Investment Company Act, 
consistent with) the public interest, the Commission shall consider 
whether the action will promote efficiency, competition, and capital 
formation, in addition to the protection of investors. Further, section 
23(a)(2) of the Exchange Act requires the Commission to consider, among 
other matters, the impact such rules would have on competition and 
states that the Commission shall not adopt any rule that would impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. The following analysis considers, in 
detail, the potential economic effects that may result from the rule, 
including the benefits and costs to investors and other market 
participants as well as the broader implications of the rule for 
efficiency, competition, and capital formation.

A. Introduction

    ETFs currently need to obtain an order from the Commission that 
exempts them from certain provisions of the Act that otherwise would 
prohibit several features essential to the structure and operation of 
ETFs. Obtaining such exemptive relief typically has resulted in 
expenses and delays in forming new ETFs. In addition, the conditions in 
the exemptive orders issued by the Commission have evolved over time. 
As a result, some ETF sponsors may have a competitive advantage over 
other sponsors because some exemptive orders allow the sponsors to 
launch new funds under the terms and conditions of those orders, and 
because the terms in some of these orders may be more flexible than 
others.
    Rule 6c-11 will allow ETFs that satisfy certain conditions to 
operate without obtaining an exemptive order from the Commission. The 
Commission also is rescinding the exemptive relief we have issued to 
ETFs that will be permitted to operate in reliance on the rule. 
However, we anticipate that ETFs whose exemptive relief will be 
rescinded under the rule generally will be able to rely on the rule 
without substantially changing their current operations, as the rule's 
conditions are similar to those contained in existing exemptive relief, 
consistent with existing market practice, or generally more flexible 
than those contained within existing exemptive relief.\530\ ETFs that 
wish to operate in a manner not covered by the final exemptive rule can 
seek individual exemptive relief from the Commission.\531\
---------------------------------------------------------------------------

    \530\ As discussed in more detail below, some conditions in the 
rule and the scope of the relief provided are less flexible than 
those included in certain exemptive orders (e.g. the absence of 
master-feeder relief) and others represent requirements that were 
not included in exemptive orders (e.g. basket policies and 
procedures and the recordkeeping requirements).
    \531\ We are not rescinding the exemptive orders for certain 
categories of ETFs (i.e., UIT ETFs, share class ETFs, leveraged/
inverse ETFs and non-transparent ETFs), with the exception of 
master-feeder relief that funds did not rely on as of the date of 
the 2018 ETF Proposing Release (June 28, 2018).
---------------------------------------------------------------------------

    We believe that rule 6c-11 will establish a regulatory framework 
that: (1) Reduces the expense and delay currently associated with 
forming and operating certain ETFs unable to rely on existing orders; 
and (2) creates a level playing field for ETFs that can rely on the 
rule. As such, the rule will enable increased product competition among 
certain ETF providers, which can lead to lower fees for investors, 
encourage financial innovation, and increase investor choice in the ETF 
market.
    The increased basket flexibility the rule affords in particular may 
benefit ETFs and their shareholders. To the extent that ETFs are able 
to implement basket policies and procedures that better facilitate the 
arbitrage mechanism, these ETFs may reduce their bid-ask spreads and 
thereby lower transaction costs for their investors. In addition, 
certain ETFs may be able to use the increased basket flexibility to 
reduce trading costs the ETF incurs.\532\
---------------------------------------------------------------------------

    \532\ Several of the anticipated benefits of rule 6c-11 may be 
associated with metrics that will be measurable only after funds 
operate in reliance on the rule; such metrics include changes in 
bid-ask spreads, premiums/discounts to NAV per share, fund fees, and 
the number of ETFs. These metrics may help facilitate evaluation of 
the extent to which the rule has generated the anticipated benefits, 
although these metrics may also be affected by developments 
independent of rule 6c-11.
---------------------------------------------------------------------------

    The amendments to Forms N-1A and N-8B-2 as well as the additional 
website disclosures required by the rule are intended to improve the 
information

[[Page 57205]]

about ETFs available to the market and to allow investors to more 
readily obtain information about fund products, resulting in reduced 
investor search costs. To the extent that the disclosure requirements 
will improve investors' ability to evaluate the performance and other 
characteristics of fund products, the amendments may result in better 
informed investor decisions and more efficient allocation of investor 
capital among fund products, and may further promote competition among 
ETFs and between ETFs and mutual funds.
    The rule and amendments to Forms N-1A and N-8B-2 also may impact 
non-ETF products and market participants. To the extent that the rule 
will lead to lower investor search costs, lower fees, and increased 
product innovation and investor choice in the ETF market, investors may 
shift their investments towards ETFs and away from funds similar to 
ETFs, such as mutual funds. Such a shift in investor demand also may 
affect broker-dealers and investment advisers, whose customers and 
clients may show increased interest in and demand for ETFs. Moreover, 
because ETF shares are traded on the secondary market, the rule also 
can affect exchanges, alternative trading systems, facilities for OTC 
trading, broker-dealers, and clearing agencies to the extent that the 
rule causes changes in the ETF trading activity they support.

B. Economic Baseline

1. ETF Industry Growth and Trends
    The ETF industry has experienced extensive growth since the first 
U.S. ETF began trading in 1993.\533\ From 1993 to 2002, an average of 
10 new ETFs registered each year and ETF net assets increased by an 
average of $10.7 billion annually. Industry growth accelerated from 
2003 to 2006, when, on average, 62 new ETFs and $77 billion in net 
assets were added to the industry annually. Since 2007, the industry 
has seen an average of 137 new ETF entrants and an average growth of 
$241.2 billion annually. Since 2007, ETF net assets have grown at an 
average rate of 17.2% per year, which compares to 3.2% for closed-end 
funds and 6.3% for open-end funds over the same period.\534\
---------------------------------------------------------------------------

    \533\ For the purpose of this release, we focus exclusively on 
ETFs that trade on U.S. exchanges.
    \534\ Unless otherwise noted, the number and net assets of ETFs 
in this section of the Release are based on a staff analysis of 
Bloomberg data. Growth rates for open- and closed-end funds are 
based on a staff analysis of Morningstar data.
---------------------------------------------------------------------------

    At the end of December 2018, there were 1,978 registered ETFs, 
totaling $3.3 trillion in net assets and spanning six broad investment 
style categories. ETFs are predominantly structured as open-end funds; 
however, eight UIT ETFs together represented 10.3% of ETF total net 
assets ($340.6 billion), and 68 share class ETFs together represented 
25.6% of total net assets ($854.6 billion). The chart illustrates 
growth in ETF net assets by investment strategy beginning in 2000. It 
also tracks the percentage of net assets invested in actively managed 
ETFs.

[[Page 57206]]

[GRAPHIC] [TIFF OMITTED] TR24OC19.019

    Although indexing is still the most common ETF strategy, over time 
ETFs have evolved to offer, among other things, active management, 
leveraged and inverse investment strategies, and exposure to various 
types of foreign securities (in both index-based and actively managed 
ETFs). At the end of December 2018, there were 167 leveraged/inverse 
ETFs that were structured as open-end funds.\535\ In total, leveraged/
inverse ETFs had total net assets of $29.64 billion or approximately 1% 
of all ETF net assets. None of the eight registered UIT ETFs employed 
leveraged or inverse investment strategies. Of the remaining 
unleveraged ETFs, both index-based and actively managed, 1,705 ETFs had 
combined net assets of $3 trillion operated as open-end funds, while 
eight UIT ETFs had $340.6 billion in net assets.\536\
---------------------------------------------------------------------------

    \535\ See supra footnote 92 (noting that the exemptive orders 
that we have issued to sponsors of leveraged/inverse ETFs do not 
provide relief to ETFs described as seeking investment returns that 
correspond to the performance of a leveraged or inverse leveraged 
market index over a predetermined period of time).
    \536\ Bloomberg defines actively managed or index-based managed 
funds according to disclosure in the fund prospectus.
---------------------------------------------------------------------------

    There were 257 actively managed ETFs with total net assets of $69.5 
billion. The remaining 1,721 ETFs, with a combined $3.23 trillion in 
net assets, were index-based ETFs. Of these, 1,713 ETFs with total net 
assets of $2.892 trillion were structured as open-end funds and eight 
UIT ETFs had total net assets of $340.6 billion.
    The majority of ETFs (1,615) held some foreign exposure in their 
portfolio according to Morningstar data. These ETFs had total net 
assets of $2.921 trillion. Of these funds, seven were UIT ETFs and had 
$320.6 billion in net assets. The remaining 1,608 ETFs accounting for 
$2.6 trillion in net assets were organized as open-end funds. On 
average, these ETFs reported foreign exposure of 40.15% (56.87% for UIT 
ETFs and 40.07% for ETFs structured as open-end funds).\537\
---------------------------------------------------------------------------

    \537\ We estimate funds' foreign holdings on February 27, 2019 
from Morningstar data. For each ETF, foreign holdings of equity and 
debt securities are combined to obtain the approximate percentage of 
assets invested in foreign securities. Morningstar provided foreign 
holding data for 1,970 ETFs. In this data, 363 funds, one of which 
is a UIT ETF, reported holding no foreign securities and 8 funds 
from the original 1,978 are missing foreign holdings data.
---------------------------------------------------------------------------

2. Exemptive Order Process and Certain Conditions Under Existing Orders
    ETFs seeking to operate as investment companies required exemptive 
relief from the Commission. Since the first exemptive order was granted 
in 1992, the Commission has issued approximately 300 exemptive orders 
to ETFs. The average number of approved exemptive orders between 1992 
and 2006 was approximately 2.5 per year, which has increased to 
approximately 29 per year since 2007.

[[Page 57207]]

    Based on our review of exemptive orders that granted relief for 
unleveraged ETFs between January 2007 and early April 2019, the median 
processing time from the filing of an initial application to the 
issuance of an order was 213 days, although there was considerable 
variation.\538\ Depending on the complexity of a fund's application, 
some ETF sponsors received exemptive relief in a relatively short 
period of time (the 10th percentile of the processing time was 87 days) 
while others waited over one year for approval (the 90th percentile of 
the processing time was 669 days).
---------------------------------------------------------------------------

    \538\ The earliest order in our sample was approved on January 
17, 2007 and the latest order was approved on April 2, 2019. This 
data does not include orders for non-transparent ETFs.
---------------------------------------------------------------------------

    In addition to the processing time associated with applying for an 
exemptive order, Commission staff estimates that the direct cost of a 
typical fund's application for ETF relief (associated with, for 
example, legal fees) is approximately $100,000, which may vary 
considerably depending on the complexity of the prospective fund.
    These exemptive orders permit ETFs to operate as investment 
companies under the Investment Company Act, subject to representations 
and conditions, some of which have changed over time.\539\ For example, 
as discussed above, our orders have required ETFs that will rely on 
rule 6c-11 to provide some degree of transparency regarding their 
portfolio holdings.\540\ Actively managed ETFs and some self-indexed 
ETFs have been required to disclose their full portfolio holdings each 
day, while other index-based ETFs are permitted to specify the index 
they seek to track (as long as the index provider lists the constituent 
securities on its website) or disclose the components of their baskets. 
Based on a staff review of 150 randomly selected ETFs, which included 
100 index-based ETFs and 50 actively managed ETFs, however, all 150 
ETFs maintain a website and provide the ETF's complete daily portfolio 
holdings. Therefore, we believe it is likely that all ETFs that can 
rely on the rule, including those that are not subject to a full 
transparency condition in their exemptive order, currently provide full 
portfolio transparency.\541\
---------------------------------------------------------------------------

    \539\ ETFs generally have obtained similar exemptive relief 
under these orders. However, over time, our exemptive orders 
generally have increased the maximum number of days that an ETF 
holding foreign investments can delay the satisfaction of 
redemptions as part of the relief from section 22(e) of the Act 
(from 12 days to 15 days).
    \540\ See supra footnote 225.
    \541\ The samples were randomly drawn from all index-based ETFs 
and all actively managed ETFs currently trading according to 
Bloomberg. We recognize that the selection of ETFs examined 
overweights the sample of actively managed ETFs relative to the 
entire population of actively managed ETFs. Our sampling procedure 
was done to avoid small sample bias as equally proportioned sampling 
would call for a survey of approximately 2 actively managed funds. 
Commenters did not disagree with statements in the proposing release 
that ETFs that can rely on the rule maintain a website and provide 
the ETF's complete daily portfolio holdings.
---------------------------------------------------------------------------

    ETFs' flexibility to use custom baskets also has evolved over time 
under our exemptive orders. From 1996 to 2006, exemptive orders for 
open-end ETFs did not expressly limit baskets to a pro rata 
representation of the ETF's portfolio holdings. Since approximately 
2006, however, our exemptive orders placed increasingly tighter 
restrictions on ETFs' composition of baskets.\542\ Because our 
exemptive orders have generally included future funds relief to allow 
sponsors to form and operate new ETFs, we are unable to quantify the 
number of funds operating under each of the different basket 
flexibility conditions included in our orders.\543\
---------------------------------------------------------------------------

    \542\ See 2018 ETF Proposing Release, supra footnote 7, at 
nn.236-241 and accompanying text.
    \543\ See supra footnote 5.
---------------------------------------------------------------------------

    Many exemptive orders also have required ETFs to provide certain 
website disclosures on their website, free of charge.\544\ Based on a 
staff review of the websites of 150 randomly selected ETFs, all 150 
ETFs provided the previous day's NAV, price of the ETF shares,\545\ and 
the premium or discount associated with the ETF share price at the 
market close. Accordingly, we believe that all ETFs that can rely on 
rule 6c-11 currently disclose this information on their website.\546\ 
Our exemptive orders also have included other requirements, including 
the publication of the ETF's IIV every 15 seconds.
---------------------------------------------------------------------------

    \544\ See 2018 ETF Proposing Release, supra footnote 7, at 
section II.C.6.c. Substantially all exemptive orders starting in 
2008 include a requirement for daily website disclosures of NAV, 
closing price, and premiums and discounts--each as of the end of the 
prior business day.
    \545\ One actively managed ETF provided a price based on the 
midpoint between the bid and ask prices, while the remainder of the 
actively managed ETFs and all index-based ETFs provided closing 
prices.
    \546\ Commenters did not disagree with a statement in the 
proposing release that all ETFs that can rely on the rule currently 
provide this information on their website.
---------------------------------------------------------------------------

3. Market Participants
    Several non-ETF market participants may be affected by the rule, 
including fund sponsors, authorized participants, liquidity providers, 
trading venues, and institutional and retail investors.
    Using data from Bloomberg, we estimate that there are 81 unique ETF 
sponsors with approximately 1,978 ETFs as of December 31, 2018. The 
median number of ETFs per sponsor is six and the mean is 24, suggesting 
that a small number of sponsors have a large share of the ETF market 
(in terms of number of ETFs). Indeed, the top five sponsors operate a 
combined 965 ETFs, whereas the bottom half of sponsors operate only a 
combined 118 ETFs.
    An ETF (either directly or through a service provider) has 
contractual arrangements with authorized participants to purchase or 
redeem ETF shares in creation unit size aggregations in exchange for a 
basket of securities and other assets. Based on data from Form N-CEN as 
of July 26, 2019, the median ETF has 23 authorized participant 
agreements and 4 active authorized participants.\547\ \548\ Larger ETFs 
tend to have more authorized participant agreements, with the median 
number of authorized participant agreements ranging from 13 for the 
smallest quarter of ETFs to 33 for the largest quarter of ETFs. Larger 
ETFs also tend to have more active authorized participants, ranging 
from a median of 2 to 7 for the smallest and largest quarters of ETFs, 
respectively. A 2015 survey-based study of fifteen fund sponsors 
reports, however, that creation and redemption transactions occurred 
only on between 10% to 20% of trading days and that only 10% of the 
daily activity in all ETF shares (by volume) are creations or 
redemptions.\549\
---------------------------------------------------------------------------

    \547\ Beginning July 30, 2018, ETFs started reporting 
information on authorized participants in response to Item E.2 of 
Form N-CEN. As of July 26, 2019, 1,739 ETFs had filed the form.
    \548\ An active AP is an authorized participant that engaged in 
creation or redemption activity during the reporting period. Some 
market makers and other market participants engage in creation and 
redemptions indirectly through authorized participants. See supra 
section I.B. Data on the number of such market participants is not 
reported on Form N-CEN.
    \549\ See Rochelle Antoniewicz & Jane Heinrichs, The Role and 
Activities of Authorized Participants of Exchange-Traded Funds, ICI 
Report (Mar. 2015) (``Antoniewicz II''). The study also points out 
that NSCC is the sole provider of clearing services for ETF primary 
market transactions and that whether a creation or redemption order 
is eligible to be processed through NSCC depends on the eligibility 
for NSCC processing of the securities in the ETF's basket. See also 
2019 ICI Factbook, supra footnote 3 (``On average, 90 percent of the 
total daily activity in ETFs occurs on the secondary market.'').
---------------------------------------------------------------------------

    Some authorized participants also act as registered market makers 
in ETF shares. Other liquidity providers for ETF shares include market 
makers that are not authorized participants, hedge funds, and 
proprietary trading firms. According to a 2014 survey, the median 
number of liquidity providers for an ETF was 17, while the median 
number of authorized participants that are

[[Page 57208]]

registered market makers for an ETF was 4.\550\
---------------------------------------------------------------------------

    \550\ See Antoniewicz II, supra footnote 550; see also 2019 ICI 
Factbook, supra footnote 3.
---------------------------------------------------------------------------

    ETF shares are mainly traded on national securities exchanges.\551\ 
Table 4 lists the 9 exchanges with the largest average daily ETF 
trading volume, measured over the 30 business days ending on March 7, 
2019. The data shows that NYSE Arca handles the largest portion of ETF 
trades ($15.3 billion), followed by Cboe BZX Exchange ($6.6 billion), 
and Cboe EDGX Exchange ($4.5 billion).
---------------------------------------------------------------------------

    \551\ In the first quarter of 2019, 64% of ETF trading by dollar 
volume was executed on exchanges, 26% over the counter without using 
alternative trading systems (ATSs), and 10% over the counter using 
ATSs, based on Trade and Quote (TAQ) data provided by the New York 
Stock Exchange, Trade Reporting Facility (TRF) data provided by 
FINRA, and ATS information made publicly available on the FINRA 
website.

   Table 4--ETFS Traded on National Exchanges and Their Trading Volume
------------------------------------------------------------------------
                                                          Trading volume
                Exchange                  Number of ETFs     (billion)
------------------------------------------------------------------------
NYSE Arca, Inc..........................           1,939           $15.3
Cboe BZX Exchange, Inc..................           1,813             6.6
Cboe EDGX Exchange, Inc.................           1,815             4.5
Cboe BYX Exchange, Inc..................           1,721             3.6
The Nasdaq Stock Market LLC.............             348             2.6
Cboe EDGA Exchange, Inc.................           1,668             2.1
Nasdaq PHLX LLC.........................           1,070             1.9
Nasdaq BX, Inc..........................           1,671             1.5
NYSE Chicago, Inc.......................             184            1.2
------------------------------------------------------------------------
The table reports the number of ETFs traded at each exchange and the
  average daily ETF trading volume, measured over the 30 business days
  ending on March 7, 2019. Trading volume is calculated as trade price
  multiplied by the number of shares relating to each price by exchange.
  The figures reflect an analysis by Commission staff using data
  obtained through a subscription to Bloomberg.

    Both institutional and retail investors participate in the ETF 
secondary market. As shown in Table 5 below, from the first quarter of 
2015 to the fourth quarter of 2017, we estimate that institutions own, 
on average, 43% of ETF shares, when calculating the average using equal 
weights for all ETFs, and 57% when calculating the average using total 
net assets (``TNA'')--based weights. The difference between the equal-
weighted and TNA-weighted average institutional ownership numbers--43% 
vs. 57%--suggests that institutional investors tend to hold larger 
ETFs. In addition, there is considerable variation in the degree to 
which ETF shares are held by institutions, ranging from an average for 
the 5th percentile of 6% to an average for the 95th percentile of 
90%.\552\ However, we observe that the average institutional holding 
did not change considerably over time during the sample period.
---------------------------------------------------------------------------

    \552\ The data we use is from Form 13F filings, which does not 
capture all institutional positions because Form 13F does not 
require reporting of short positions (which would lead to an 
overstatement of institutional ownership) and not all institutional 
investors are required to file the form (which would lead to an 
understatement of institutional ownership).

                                                        Table 5--Institutional Ownership of ETFs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                                                    weighted     weighted
                     Quarter                        average      average      SD  (%)      P5  (%)      P25  (%)     P50  (%)     P75  (%)     P95  (%)
                                                      (%)          (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2015Q1..........................................           41           54           24            5           22           38           58           85
2015Q2..........................................           42           55           25            6           23           40           60           91
2015Q3..........................................           44           56           26            7           25           41           62           94
2015Q4..........................................           44           57           26            5           24           43           62           92
2016Q1..........................................           44           57           26            5           24           42           62           92
2016Q2..........................................           43           56           26            6           23           41           61           92
2016Q3..........................................           43           56           26            5           24           41           62           91
2016Q4..........................................           44           57           25            6           24           42           61           91
2017Q1..........................................           43           58           25            6           24           42           61           91
2017Q2..........................................           44           55           25            6           25           42           61           90
2017Q3..........................................           43           61           25            6           24           42           61           88
2017Q4..........................................           44           58           24            7           25           43           61           87
Average.........................................           43           57           25            6           24           41           61           90
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports the quarterly institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided
  by the total shares outstanding adjusted for share splits. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles.
  All descriptive stats are equal-weighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using data from 2015Q1
  to 2017Q4 obtained through a subscription to WRDS SEC Analytics Suite and the Center for Research in Security Prices (CRSP).

    Further analysis shows that institutional ownership varies 
considerably by the type of ETF. Using Morningstar Categories, for the 
fourth quarter of 2017, Table 6 below shows that ETFs' equal-weighted 
average institutional ownership ranges from 20% for alternative ETFs to 
56% for taxable bond ETFs. We also find that

[[Page 57209]]

TNA-weighted average institutional ownership is higher than equal-
weighted average institutional ownership for international equity, 
municipal bond, sector equity, taxable bond, and U.S. ETFs, suggesting 
that institutional investors tend to hold larger ETFs within these 
categories. The converse is true for allocation, alternative, and 
commodity ETFs. The table also shows that there is large variation 
within categories.\553\
---------------------------------------------------------------------------

    \553\ Morningstar Category is assigned based on the underlying 
securities in each portfolio. Per Morningstar, funds in allocation 
categories seek to provide both income and capital appreciation by 
investing in multiple asset classes, including stocks, bonds, and 
cash. Funds in alternative strategies employ investment approaches 
(similar to those used by hedge funds) designed to offer returns 
different than those of the long-only investments in the stock, 
bond, or commodity markets. International equity portfolios expand 
their focus to include stocks domiciled in diverse countries outside 
the United States though most invest primarily in developed markets. 
Municipal bond strategies are generally defined by state or national 
focus and duration exposure. A fund is considered state-specific if 
at least 70% of its assets are invested in municipal securities 
issued by the various government entities of a single state. Sector-
specific equity funds are usually equity funds, in that they 
maintain at least 85% exposure to equity. Fixed-Income/Taxable bond 
portfolios invest at least 80% of assets in securities that provide 
bond or cash exposure. U.S. equity portfolios are defined as 
maintaining at least 85% exposure to equity and investing at least 
70% of assets in U.S.-domiciled securities.

                                      Table 6--Institutional Ownership of ETFs by Morningstar Category for 2017:Q4
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                                                    weighted     weighted
                    Category                        average      average      SD  (%)      P5  (%)      P25  (%)     P50  (%)     P75  (%)     P95  (%)
                                                      (%)          (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation......................................           46           40           27           10           22           41           67           94
Alternative.....................................           20           11           20            2            6           13           26           64
Commodities.....................................           43           40           16           16           39           39           57           61
International Equity............................           48           62           22           10           33           49           66           85
Municipal Bond..................................           52           63           16           22           40           51           64           74
Sector Equity...................................           43           59           21           12           27           42           57           82
Taxable Bond....................................           56           63           20           24           43           56           69           89
U.S. Equity.....................................           46           59           21           10           31           44           61           87
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports the institutional ownership ratio of ETFs, measured as the total number of shares owned by institutional investors divided by the
  total shares outstanding adjusted for share splits, by Morningstar Category. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to
  95th percentiles. All descriptive stats are equal-weighted except TNA-Weighted Average. The figures reflect an analysis by the Commission staff using
  data for 2017Q4 obtained a through subscription to WRDS SEC Analytics Suite and the CRSP.

4. Secondary Market Trading, Arbitrage, and ETF Liquidity
    Unlike shares of open-end funds, ETF shares are traded in the 
secondary market at prices that may deviate from the ETF's NAV. As a 
result, ETF investors may trade shares at prices that do not 
necessarily reflect the NAV of the underlying ETF assets.\554\ As 
discussed above, however, authorized participants engage in primary 
market arbitrage activity that brings the market price of ETF shares 
and the NAV of the ETF's portfolio closer together.\555\ Market 
participants also can engage in arbitrage activity in the secondary 
market by taking offsetting positions in the ETF shares and the 
underlying basket assets.
---------------------------------------------------------------------------

    \554\ It is possible for both the ETF's NAV per share and its 
share price to deviate from the intrinsic value of the ETF's 
underlying portfolio. In addition, there may be cases in which the 
ETF's share price is closer to the intrinsic value of the ETF's 
portfolio than its NAV per share. See, e.g., Ananth Madhavan & 
Aleksander Sobczyk, Price Dynamics and Liquidity of Exchange-Traded 
Funds, Journal of Investment Management, Second Quarter 2016, at 1.
    \555\ See supra section I.B.
---------------------------------------------------------------------------

    Using data from Bloomberg, we find that ETFs, on average, have 
closing prices slightly higher than the NAV per share (i.e., trade at a 
premium at market close), as shown in Table 7 below. The equal-weighted 
and TNA-weighted average premium/discount over the last 15 years for 
all ETFs in the dataset are 0.07% and 0.06%, respectively, and the 
median is 0.02%, indicating that the closing prices of ETF shares are, 
on average, higher than the NAV per share. One study finds similar 
results and concludes that, on average, ETF market prices tend to 
reflect NAV per share closely.\556\ However, consistent with the study, 
we find that ETF premiums/discounts vary significantly.\557\ For 
example, we find that the (weighted) average premium/discount ranges 
from 0.02% in 2018 to 0.14% in 2009, and the standard deviation of 
premiums/discounts ranges from 0.16% in 2017 to 0.59% in 2008. 
Moreover, not all ETF shares trade at a premium. For example, the table 
shows, in a given year, at least 25% of ETF shares trade at a discount, 
on average.
---------------------------------------------------------------------------

    \556\ See Antti Petajisto, Inefficiencies in the Pricing of 
Exchange-Traded Funds, Financial Analysts Journal, First Quarter 
2017, at 24.
    \557\ Commenters to our 2015 ETP Request for Comment, supra 
footnote 19, reported qualitatively similar results. See, e.g., 
Comment Letter of Eaton Vance Corp. to Request for Comment on 
Exchange-Traded Products (File No. S7-11-15) (Aug. 17, 2015).

                    Table 7--Time-Series Averages of Cross-Sectional Descriptive Statistics of Premium/Discount (%) Using Daily Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                      Year                          weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
2004............................................         0.10         0.04         0.26        -0.26        -0.06         0.02         0.09         0.55
2005............................................         0.06         0.08         0.28        -0.22        -0.04         0.04         0.11         0.62
2006............................................         0.07         0.08         0.34        -0.34        -0.04         0.03         0.14         0.67
2007............................................         0.14         0.08         0.38        -0.39        -0.06         0.03         0.20         0.64
2008............................................         0.09         0.10         0.59        -0.77        -0.14         0.05         0.34         1.03
2009............................................         0.12         0.14         0.53        -0.55        -0.08         0.02         0.34         1.02
2010............................................         0.07         0.07         0.35        -0.43        -0.05         0.02         0.16         0.63
2011............................................         0.04         0.07         0.41        -0.54        -0.04         0.02         0.17         0.76

[[Page 57210]]

 
2012............................................         0.06         0.07         0.28        -0.31        -0.02         0.02         0.14         0.58
2013............................................         0.06         0.03         0.28        -0.35        -0.03         0.02         0.09         0.43
2014............................................         0.05         0.04         0.22        -0.25        -0.01         0.02         0.08         0.35
2015............................................         0.04         0.04         0.23        -0.25        -0.01         0.02         0.08         0.40
2016............................................         0.03         0.04         0.23        -0.22        -0.01         0.01         0.09         0.39
2017............................................         0.07         0.06         0.16        -0.10        -0.01         0.02         0.09         0.33
2018............................................         0.03         0.02         0.22        -0.32        -0.03         0.01         0.07         0.36
Average.........................................         0.07         0.06         0.31        -0.35        -0.04         0.02         0.14         0.57
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The TNA-Weighted Average is weighted based
  on an ETF's previous month's total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Premiums or
  discounts are from daily Bloomberg data covering 2,235 ETFs for a total of 3,319,782 daily observations. Per Bloomberg, premium/discount (%) is the
  difference between the ETF's closing price on the day of the most recent NAV and the NAV of the fund on that day. The data covers the period from 01/
  02/2004 to 12/31/2018.

    Premiums and discounts to NAV per share also vary considerably by 
the types of assets held by the ETF.\558\ We use Morningstar Investment 
Categories to divide ETFs into groups of similar assets and, in Table 8 
below, report the time-series averages of cross-sectional descriptive 
statistics for premiums/discounts in the different Morningstar 
Investment Categories. We find that the TNA-weighted average premium/
discount ranges from as low as 0.002% for alternative ETFs to 0.183% 
for taxable bond ETFs. The results are qualitatively similar for the 
equal-weighted average premium/discount.
---------------------------------------------------------------------------

    \558\ See, e.g., Robert Engle & Debojyoti Sarkar, Premiums-
Discounts and Exchange Traded Funds, Journal of Derivatives, Summer 
2006, at 27 (observing that premiums and discounts for domestic ETFs 
are generally small and highly transient, and that while premiums 
and discounts are larger and more persistent in international ETFs, 
they are smaller and less persistent than the premiums and discounts 
of international closed-end funds).

           Table 8--Time-Series Averages of Cross-Sectional Descriptive Statistics of Premium/Discount (%) by Morningstar Investment Category
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                    Category                        weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation......................................        0.068        0.077        0.222       -0.124       -0.039        0.046        0.222        0.287
Alternative.....................................        0.006        0.002        0.317       -0.388       -0.119       -0.004        0.110        0.444
Commodities.....................................        0.199        0.105        0.446       -0.501        0.009        0.079        0.150        0.924
International Equity............................        0.176        0.181        0.422       -0.467       -0.071        0.192        0.438        0.799
Municipal Bond..................................        0.071        0.059        0.290       -0.351       -0.097        0.050        0.241        0.477
Sector Equity...................................        0.030        0.012        0.183       -0.234       -0.070        0.005        0.081        0.294
Taxable Bond....................................        0.192        0.183        0.196       -0.075        0.080        0.175        0.257        0.506
U.S. Equity.....................................        0.003        0.006        0.076       -0.098       -0.033        0.008        0.046        0.109
--------------------------------------------------------------------------------------------------------------------------------------------------------
The table reports time-series averages of cross-sectional descriptive statistics of premiums/discounts (%). The ETFs are first divided into groups based
  on Morningstar Categories. The TNA-Weighted Average is weighted based on an ETF's previous month's total net assets. SD refers to standard deviation.
  Columns P5 to P95 refer to the 5th to 95th percentiles. Premiums or discounts are from daily Bloomberg data covering 2,235 ETFs for a total of
  3,319,782 daily observations. Per Bloomberg, premium/discount (%) is the difference between the fund's closing price on the day of the most recent NAV
  and the NAV of the fund on that day. The data covers the period from 01/02/2004 to 12/31/2018.

    When the ETF arbitrage mechanism functions effectively, ETFs also 
should trade at smaller bid-ask spreads.\559\ As shown in Table 9 
below, the TNA-weighted average bid-ask spread, as a percentage of the 
mid-price, has been relatively constant over the years, ranging from 
highs of 0.37% in 2012 and 2016 to a low of 0.31% in 2018.\560\ Equal-
weighted average bid-ask spreads averaged 0.33% and were considerably 
higher than TNA-weighted bid-ask spreads, which averaged 0.04%, 
reflecting that larger ETFs tend to have smaller bid-ask spreads. The 
table also shows that the bid-ask spread varies considerably between 
ETFs, with an average of the 5th percentile of bid-ask spreads of 0.01% 
and an average of the 95th percentile of bid-ask spreads at 0.16%.
---------------------------------------------------------------------------

    \559\ See, e.g., Joanne M. Hill, Dave Nadig, & Matt Hougan, 
Comprehensive Guide to Exchange-Traded Funds (ETFS), CFA Institute 
Research Foundation (2015), available at https://www.cfapubs.org/doi/pdf/10.2470/rf.v2015.n3.1 (``CFA Guide'').
    \560\ This analysis starts in 2012 because the available data 
begins in that year.

                         Table 9--Time-Series Averages of Cross-Sectional Descriptive Statistics of Relative Bid-Ask Spread (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                      Year                          weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012............................................         0.37         0.06         0.12         0.01         0.02         0.02         0.05         0.27
2013............................................         0.33         0.05         0.10         0.01         0.01         0.02         0.05         0.21

[[Page 57211]]

 
2014............................................         0.27         0.04         0.06         0.01         0.01         0.02         0.04         0.11
2015............................................         0.32         0.04         0.07         0.00         0.01         0.02         0.05         0.12
2016............................................         0.37         0.04         0.07         0.01         0.01         0.02         0.04         0.11
2017............................................         0.34         0.03         0.07         0.00         0.01         0.02         0.03         0.11
2018............................................         0.31         0.05         0.09         0.01         0.01         0.02         0.04         0.16
Average.........................................         0.33         0.04         0.08         0.01         0.01         0.02         0.04         0.16
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The TNA-Weighted Average is weighted
  based on an ETF's previous month's total net assets. SD refers to standard deviation. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask
  spreads are from daily Bloomberg data covering 2,235 ETFs for a total of 2,477,272 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is the
  average of all bid/ask spreads taken as a percentage of the mid-price. The data covers the period from 01/02/2004 to 12/31/2018.

    Table 10 below reports bid-ask spreads for ETF shares by 
Morningstar Category. U.S. Equity ETFs have the smallest average bid-
ask spread of 0.03%, whereas allocation ETFs--ETFs that seek to provide 
both income and capital appreciation by investing in multiple asset 
classes, including stocks, bonds, and cash strategy--have the largest 
average bid-ask spread of 0.21%.

       Table 10--Time-Series Averages of Cross-Sectional Descriptive Statistics of Relative Bid-Ask Spread (%) by Morningstar Investment Category
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     Equal-        TNA-
                    Category                        weighted     weighted        SD           P5          P25          P50          P75          P95
                                                    average      average
--------------------------------------------------------------------------------------------------------------------------------------------------------
Allocation......................................         0.57         0.21         0.30         0.06         0.07         0.14         0.22         0.64
Alternative.....................................         0.38         0.10         0.16         0.02         0.03         0.05         0.09         0.33
Commodities.....................................         0.30         0.06         0.07         0.02         0.02         0.02         0.08         0.14
International Equity............................         0.43         0.07         0.11         0.02         0.02         0.03         0.08         0.21
Municipal Bond..................................         0.29         0.10         0.11         0.03         0.04         0.06         0.10         0.30
Sector Equity...................................         0.28         0.06         0.09         0.01         0.02         0.04         0.06         0.20
Taxable Bond....................................         0.29         0.04         0.08         0.01         0.01         0.02         0.04         0.15
U.S. Equity.....................................         0.21         0.03         0.04         0.01         0.01         0.01         0.03         0.09
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports time-series averages of cross-sectional descriptive statistic of relative bid-ask spreads (%). The ETFs are first divided into groups
  based on Morningstar Categories. The mean is weighted based on an ETF's previous month TNA and the data covers the period from 01/03/2012 to 12/31/
  2018. SD, Min and Max refer to standard deviation, minimum and maximum. Columns P5 to P95 refer to the 5th to 95th percentiles. Bid-ask spreads are
  from daily Bloomberg data covering 2,235 ETFs for a total of 2,477,272 daily bid-ask spreads. Per Bloomberg, the bid-ask spread (%) is the average of
  all bid/ask spreads taken as a percentage of the mid-price.

    The summary statistics presented thus far in this section suggest 
that the arbitrage mechanism generally functions effectively during 
normal market conditions. However, the Commission has observed periods 
of market stress during which the arbitrage mechanism has functioned 
less effectively and during which there were significant deviations for 
some ETFs between market price and NAV per share and when bid-ask 
spreads widened considerably. These conditions only persisted for very 
short periods of time for the periods of market stress we have 
observed, suggesting that the arbitrage mechanism recovered 
quickly.\561\
---------------------------------------------------------------------------

    \561\ See, e.g., Ananth Madhavan, Exchange-Traded Funds, Market 
Structure, and the Flash Crash, Financial Analysts Journal, July/
Aug. 2012, at 20.
---------------------------------------------------------------------------

C. Benefits and Costs of Rule 6c-11 and Form Amendments

    The Commission is sensitive to the economic effects that can result 
from rule 6c-11 and amendments to Forms N-1A and N-8B-2, including 
benefits and costs. Where possible, the Commission quantifies the 
likely economic effects; however, the Commission is unable to quantify 
certain economic effects because it lacks the information necessary to 
provide estimates or ranges. In some cases, quantification is 
particularly challenging due to the difficulty of predicting how market 
participants will act under the conditions of the rule. Nevertheless, 
as described more fully below, the Commission is providing both a 
qualitative assessment and quantified estimate of the economic effects, 
including the initial and ongoing costs of the additional disclosure 
requirements, where feasible.
1. Rule 6c-11
    Rule 6c-11 will allow ETFs to operate in reliance on a rule rather 
than individual exemptive orders if they meet the requirements and 
conditions of the rule. In addition, we are rescinding all existing ETF 
exemptive orders, with the exception of: (i) The section 12(d)(1) 
relief included in those orders that permit certain fund of funds 
arrangements; \562\ and (ii) orders relating to UIT ETFs, leveraged/
inverse ETFs, share class ETFs, and non-transparent ETFs. This section 
first evaluates the general considerations associated with the 
rulemaking and then discusses the

[[Page 57212]]

effects of the specific requirements and conditions of the rule.
---------------------------------------------------------------------------

    \562\ We will, however, rescind relief from sections 12(d)(1) 
and 17(a)(1) and (2) that have been provided to allow master-feeder 
arrangements for those ETFs that do not currently rely on the 
relief. See supra section II.F. In addition, we will grandfather 
existing master-feeder arrangements involving ETF feeder funds, but 
prevent the formation of new ones under existing orders, by amending 
relevant exemptive orders. See id.
---------------------------------------------------------------------------

a. General Considerations
    Rule 6c-11 will grant exemptive relief from the provisions of the 
Act that otherwise prohibit several features essential to the ETF 
structure. This section evaluates the overall effect of reducing the 
expense and delay of operating certain new ETFs by granting this 
exemptive relief as part of a rule rather than through the individual 
exemptive order process.
    As the requirements and conditions of the rule are either similar 
to those contained in existing exemptive orders, consistent with market 
practice, or generally provide more flexibility, we anticipate that the 
rule and the related rescission of ETF exemptive relief will not 
require any existing ETFs whose exemptive relief will be rescinded to 
significantly change the way they operate. Conversely, some ETFs whose 
exemptive orders contain conditions that are more restrictive than 
those contained in the rule may decide to change the way they operate 
in order to make use of such increased flexibility.
    Relative to the baseline, rule 6c-11 will eliminate the costs 
associated with applying to the Commission for an exemptive order to 
form and operate as an ETF for funds relying on the rule. Specifically, 
the process of forming new ETFs in reliance on the rule will be 
quicker, more predictable, less complex, and therefore less costly than 
obtaining an exemptive order as new ETFs that cannot rely on existing 
orders are currently required to do. ETFs that cannot rely on the rule 
will continue to be required to apply for an exemptive order to form 
and operate, unless they have an existing exemptive order that includes 
future fund relief.\563\
---------------------------------------------------------------------------

    \563\ See supra footnote 42 (noting that UIT ETFs' orders do not 
include relief for future ETFs formed pursuant to the same order). 
As discussed below, some ETFs will incur additional costs as a 
result of the rule's requirement to adopt and implement written 
policies and procedures that govern the construction of basket 
assets and the process that will be used for the acceptance of 
basket assets, the rule's additional website disclosure 
requirements, and the amendments to Forms N-1A and N-8B-2. The 
operation of such ETFs may therefore become more costly, on balance, 
to the extent that these costs are not offset by the benefits from 
the other parts of the rule, such as the increased basket 
flexibility and, for certain new ETFs, the reduced costs of forming 
the fund.
---------------------------------------------------------------------------

    As described above in section IV.B.2, we estimate that the cost for 
a typical unleveraged ETF of filing for exemptive relief is $100,000. 
In addition, based on our review of exemptive orders that granted 
relief for unleveraged ETFs between January 2007 and early April 2019, 
the median processing time from the filing of an initial application to 
the issuance of an order was 213 days, although there was considerable 
variation. Thus, any new ETF planning to operate within the parameters 
set forth by the rule will save this expected cost and avoid this 
delay. In addition, such ETFs would avoid the uncertainty about the 
length of the delay associated with the exemptive order process, 
allowing each sponsor to better control the timetable for launching a 
new ETF product in a way that maximizes benefits to its business. 
Conversely, funds that are not able to comply with the conditions of 
the rule will continue to need to apply for an exemptive order. 
Assuming that the number of new ETFs seeking to form and operate under 
the rule that would otherwise need to apply for exemptive relief is 
equal to the annual average number of ETFs that have applied for 
exemptive relief since 2007, these cost and time savings would accrue 
to approximately 29 ETFs per year.\564\ Using this assumption, the 
annual costs savings to this group of ETF sponsors are approximately 
$2.9 million.\565\ We are unable to quantify the benefit a new ETF will 
derive from avoiding the delay and the uncertainty about the length of 
the delay associated with the exemptive order process as the cost of a 
delayed registration for a new ETF is inherently difficult to 
measure.\566\
---------------------------------------------------------------------------

    \564\ Compared to the baseline, these cost and time savings will 
only accrue to new ETFs whose sponsors have not received exemptive 
relief that would allow such ETFs to operate.
    \565\ This estimate is based on the following calculation: 29 x 
$100,000 = $2,900,000.
    \566\ Costs arising from the delay and the uncertainty 
associated with the exemptive order process include primarily 
forgone profits and costs associated with missed business 
opportunities. We do not have access to data on ETFs' profits, and 
commenters did not provide such data. Additionally, forgone profits 
associated with missed business opportunities, such as forgoing a 
``first-mover advantage,'' can be highly variable and dependent on 
specific circumstances.
---------------------------------------------------------------------------

    By eliminating the need for ETFs that can rely on the rule to seek 
an exemptive order from the Commission, the rule will also eliminate 
certain indirect costs associated with the exemptive application 
process. Specifically, ETFs that apply for an order forgo potential 
market opportunities until they receive the order, while others forgo 
the market opportunity entirely rather than seek an exemptive order 
because they have concluded that the cost of seeking an exemptive order 
would exceed the anticipated benefit of the market opportunity.
    In addition, we believe that the rule will make it easier for some 
fund complexes to ensure that each ETF in the complex is in compliance 
with regulations. Specifically, we anticipate that it will be easier, 
and thus less costly, for ETF complexes that today operate funds under 
multiple exemptive orders to ensure compliance with a single set of 
requirements and conditions contained in the rule rather than with 
multiple exemptive orders to the extent that the orders vary in the 
requirements and conditions they contain.
    We acknowledge that fund complexes may initially incur costs 
associated with assessing the requirements of the rule. However, we 
believe that these costs will be relatively small.\567\ In addition, we 
anticipate that it will be more efficient for third-party providers, 
such as lawyers and compliance consultants, to offer services that help 
ETFs ensure compliance with the rule, which will have broad 
applicability, than is currently the case with ETFs relying on 
exemptive orders with varying conditions. As a result, third party 
service providers may be able to reduce the price of their services, 
compared to the baseline, for ETFs that can rely on the rule, which may 
partially or fully offset the initial costs of studying the 
requirements of the rulemaking that ETFs may incur.
---------------------------------------------------------------------------

    \567\ We estimate that assessing the requirements of the final 
rule will require 5 hours of a compliance manager ($309 per hour) 
and 5 hours of a compliance attorney ($365 per hour), resulting in a 
cost of $3,370 (5 x $309 + 5 x $365) per fund. The total cost for 
all 1,735 ETFs that can rely on the rule will thus be $5,846,950 
(1,735 x $3,370). The Commission's estimates of the relevant wage 
rates are based on salary information for the securities industry 
compiled by the Securities Industry and Financial Markets 
Association's Office Salaries in the Securities Industry 2013. The 
estimated wage figures are modified by Commission staff to account 
for an 1800-hour work-year and multiplied by 2.93 to account for 
bonuses, firm size, employee benefits, overhead, and adjusted to 
account for the effects of inflation. See Securities Industry and 
Financial Markets Association, Report on Management & Professional 
Earnings in the Securities Industry 2013 (``SIFMA Report'').
---------------------------------------------------------------------------

    We expect that the rule also will benefit ETF investors to the 
extent that it will remove a possible disincentive for sponsors to form 
and operate new ETFs that provide investors with additional investment 
choices if they currently do not have relief. As noted above, the 
direct and indirect costs of the exemptive application process may 
discourage potential sponsors, particularly sponsors interested in 
offering smaller, more narrowly focused ETFs that may serve the 
particular investment needs of certain investors.
    As we discuss below in section IV.D.2, we believe that the rule 
could increase competition in the ETF market as a whole, which could 
also lead to lower fees. Any effect of increased

[[Page 57213]]

competition on fees will likely be larger for segments of the ETF 
market that currently may be less competitive (e.g., actively managed 
ETFs) and smaller for segments of the market that currently may be more 
competitive (e.g., index-based ETFs tracking major stock indices).
    By eliminating the need for individual exemptive relief, we 
anticipate that the rule will, over time, increase the number of ETFs 
and thus reinforce the current growth trend in the ETF industry. In 
addition, the rule will increase demand for such ETFs, to the extent 
that such ETFs lower their fees to investors and investors are 
sensitive to fees.\568\ To the extent that some ETFs will experience 
larger reductions in trading costs (e.g., fixed-income, international, 
and actively managed ETFs, as discussed below in section IV.C.1.b.i.) 
or larger increases in competition (e.g., actively managed ETFs, as 
discussed above in this section), demand for these types of ETFs will 
likely increase more than for other types of ETFs. The increased demand 
will likely be due in part to investors substituting away from 
comparable types of funds, such as mutual funds, and possibly due to 
investors increasing the rate at which they save.\569\ Consequently, 
the rule could increase total assets of ETFs and could decrease total 
assets of other funds. The size of these effects will depend on the 
degree to which ETFs will lower their fees or experience reduced 
trading costs, as well as on the sensitivity of investor demand for 
ETFs and other funds to changes in ETF fees and trading costs. We are 
unable to quantify these effects on investor demand, in part, because 
we cannot estimate the extent to which funds will lower their fees or 
experience reduced trading costs and how lower fees and trading costs 
will change investor demand.
---------------------------------------------------------------------------

    \568\ There is research to support that fund investors are 
sensitive to fees. For instance, one paper (Erik R. Sirri & Peter 
Tufano, Costly Search and Mutual Fund Flows, 53 Journal of Finance 
1589 (1998)) finds that ``lower-fee funds and funds that reduce 
their fees grow faster.'' However, we acknowledge that there are 
studies that suggest that investors' sensitivity to fees may be 
limited. One experimental study (James J. Choi, David Laibson, & 
Brigitte C. Madrian, Why Does the Law of One Price Fail? An 
Experiment on Index Mutual Funds, 23 Review of Financial Studies 
1405 (2010)) finds that investors may not always pick the lowest-fee 
fund when presented with a menu of otherwise identical funds to 
choose from. In addition, other studies (e.g., Michael J. Cooper, 
Michael Halling, & Wenhao Yang, The Mutual Fund Fee Puzzle (Working 
Paper, 2016)) find evidence of significant fee dispersion among 
mutual funds, even after controlling for other observable 
differences between funds. While these studies investigate the 
sensitivity of investors to fees of mutual funds rather than ETFs, 
we believe that these results are likely to hold for ETFs as well. 
We are not aware of any studies that specifically study the 
sensitivity of ETF investors to fees.
    \569\ Investments in ETFs are one of many ways for investors to 
allocate savings. If investors choose to increase their investment 
in ETFs, there can be two sources for this additional investment: 
(1) An increase in overall savings; and (2) a decrease in savings 
allocated to other investments, such as mutual funds. These two 
sources are not mutually exclusive, so that an increase in ETF 
investments can be accompanied by both an increase in overall 
savings and a decrease in savings invested elsewhere.
---------------------------------------------------------------------------

    Since ETFs are traded in the secondary market, an increase in total 
assets of ETFs will likely coincide with larger trade volumes for the 
exchanges where ETFs are traded, as well as for the clearing agencies 
and broker-dealers involved in these trades. To the extent that these 
market participants are compensated by volume, the rule will thus 
benefit them by leading to an increase in revenues.\570\
---------------------------------------------------------------------------

    \570\ To the extent that investors substitute away from products 
that are comparable to ETFs, such as mutual funds, an increase in 
revenue for entities facilitating ETF transactions may be offset by 
a decrease in revenue for entities facilitating fewer transactions 
in those other products.
---------------------------------------------------------------------------

    In addition, we expect the rule to reduce the number of 
applications for ETF exemptive relief. This will allow Commission staff 
more time to review applications for exemptive relief from registered 
investment companies, including those for more complex or novel ETFs 
that will continue to require exemptive relief. To the extent that this 
speeds up the processing time for these remaining applications, the 
rule may reduce the indirect costs of forming and operating for ETFs 
that seek to operate outside its parameters and for other registered 
investment companies that require exemptive relief to operate and, as a 
result, may promote innovation among these types of funds.
b. Conditions for Reliance on Rule 6c-11
    Rule 6c-11 contains several conditions that are designed to 
facilitate an effective arbitrage mechanism, reduce costs, and inform 
and protect investors. Beyond the general impact of reducing the 
expense and delay of new ETFs, many of the conditions in rule 6c-11 do 
not offer additional benefits or costs when measured against the 
baseline, as they are generally codifications of the current regulatory 
practice. However, some conditions are departures from current 
exemptive orders or current market practice and we discuss the effects 
of these departures in more detail below.
i. Conditions That May Facilitate an Effective Arbitrage Mechanism
    Arbitrage is the practice of buying and selling equivalent or 
similar assets (or portfolios of assets) in different markets to take 
advantage of a price difference.\571\ As a consequence, arbitrageurs 
generate price pressure that works to equalize the prices of these 
assets across different markets. This is important for investors as it 
helps ensure that asset prices reflect market fundamentals (i.e., are 
efficient) irrespective of the market in which they are traded.
---------------------------------------------------------------------------

    \571\ See, e.g., Jonathan B. Berk & Peter DeMarzo, Corporate 
Finance (3rd ed. 2013).
---------------------------------------------------------------------------

    There are several factors that are important for arbitrageurs to 
consider in order to determine the existence of arbitrage opportunities 
and execute an arbitrage strategy effectively. First, when the assets 
involved in the arbitrage are similar but not the same, as is the case 
for ETFs, arbitrage will be more effective the more closely the prices 
of the two assets track each other and the more transparency 
arbitrageurs have into any factors that may cause price differences 
between the two assets. In addition, arbitrage requires that 
arbitrageurs have the ability to enter into the trades necessary to 
execute the arbitrage strategy, and arbitrage is more effective the 
smaller and more predictable the associated trading costs are.\572\ The 
rule contains conditions that take these considerations into account 
and are designed to promote the effective functioning of the arbitrage 
mechanism for ETFs.
---------------------------------------------------------------------------

    \572\ Authorized participants, other market participants, and 
arbitrageurs acting in secondary markets may incur costs and be 
exposed to risk when engaging in arbitrage. The costs include bid-
ask spreads and transaction fees associated with the arbitrage 
trades. In addition, during the time it takes arbitrageurs to 
execute these trades, they are exposed to the risk that the prices 
of the basket assets and the ETF shares change. As a consequence, 
arbitrageurs are likely to decide to wait for any deviation between 
the market price of ETF shares and NAV per share to widen until the 
expected profit from arbitrage is large enough to compensate for any 
additional costs and risks associated with engaging in the 
transaction.
---------------------------------------------------------------------------

    The rule will require ETFs relying on the rule to adopt and 
implement written policies and procedures that govern the construction 
of basket assets and the process that will be used for the acceptance 
of basket assets, including policies and procedures specific to the 
creation of custom baskets if the ETF uses custom baskets.
    Although current exemptive orders contain varying provisions for 
basket flexibility, we do not believe that the rule will require 
existing ETFs to change how they construct baskets. Instead, the

[[Page 57214]]

rule will give some ETFs more flexibility for constructing baskets than 
what is allowed by their existing exemptive orders, provided they adopt 
and implement custom basket policies and procedures.
    We believe that fixed-income, international, and actively managed 
ETFs will particularly benefit from the increased basket flexibility 
under the rule if they currently operate under exemptive orders that do 
not allow custom baskets. For example, the increased basket flexibility 
should allow fixed-income ETFs to avoid losing hard-to-find bonds when 
meeting redemptions or to use sampling techniques to construct baskets 
that are composed of fewer individual bonds, thus reducing trading 
costs for authorized participants. Similarly, international ETFs will 
be able to tailor their creation and redemption baskets to accommodate 
difficulties in transacting in certain international securities. In 
addition, actively managed ETFs will, in certain instances, be able to 
use the increased basket flexibility to acquire or dispose of 
securities by adjusting the composition of the creation or redemption 
basket rather than by directly purchasing or selling the securities. In 
these instances, actively managed funds will be able to reduce certain 
transaction costs, such as those associated with bid-ask spreads.
    For these reasons, we believe that, to the extent that ETFs are 
able to implement procedures that facilitate the arbitrage mechanism or 
reduce costs for those ETFs, the rule will benefit ETFs that use the 
increased basket flexibility the rule affords and will ultimately 
benefit their investors. One commenter submitted results from an 
empirical analysis that supported this assessment.\573\ For example, 
the commenter observes that fixed-income ETFs that currently have 
increased basket flexibility exhibit smaller bid-ask spreads and 
reduced premiums and discounts to NAV, particularly during times of 
market stress.\574\ Due to a lack of data, we are unable to quantify 
the number of ETFs that would choose to implement custom basket 
policies and procedures, and thus the potential benefits accruing to 
ETFs and their investors.
---------------------------------------------------------------------------

    \573\ See ICI Comment Letter (providing the results of an 
empirical analysis indicating that fixed-income ETFs with basket 
flexibility had narrower bid-ask spreads, lower tracking 
differentials, and traded at smaller discounts than fixed-income 
ETFs without basket flexibility). The commenter conducted a survey 
to identify fixed-income ETFs that currently have increased basket 
flexibility. While the commenter provided the results of an 
empirical analysis based on this data, the commenter did not provide 
the Commission with the survey responses themselves.
    \574\ Conversely, another commenter stated that increased basket 
flexibility may reduce arbitrage efficiency for fixed-income ETFs, 
particularly during market stress. See Bluefin Comment Letter. This 
commenter observes that such ETFs may choose to include less liquid 
portfolio holdings in redemption baskets in greater than pro-rata 
proportions, thereby increasing trading costs for arbitrageurs and 
leading to larger premiums and discounts. While we acknowledge this 
concern, ETFs generally are incentivized to choose custom baskets 
that reduce premiums and discounts for the benefit of transacting 
shareholders. In addition, as discussed above in section II.C.5.a, 
we believe that requiring fixed-income ETFs to establish detailed 
parameters for the construction and acceptance of custom baskets 
that are in the best interests of the ETF and its shareholders 
addresses the risks associated with custom baskets.
---------------------------------------------------------------------------

    To the extent that existing ETFs do not already have policies and 
procedures governing basket assets in place or that existing policies 
and procedures are not consistent with the requirements of the rule, 
ETFs will incur costs associated with developing and implementing such 
policies and procedures. However, such costs may be partially or 
totally offset by the basket flexibility discussed above. We estimate 
that an average ETF will incur an initial cost of $10,718 \575\ 
associated with establishing and implementing standard and custom 
basket policies and procedures. In addition, we estimate that an 
average ETF will incur an ongoing cost of $4,135 \576\ each year to 
review and update its basket policies and procedures. We thus estimate 
that the total industry cost associated with the policies and 
procedures requirement in the rule for ETFs that can rely on the rule 
in the first year will equal $25,769,955.\577\
---------------------------------------------------------------------------

    \575\ This estimate is based on the following calculations: 12 
hours x $329 per hour (senior manager) + 7 hours x $530 (chief 
compliance officer) + 2 hours x $365 (compliance attorney) + 5 hours 
x $466 (assistant general counsel) = $10,718. See infra section 
V.B.3, Table 13.
    \576\ This estimate is based on the following calculations: 5 
hours x $329 per hour (senior manager) + 2.5 hours x $530 (chief 
compliance officer) + 2.5 hours x $466 (assistant general counsel) = 
$4,135. See infra section V.B.3, Table 13.
    \577\ This estimate is based on the following calculation: 
($10,718 + $4,135) x 1,735 ETFs = $25,769,955. This estimate may be 
an over-estimate in that it assumes that all ETFs, regardless of 
their actual use of custom baskets, would implement policies and 
procedures for custom basket assets. It also may overestimate costs 
because some fund complexes may use the same basket policies and 
procedures for all ETFs within the complex.
---------------------------------------------------------------------------

    Finally, although the rule's custom basket policies and procedures 
requirements are designed to reduce the potential for cherry-picking, 
dumping, and other potential abuses, we acknowledge that this 
principles-based approach may not be effective at preventing all such 
abuses. However, ETFs will be required to maintain records related to 
the custom baskets used, which will allow the Commission to examine for 
potential abuses.
    As proposed, the rule also will require an ETF to disclose 
prominently on its website the portfolio holdings that will form the 
basis for the next calculation of NAV per share. This information 
allows authorized participants and other arbitrageurs to identify 
arbitrage opportunities and execute arbitrage trades that reduce 
premiums and discounts to NAV per share, ultimately benefiting all 
investors. In addition, we agree with a commenter who stated that 
portfolio transparency helps investors to better discern differences 
between ETFs that track similar indexes or have similar investment 
objectives.\578\
---------------------------------------------------------------------------

    \578\ See CSIM Comment Letter.
---------------------------------------------------------------------------

    The requirements for portfolio transparency in existing exemptive 
orders have varied. However, based on a staff review of ETFs' websites, 
we understand that all ETFs that can rely on the rule currently provide 
daily full portfolio transparency. Thus, ETFs that can rely on the rule 
already bear the ongoing costs associated with maintaining such 
disclosures.\579\ We believe that the ETFs that can rely on the rule 
will incur a one-time cost associated with reviewing whether their 
current portfolio disclosure is compliant with the requirements of 
proposed rule 6c-11 and, if necessary, make changes to the information 
that is presented on their website.\580\ We estimate this one-time cost 
to be $1,997 for the average ETF, resulting in an aggregate one-time 
cost of $3,463,928 for all ETFs that can rely on the rule.\581\
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    \579\ In the 2018 ETF Proposing Release, we estimated that an 
ETF that does not currently maintain daily portfolio holdings on its 
website would spend approximately 5 hours of professional time to 
update the relevant web page daily at a cost of $1,405.50 each year. 
Because we believe all ETFs that can rely on the rule already 
provide this information on their websites, we believe that very 
few, if any, ETFs would have to bear these additional costs.
    \580\ The rule will require ETFs to provide certain information 
for each portfolio holding. These item requirements are a more 
limited set of the information currently required by the listing 
exchanges' generic listing standards for actively managed ETFs.
    \581\ This estimate is based on the following calculations: 1.5 
hours x $284 (senior systems analyst) + 1.5 hours x $331 (senior 
programmer) + 1 hour x $309 (compliance manager) + 1 hour x $365 
(compliance attorney) + $400 for external website development = 
$1,997. The industry cost is 1,735 x $1,997 = 3,463,928. This 
estimate is conservative as it does not assume a cost reduction for 
actively managed ETFs that already comply with the listing standards 
on which the item requirements for the portfolio holding disclosure 
under the rule are based.
---------------------------------------------------------------------------

    Some commenters raised concerns that providing daily portfolio 
information on an ETF's website could expose the fund and its investors 
to

[[Page 57215]]

costs associated with ``front-running'' and, in the case of actively 
managed ETFs, ``piggybacking.'' \582\ However, based on our 
understanding that all ETFs that can rely on the rule currently provide 
daily full portfolio transparency, the rule will not change the degree 
to which ETFs and their investors are exposed to such costs compared to 
the baseline.
---------------------------------------------------------------------------

    \582\ See supra section II.C.4.
---------------------------------------------------------------------------

    As proposed, rule 6c-11 would have required that an ETF's portfolio 
holdings disclosure be made on each business day: (1) Before the 
opening of regular trading on the primary listing exchange of the ETF's 
shares; and (2) before the ETF starts accepting orders for the purchase 
or redemption of creation units. The rule will omit the second 
requirement in order to accommodate the current industry practice of T-
1 creation and redemption orders.\583\ We agree with commenters that T-
1 orders facilitate ETF arbitrage for certain ETFs holding foreign 
securities by allowing arbitrageurs to align the execution time of 
underlying securities with the NAV calculation of the order.\584\ 
Compared to the proposal, we therefore believe that this aspect of the 
rule will lead to narrower bid-ask spreads and smaller premiums and 
discounts, benefiting investors in these ETFs.
---------------------------------------------------------------------------

    \583\ See supra section II.C.4.a. This timing requirement is 
consistent with the transparency requirements of our existing 
exemptive orders.
    \584\ See id.
---------------------------------------------------------------------------

    Compared to the proposal, the rule will require ETFs to present 
enumerated information regarding each portfolio holding (which are a 
more limited set of the disclosures currently required by the listing 
exchanges' generic listing standards for actively managed ETFs), rather 
than the description, amount, value, and unrealized gain/loss of each 
position in the manner prescribed by Article 12 of Regulation S-X. As 
discussed above in section II.C.4.b, we believe that this information 
will focus the disclosure on the pieces of information that are most 
relevant to investors while reducing the burden for ETFs of complying 
with the disclosure requirement. As a result, we believe that the 
disclosure format under the rule will provide similar benefits to 
investors at lower costs to ETFs.\585\
---------------------------------------------------------------------------

    \585\ The cost estimates in this section of the economic 
analysis reflect the cost reduction, compared to the proposal, 
associated with the change in the format of the disclosure. See also 
infra footnote 684 and accompanying text.
---------------------------------------------------------------------------

ii. Other Cost Savings From the Rule
    Under the terms of the exemptive orders, ETFs are required to 
disclose in their registration statement that redemptions may be 
postponed for foreign holidays. Rule 6c-11 does not contain such a 
requirement and will thus eliminate the cost of preparing and updating 
this disclosure for existing ETFs. This information is already covered 
by the agreement between the ETF and the authorized participant.\586\
---------------------------------------------------------------------------

    \586\ We believe that authorized participants would share this 
information with other market participants as necessary. For 
example, an authorized participant acting as agent typically would 
share this information with its customer if it is a necessary part 
of the creation or redemption process.
---------------------------------------------------------------------------

    The terms of the exemptive orders also require an ETF to identify 
itself in any sales literature as an ETF that does not sell or redeem 
individual shares and explain that investors may purchase or sell 
individual ETF shares through a broker via a national securities 
exchange. The rule will not include such a requirement, as we no longer 
believe that it is necessary given that markets have become familiar 
with ETFs in the multiple decades they have been available. The 
omission of such a requirement will lead to cost savings for existing 
and future ETFs associated with preparing and reviewing this disclosure 
for sales literature.\587\
---------------------------------------------------------------------------

    \587\ We estimate that the omission of this requirement will 
save 0.25 hours of a compliance attorney ($365 per hour), resulting 
in a cost savings of $91 (0.25 x $365) per fund each year. The total 
cost savings for all 1,735 ETFs that can rely on the rule will thus 
be $158,319 (1,735 x $91).
---------------------------------------------------------------------------

iii. Intraday Indicative Value
    The rule will not require an ETF to disseminate its IIV, as is 
currently required under all exemptive orders and current exchange 
listing standards. To the extent that current exchange listing 
standards require IIV to be disseminated, the rule's omission of such a 
requirement will not represent a change from the baseline and will not 
result in any costs or benefits to market participants.
    We believe, and commenters agreed, that many sophisticated 
institutional market participants do not rely on the IIV to value an 
ETF's assets, as discussed above in section II.C.3. In addition, the 
IIV may not reflect the intrinsic value of certain ETFs' assets (e.g., 
for funds that invest in foreign securities whose markets are closed 
during the ETF's trading day or funds whose assets trade infrequently, 
as is the case for certain bond funds).\588\ An investor who relies on 
stale or inaccurate IIV information to purchase or sell ETF shares 
could be exposed to price risk until the position is closed and could 
incur the trading costs associated with these trades. Furthermore, as 
discussed above in section II.C.3, based on a staff review of the 
websites of the ten largest ETFs by assets under management and of 
several publicly available free websites, we do not believe that 
investors have easy access to IIV through free, publicly available 
websites.
---------------------------------------------------------------------------

    \588\ Commenters agreed that traditional IIV can have 
significant limitations, for example for ETFs holding fixed-income 
securities. See, e.g., ICI Comment Letter. See also supra footnote 
203.
---------------------------------------------------------------------------

    Some commenters stated that retail investors relying on IIV could 
see their ability to evaluate ETFs reduced without this metric.\589\ As 
we stated in the proposing release, we agree that the IIV may provide a 
reasonably accurate estimate of the value of certain ETFs' portfolios, 
including those ETFs whose underlying assets are very liquid and 
frequently traded during the ETF's trading day. However, as discussed 
above in section II.C.3, we have concerns regarding the accuracy of IIV 
estimates and the lack of uniform methodology requirements. Moreover, 
retail investors do not have easy access to IIV through free, publicly 
available websites today even for those assets classes where IIV may be 
more reliable. Therefore, we do not believe that IIV provides 
information that retail investors can reliably use when making 
investment decisions and thus do not believe that it is a necessary 
condition for ETFs that are operating in reliance on rule 6c-11.
---------------------------------------------------------------------------

    \589\ See, e.g., Angel Comment Letter; Nasdaq Comment Letter; 
IDS Comment Letter.
---------------------------------------------------------------------------

iv. Website Disclosure Provisions
    Rule 6c-11 will require an ETF to disclose certain information 
prominently on its website.\590\ The goal of these disclosure 
requirements is to provide investors with key metrics to evaluate their 
trading and investment decisions in a location that is easily 
accessible and frequently updated.\591\

[[Page 57216]]

Based on a staff review of ETFs' websites, we believe that all ETFs 
that can rely on the rule currently have a website and currently 
provide daily website disclosures of NAV, closing price, and premiums 
or discounts.\592\ As a consequence, existing ETFs generally will not 
incur any additional cost associated with the creation and technical 
maintenance of a website or these specific website disclosure 
requirements.
---------------------------------------------------------------------------

    \590\ See supra footnote 226.
    \591\ According to the most recent U.S. census data, 
approximately 77.2% of U.S. households had some form of internet 
access in their home in 2015 and 86.8% have a computer (e.g., 
desktop, laptop, tablet or smartphone). See Camille Ryan & Jamie M. 
Lewis, Computer and Internet Usage in the United States: 2015, U.S. 
Census Bureau ACS-37 (Sept. 2017), available at https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf; see also Sarah Holden, Daniel Schrass, & Michael Bogdan, 
Ownership of Mutual Funds, Shareholder Sentiment, and Use of the 
Internet, 2017, ICI Research Perspective (Oct. 2017), available at 
https://www.ici.org/pdf/per23-07.pdf (stating that ``[i]n mid-2017, 
95 percent of households owning mutual funds had internet access, up 
from about two-thirds in 2000'' and ``86 percent of mutual fund-
owning households with a household head aged 65 or older had 
internet access in mid-2017''); Andrew Perrin & Maeve Duggan, 
Americans' Internet Access: 2000-2015, Pew Research Center (June 
2015), available at http://assets.pewresearch.org/wp-content/uploads/sites/14/2015/06/2015-06-26_internet-usage-across-demographics-discover_FINAL.pdf (finding in 2015, 84% of all U.S. 
adults use the internet). We acknowledge that the benefits of the 
website disclosure requirement would be attenuated for those 
investors who lack internet access or otherwise are not able to 
access ETFs' websites.
    \592\ See supra section IV.B.4.
---------------------------------------------------------------------------

    Our exemptive orders have not included requirements for line graph 
and tabular historical information regarding premiums and discounts. 
While Form N-1A contains tabular website disclosures related to 
historical premiums/discounts in Items 11(g)(2) and 27(b)(7)(iv), which 
we are eliminating for ETFs that will rely on rule 6c-11, we anticipate 
that all existing ETFs that fall within the scope of the rule will 
still incur some additional costs associated with these 
disclosures.\593\ We believe that substantially all ETFs already have 
the required data available to them as part of their regular operations 
(as it is required by Form N-1A and allows ETFs to monitor the trading 
behavior of their shares), and have systems (such as computer 
equipment, an internet connection, and a website) in place that can be 
used for processing this data and uploading it to their websites. 
However, these ETFs will incur the costs associated with establishing 
and following (potentially automated) processes for processing and 
uploading this data to their websites. We estimate that an average ETF 
will incur a one-time cost of $1,997 \594\ for implementing this 
website disclosure and an ongoing cost of $491\595\ per year for 
updating the relevant web page with this information. We thus estimate 
the total cost, in the first year, to ETFs that can rely on the rule 
for providing this website disclosure, of $4,315,379.\596\
---------------------------------------------------------------------------

    \593\ See supra section II.H.2.b.
    \594\ This estimate is based on the following calculations: 1.5 
hours x $284 (senior systems analyst) + 1.5 hours x $331 (senior 
programmer) + 1 hour x $309 (compliance manager) + 1 hour x $365 
(compliance attorney) + $400 for external website development = 
$1,997.
    \595\ This estimate is based on the following calculations: 0.25 
hours x $284 (senior systems analyst) + 0.25 hours x $331 (senior 
programmer) + 0.5 hour x $309 (compliance manager) + 0.5 hour x $365 
(compliance attorney) = $491.
    \596\ This estimate is based on the following calculation: 
($1,997 + $491) x 1,735 ETFs = $4,315,379.
---------------------------------------------------------------------------

    Our exemptive orders have not included a requirement for ETFs to 
provide disclosure if an ETF's premium or discount is greater than 2% 
for more than seven consecutive trading days and the factors that 
materially contributed to a premium or discount, if known. As a result, 
under the rule those ETFs that experience such a premium or discount 
will incur additional costs associated with determining what factors 
contributed to the premiums or discounts and drafting and uploading a 
discussion to their website.
    Based on a staff analysis of historical data on ETF premiums and 
discounts from 2008 to 2018 using Bloomberg data, we believe that, on 
average, 4.5% of ETFs that can rely on the rule will trigger this 
disclosure requirement each year.\597\ As suggested by commenters, this 
disclosure requirement is likely to affect certain categories of ETFs 
more than others.\598\ For example, in 2018, we estimate that the 
reporting requirement would not have been triggered for any allocation 
ETFs, commodity ETFs, or municipal bond ETFs, while it would have been 
triggered for 0.3% of taxable bond ETFs, 0.6% of sector equity ETFs, 
3.1% of U.S. equity ETFs, 4.2% of international equity ETFs, and 4.8% 
of alternative ETFs. We estimate that an ETF required to make such a 
disclosure in a given year will incur an average cost of $1,504, 
yielding a total annual industry cost of $117,405.\599\
---------------------------------------------------------------------------

    \597\ This estimate represents the average of the percentage of 
ETFs for which the reporting requirement was triggered at least once 
in a given year, for those ETFs that could rely on the rule. During 
the sample period from 2008 to 2018, the percentage of ETFs for 
which the reporting requirement was triggered at least once varied 
from 1.5% (2010) to 10% (2008).
    \598\ See supra footnote 359 and accompanying text.
    \599\ We believe that such disclosure will require 1.25 hours 
for a compliance attorney and the compliance manager to determine if 
this requirement has been triggered and produce a draft of the 
required disclosures + 0.75 hours for a senior programmer and a 
senior systems analyst to include the information on the website, at 
a time cost of (1.25 hours x $365 compliance attorney hourly rate) + 
(1.25 hours x $309 compliance manager hourly rate) + (0.75 hours x 
$331 senior programmer hourly rate) + (0.75 hours x $284 senior 
systems analyst hourly rate) in addition to $200 for external 
website development = $1,504. The annual cost of this requirement 
for those ETFs that can rely on the rule is calculated as 4.5% x 
1,735 ETFs x $1,504 = $117,405. This estimate includes costs for 
website development, which would only be incurred by an ETF making 
this disclosure for the first time.
---------------------------------------------------------------------------

    The rule also will require additional disclosure by the ETF of the 
median bid-ask spread for the most recent 30-day period on its website. 
This requirement is modified from the proposal, which would have 
required an ETF to disclose the median bid-ask spread for the ETF's 
most recent fiscal year on its website and in its prospectus.
    We believe that the rule's disclosure requirement will further 
inform investors about the expected cost of trading an ETF and 
facilitate comparison of transaction costs across ETFs. As such, the 
disclosure of median bid-ask spreads could reduce investors' 
uncertainty about the trading environment. We agree with commenters 
that actual bid-ask spreads paid by ETF investors can be influenced by 
a variety of factors, including order size, market conditions, as well 
as the broker-dealer used.\600\ Nevertheless, we believe that requiring 
the disclosure of bid-ask spread information is still valuable to 
investors as it is indicative of the general magnitude of an ETF's 
trading costs attributable to bid-ask spreads. In addition, we believe 
bid-ask spreads can help investors rank ETFs in terms of expected 
execution costs, as an ETF with historically larger bid-ask spreads can 
be expected to be more costly to trade than an ETF with historically 
lower bid-ask spreads, when holding other factors that impact execution 
costs, such as order size, market conditions, and the broker-dealer, 
constant.
---------------------------------------------------------------------------

    \600\ See, e.g., Vanguard Comment Letter (also pointing out 
that, in certain circumstances, broker-dealers can obtain price 
improvements leading to market orders being executed either within 
the NBBO or at midpoint or better).
---------------------------------------------------------------------------

    Existing exemptive orders do not require ETFs to disclose median 
bid-ask spreads. As a result, we assume that all ETFs operating under 
the final rule will have to implement processes and systems to compute 
the median bid-ask spreads and will have to accommodate a new data 
point on their web page to report this information.\601\ We estimate 
that an ETF will incur a one-time estimated cost of $8,294 to comply 
with this requirement.\602\ In addition, we estimate that an ETF that 
purchases

[[Page 57217]]

NBBO information to compute bid-ask spread will incur an additional 
ongoing annual cost of $4,042.\603\ Assuming that all ETFs will have to 
purchase data to satisfy this requirement, we estimate an upper bound 
for the total industry cost in the first year of $21,401,659.\604\
---------------------------------------------------------------------------

    \601\ Based on a review of 150 randomly selected ETFs, which 
included 100 index-based ETFs and 50 actively managed ETFs, 10 
percent of index-based ETFs and 1.5 percent of actively managed ETFs 
provided some information on bid-ask spreads. However, all ETFs that 
provided such information displayed bid-ask spreads only for a 
particular point in time (for example as of the time the prior day's 
NAV was struck) rather than median bid-ask spreads computed for the 
most recent 30-day period, as required by the rule.
    \602\ This estimate is based on the following calculations: 6.5 
hours x $284 (senior systems analyst) + 6.5 hours x $331 (senior 
programmer) + 4 hour x $309 (compliance manager) + 4 hour x $365 
(compliance attorney) + $1,600 for external website development = 
$8,294.
    \603\ In the 2018 ETF Proposing Release, we stated that we 
believed ETFs currently maintain a record of historical price data 
as a matter of current business practices which could be used to 
satisfy the requirement to compute bid-ask spreads at a nominal 
cost. See 2018 ETF Proposing Release, supra footnote 7, at section 
III.C.1. Some commenters, however, suggested that some ETFs would 
incur costs to purchase data collected by third parties, although 
these commenters did not provide specific estimates of such costs. 
See, e.g., BNY Mellon Comment Letter; John Hancock Comment Letter. 
Assuming a data cost of $2,500 per year, we estimate that an ETF 
that would need to purchase the data will incur the following 
ongoing cost: 1 hours x $284 (senior systems analyst) + 1 hours x 
$331 (senior programmer) + 1.375 hours x $309 (compliance manager) + 
1.375 hours x $365 (compliance attorney) + $2,500 (data) = $4,042.
    \604\ This estimate is based on the following calculation: 
($8,294 + $4,042) x 1,735 ETFs = $21,401,659.
---------------------------------------------------------------------------

    The requirement of disclosures on ETFs' websites we are adopting 
will enable investors to more readily obtain certain key information 
for individual ETFs, potentially resulting in better informed trading 
decisions.\605\ The conditions standardize certain content requirements 
to facilitate investor analysis of information while allowing ETFs to 
select a layout for displaying the required information that the 
individual ETF finds most efficient and appropriate for its website. 
Because the information will be made available on individual websites, 
in the layout chosen by the ETF, we acknowledge that an investor's 
ability to efficiently extract information from website disclosures for 
purposes of aggregation, comparison, and analysis across multiple ETFs 
and time periods may be limited. Investors seeking to compare multiple 
ETFs will have to visit the website of every ETF, navigate to the 
relevant section of the website, and extract the information provided 
in the layout chosen by the fund. Depending on the manner in which a 
typical fund investor will use the website disclosures, these 
considerations may decrease the information benefits of the new 
disclosures. However, we recognize that investors may rely on third-
party providers that aggregate such information for all ETFs into a 
structured format that investors can more easily access and process for 
the purpose of statistical and comparative analyses. While investors 
may incur costs of obtaining information from third-party service 
providers, it will likely be lower than the cost they would incur if 
they performed the collection themselves, and the cost of such services 
may otherwise be reduced as a result of competition among service 
providers. Overall, we believe that requiring ETFs to provide this 
information on their websites will ultimately provide an efficient 
means for facilitating investor access to information.
---------------------------------------------------------------------------

    \605\ See supra footnote 226.
---------------------------------------------------------------------------

c. Recordkeeping
    The rule will require ETFs to preserve and maintain copies of all 
written authorized participant agreements for at least five years, the 
first two years in an easily accessible place. This requirement will 
provide Commission examination staff with a basis to evaluate whether 
the authorized participant agreement is in compliance with the rule and 
other provisions of the Investment Company Act and the rules 
thereunder, and also will promote internal supervision and 
compliance.\606\ As the agreement forms the contractual foundation on 
which authorized participants engage in arbitrage activity, compliance 
of the agreement with applicable rules is important for the arbitrage 
mechanism to function properly.
---------------------------------------------------------------------------

    \606\ ETFs already are required to provide some information 
about authorized participants on Form N-CEN, including the name of 
each authorized participant, additional identifying information, and 
the dollar values of the fund shares the authorized participant 
purchased and redeemed during the reporting period. However, this 
information alone would not be sufficient for Commission staff to 
evaluate whether a fund's authorized participant agreements are in 
compliance with the rule.
---------------------------------------------------------------------------

    We also are requiring ETFs to maintain information regarding the 
baskets exchanged with authorized participants on each business day, 
including a record identifying any custom basket and stating that the 
custom basket complies with the ETF's custom basket policies and 
procedures. We believe that these records will help our examination 
staff understand how baskets are being used by ETFs, evaluate 
compliance with the rule and other provisions of the Act and rules 
thereunder and other applicable law, and examine for potential 
overreach by ETFs in connection with the use of custom baskets or 
transactions with affiliates.
    Existing exemptive orders have not required ETFs to preserve and 
maintain copies of authorized participant agreements or information 
about basket composition, or to prepare and maintain a record 
identifying each custom basket and stating that custom baskets comply 
with the custom basket policies and procedures. However, we believe 
that most ETFs, as a matter of established business practice, already 
preserve and maintain copies of authorized participant agreements as 
well as data on baskets used.\607\
---------------------------------------------------------------------------

    \607\ One commenter stated that ETFs generally already implement 
robust recordkeeping programs. See Invesco Comment Letter.
---------------------------------------------------------------------------

    As discussed below in section V.B.2, we estimate the average annual 
cost for an ETF to comply with these recordkeeping requirements is $393 
per year.\608\ Assuming that (1) 80% of ETFs already preserve and 
maintain copies of authorized participant agreements as well as 
information on basket composition; (2) no ETF currently maintains 
records identifying any custom basket and stating that the custom 
basket complies with the ETF's custom basket policies and procedures; 
and (3) 25% of the total annual recordkeeping costs can be attributed 
to the new recordkeeping requirements for custom baskets, the total 
industry cost for ETFs that can rely on the rule will be $544,790 per 
year.\609\
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    \608\ See infra section V.B.3, Table 12. An average ETF would 
have to maintain and store 24 authorized participant agreements. See 
also supra footnotes 548-550 and accompanying text.
    \609\ This estimate is based on the following calculation: 1,735 
ETFs x (20% + 80% * 75%) x $393 = $544,790. The final rule will 
require ETFs to maintain additional information on basket 
composition (ticker symbol, CUSIP or other identifier, description 
of holding, quantity of each holding, and percentage weight of each 
holding composing the basket). We believe that this additional 
requirement does not present a significant additional recordkeeping 
cost.
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d. Master-Feeder Relief
    We will rescind the master-feeder relief granted to ETFs, with the 
exception of master-feeder relief that funds relied on as of the date 
of the 2018 ETF Proposing Release (June 28, 2018). We are rescinding 
such relief because there generally is a lack of industry interest in 
ETF master-feeder arrangements, and certain master-feeder arrangements 
raise policy concerns, as discussed above in section II.F. While there 
are currently many exemptive orders that contain the master-feeder 
relief, it is our understanding that only one fund complex currently 
relies on this relief to structure master-feeder arrangements with one 
master and one feeder fund each.\610\ We will grandfather existing 
master-feeder arrangements involving ETF feeder funds, but prevent the 
formation of new ones under existing orders, by amending relevant 
exemptive orders.\611\ As a result, we do

[[Page 57218]]

not expect that the rescission of the existing master-feeder relief 
will impose costs on ETFs that currently rely on the relief to 
structure master-feeder arrangements. However, to the extent that an 
ETF without a grandfathered master-feeder arrangement would apply for 
an exemptive order that grants master-feeder relief, such an ETF would 
incur costs associated with the exemptive order application.\612\ At 
the same time, the rescission of the relief may benefit investors in 
prospective feeder ETFs to the extent that it protects them from any 
concerns associated with feeder ETFs discussed above.\613\
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    \610\ See 2018 ETF Proposing Release, supra footnote 7, at n.339 
and accompanying text. See also supra footnote 449 and accompanying 
text.
    \611\ Without this relief, the affected funds could continue 
operating by effecting creation and redemption transactions between 
authorized participants and the feeder fund (as well as the 
transactions between the master and feeder fund) in cash rather than 
in kind. As cash creations and redemptions can be less efficient 
than in-kind transactions for certain ETFs, this could impose a cost 
on the ETFs that are part of the fund family. Cash redemptions and 
creations could also affect the current relationships that funds 
have with authorized participants if the authorized participants 
would be unwilling to perform the arbitrage function when receiving 
cash instead of baskets of securities, which could have unintended 
spillover effects on the secondary market trading of these funds' 
shares. Alternatively, these feeder funds may opt to pursue their 
investment objectives through direct investments in securities and/
or other financial instruments, rather than through investments in 
master funds. Such a restructuring of the funds involved would also 
lead to costs (primarily associated with legal and accounting work) 
on the ETFs that are part of the fund family. As a result, if this 
change would require portfolio transactions to occur at the fund, 
there could be additional costs, such as lower overall total returns 
to the fund or investors finding the fund to be a less attractive 
investment.
    \612\ One commenter indicated that it has invested resources 
exploring various approaches to an ETF master-feeder structure. See 
Fidelity Comment Letter.
    \613\ See supra section II.F.
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2. Amendments to Forms N-1A, N-8B-2, and N-CEN
    The amendments to Forms N-1A and N-8B-2 are designed to provide 
investors with tailored information regarding the costs associated with 
investing in ETFs.\614\ As discussed in section II.H above, we believe 
that the new disclosures will benefit investors by helping them better 
understand and compare specific funds, potentially resulting in more 
informed investment decisions, more efficient allocation of investor 
capital, and greater competition for investor capital among funds.
---------------------------------------------------------------------------

    \614\ As proposed, we also are amending Forms N-1A and N-8B-2 to 
include narrative disclosures for both mutual funds and ETFs that 
will clarify that the fees and expenses reflected in the expense 
table may be higher for investors if they sell shares of the fund. 
See supra section II.H.2.a.
---------------------------------------------------------------------------

    We are amending Forms N-1A and N-8B-2 to include information on ETF 
trading and associated costs that we anticipate will help investors 
better understand costs specific to ETFs, such as bid-ask spreads.\615\ 
In a departure from the proposal, we are eliminating the Q&A format for 
these disclosures, which will allow ETFs to determine the format for 
conveying the required disclosures to investors. In addition, the 
narrative disclosures will be streamlined and included in Item 6 of 
Form N-1A, whereas the proposed disclosure in Q&A format would have 
been included in Item 3. As discussed above in section II.H, we believe 
that the updated format and location will improve the usefulness of the 
disclosure to ETF investors.
---------------------------------------------------------------------------

    \615\ Rule 6c-11 will require ETFs that rely on the rule to 
provide the median bid-ask spread for the last thirty calendar days 
and certain disclosures regarding premiums and discounts on their 
websites. Our amendments to Forms N-1A and N-8B-2 will require ETFs 
that do not rely on rule 6c-11 to disclose median bid-ask spread 
information on their websites or in their prospectus and exclude 
only those ETFs that provide premium/discount disclosures in 
accordance with rule 6c-11 from the premium and discount disclosure 
requirements in Form N-1A.
---------------------------------------------------------------------------

    ETFs will incur costs associated with these new disclosures on 
Forms N-1A and N-8B-2.\616\ ETFs structured as open-end funds are 
currently required to disclose information about premiums and discounts 
to NAV per share in reports on Form N-1A. However, UIT ETFs, which file 
reports with the Commission on Form N-8B-2, are not required to make 
such disclosures. We estimate that this reporting requirement will 
increase the incremental cost for UIT ETFs compared to ETFs structured 
as open-end funds. In addition, ETFs that rely on rule 6c-11 will be 
exempt from the Form N-1A disclosure requirements related to bid-ask 
spreads and premiums and discounts to NAV per share (as such 
disclosures will be required under rule 6c-11 to be provided on their 
websites), which reduces the incremental cost we estimate for open-end 
funds that can rely on the rule compared to those that cannot. Taking 
these considerations into account, we estimate that each ETF that is 
structured as an open-end fund will incur a one-time cost of $3,799 
\617\ and an ongoing cost of $1,899 \618\ per year if it can rely on 
rule 6c-11, and a one-time cost of $6,960 \619\ and an ongoing cost of 
$3,480 \620\ per year if it cannot rely on rule 6c-11. We estimate that 
a UIT ETF will incur a one-time cost of $8,352 \621\ and an ongoing 
cost of $3,480 \622\ per year. We thus estimate that the total industry 
cost for this requirement for ETFs in the first year would equal 
$12,434,736.\623\
---------------------------------------------------------------------------

    \616\ As discussed in more detail below in section V.E, the 
ongoing costs of complying with the proposed amendments to Form N-
8B-2 for all UIT ETFs, as well as the one-time initial costs for 
existing UIT ETFs, would accrue to Form S-6.
    \617\ This estimate is based on the following calculations: 5.46 
hours x $365 (compliance attorney) + 5.46 hours x $331 (senior 
programmer) = $3,799.
    \618\ This estimate is based on the following calculations: 2.73 
hours x $365 (compliance attorney) + 2.73 hours x $331 (senior 
programmer) = $1,899.
    \619\ This estimate is based on the following calculations: 10 
hours x $365 (compliance attorney) + 10 hours x $331 (senior 
programmer) = $6,960.
    \620\ This estimate is based on the following calculations: 5 
hours x $365 (compliance attorney) + 5 hours x $331 (senior 
programmer) = $3,480.
    \621\ This estimate is based on the following calculations: 12 
hours x $365 (compliance attorney) + 12 hours x $331 (senior 
programmer) = $8,352.
    \622\ This estimate is based on the following calculations: 5 
hours x $365 (compliance attorney) + 5 hours x $331 (senior 
programmer) = $3,480.
    \623\ This estimate is based on the following calculation: 1,735 
ETFs structured as an open-end fund that can rely on the rule x 
($3,799 + $1,899) + 235 ETFs structured as an open-end fund that 
cannot rely on the rule ($6,960 + $3,480) + 8 UIT ETFs ($8,352 + 
$3,480) = $12,434,736.
---------------------------------------------------------------------------

    As proposed, we are amending Form N-CEN to require identification 
of ETFs that are relying on rule 6c-11.\624\ We believe that this 
requirement will allow the Commission to better monitor reliance on 
rule 6c-11 and assist us with our accounting, auditing, and oversight 
functions, including compliance with the Paperwork Reduction Act. We 
believe that the incremental cost of this requirement to ETFs is 
minimal.
---------------------------------------------------------------------------

    \624\ We also are changing the definition of ``authorized 
participant'' in Form N-CEN to conform the definition with rule 6c-
11 by excluding specific reference to an authorized participant's 
participation in DTC (Item E.2 of Form N-CEN).
---------------------------------------------------------------------------

D. Effects on Efficiency, Competition, and Capital Formation

    This section evaluates the impact of rule 6c-11 and the amendments 
to Forms N-1A, N-8B-2, and N-CEN on efficiency, competition, and 
capital formation. However, as discussed in further detail below, the 
Commission is unable to quantify the effects on efficiency, competition 
and capital formation either because they are inherently difficult to 
quantify or because it lacks the information necessary to provide a 
reasonable estimate.
1. Efficiency
    The rule will likely increase total assets of ETFs, as a result of 
reducing the expense and delay of forming and operating new ETFs 
organized as open-end funds, reducing the cost for certain ETFs to 
monitor their own compliance with regulations, and increasing 
competition among ETFs as discussed below. At the same time, the rule 
could

[[Page 57219]]

lead to a decrease in total assets of other fund types that investors 
may regard as substitutes, such as certain mutual funds.\625\ As a 
result, ETF ownership (as a percentage of market capitalization) for 
some securities, such as stocks and bonds, will likely increase, and 
ownership by other funds, such as mutual funds, will likely decrease. 
We are aware of only a limited amount of academic literature regarding 
ETFs. This literature suggests that such a shift in ownership could 
have a limited effect on the price efficiency (i.e., the extent to 
which an asset price reflects all public information at any point in 
time) and liquidity of these portfolio securities.\626\
---------------------------------------------------------------------------

    \625\ The disclosure requirements will also serve to increase 
investors' awareness of ETF trading costs, which can be substantial 
in some cases. As a result, investors who may previously not have 
been fully aware of these costs may shift their demand away from 
ETFs and towards other types of funds, such as mutual funds. We 
believe, however, that the rulemaking as a whole is likely to 
increase demand for ETFs rather than decrease it.
    \626\ In documenting the impact of ETF arbitrage on price 
efficiency and liquidity, the academic literature does not generally 
distinguish ETFs that could rely on the rule from those that could 
not. However, these studies investigate a broad range of ETFs with 
varying degrees of relief including basket flexibility. Therefore, 
we believe that the subsample of ETFs that could rely on the rule is 
representative of those used in the academic literature. As a 
result, we believe that inferences from the academic research 
generally apply to ETFs that can rely on the rule.
---------------------------------------------------------------------------

    The literature also suggests that a shift in stock ownership 
towards ETFs may somewhat improve certain dimensions of price 
efficiency while possibly attenuating price efficiency along other 
dimensions. Specifically, the results in one paper suggest that stock 
prices incorporate systematic information more quickly when they are 
held in ETF portfolios.\627\ The evidence in this paper thus indicates 
that ETF activity increases stock market efficiency with regard to 
systematic information, i.e., information relating to market-wide 
risks. On the other hand, some studies find that an increase in ETF 
ownership may introduce non-fundamental volatility into stock prices, 
i.e., cause temporary deviations of stock prices from their fundamental 
values. For example, one paper finds that ownership by U.S. equity 
index ETFs is associated with moderately higher volatility among 
component stocks and asserts that the increased volatility is non-
fundamental.\628\ Another paper finds that higher authorized 
participant arbitrage activity in U.S. equity ETFs is associated with a 
moderately higher correlation of returns among stocks in the ETF's 
portfolio.\629\ The authors observed that changes in the prices of 
these stocks tend to partially revert over the next trading day and 
state that the increased co-movement in returns is thus a sign of 
excessive price movement due to non-fundamental shocks that ETF trading 
helps propagate.
---------------------------------------------------------------------------

    \627\ Lawrence Glosten, Suresh Nallareddy, & Yuan Zou, ETF 
Trading and Informational Efficiency of Underlying Securities 
(Columbia Business School, Research Paper No. 16-71, 2016).
    \628\ See Itzhak Ben-David, Francesco Franzoni & Rabih Moussawi, 
Do ETFs Increase Volatility? (Swiss Finance Institute, Research 
Paper No. 11-66, 2017). This paper also finds that mutual fund 
ownership is associated with higher volatility in the underlying 
indexes. Thus, to the extent that part of the increase in ETF assets 
would be accompanied by a decrease in mutual fund assets, the net 
effect on price efficiency would be unclear.
    \629\ Zhi Da & Sophie Shive, Exchange Traded Funds and Asset 
Return Correlations (Working Paper, 2016).
---------------------------------------------------------------------------

    To a limited extent, the rule could decrease the liquidity of 
stocks held by ETFs, as one study finds that higher ownership of a 
stock by U.S. equity ETFs is associated with somewhat lower liquidity 
as measured by market impact.\630\ Conversely, the academic literature 
offers mixed evidence regarding the impact of ETFs on bond liquidity. 
While one paper finds that increased ETF ownership is associated with 
lower bond liquidity for investment grade bonds,\631\ another study 
finds that bonds included in ETFs experience improvements in their 
liquidity.\632\
---------------------------------------------------------------------------

    \630\ See Sophia J.W. Hamm, The Effect of ETFs on Stock 
Liquidity (Working Paper, 2014). However, the study also finds the 
same relationship for ownership by index mutual funds. Thus, to the 
extent that part of the increase in ETF assets would be accompanied 
by a decrease in mutual fund assets, the net effect on price 
efficiency would be unclear.
    \631\ Caitlin Dillon Dannhauser, The Impact of Innovation: 
Evidence from Corporate Bond ETFs, Journal of Financial Economics 
(forthcoming 2016) (``Dannhauser Article'').
    \632\ Jayoung Nam, Market Accessibility, Corporate Bond ETFs, 
and Liquidity (Working Paper, 2017).
---------------------------------------------------------------------------

    A shift in stock ownership towards ETFs could also have an effect 
on the co-movement of liquidity for stocks held by ETFs. Specifically, 
one paper observes that the liquidity of a stock with high ETF 
ownership co-moves with the liquidity of other stocks that also have 
high ETF ownership.\633\ The authors assert that this co-movement in 
liquidity exposes investors to the possibility that multiple assets in 
their portfolio will be illiquid at the same time.
---------------------------------------------------------------------------

    \633\ Vikas Agarwal et al., Do ETFs Increase the Commonality in 
Liquidity of Underlying Stocks (Working Paper, 2017).
---------------------------------------------------------------------------

    Since we do not know the degree to which the rule will increase ETF 
ownership of stocks and bonds, we are unable to quantify the rule's 
effects on price efficiency and liquidity. However, the effects 
documented in the literature surveyed above are generally small, so 
that we do not anticipate that the rule would have a significant effect 
on the price efficiency or liquidity of assets held by ETFs.
    As a result of the rule's allowance of increased basket 
flexibility, some ETFs that did not already have this flexibility in 
their baskets may choose to increase the weight of more liquid 
securities and decrease the weight of less liquid securities in their 
baskets compared to their portfolios.\634\ During normal market 
conditions, this may lead those ETFs' shares to trade at smaller bid-
ask spreads, thus benefiting investors. Such a reduction in bid-ask 
spreads by over-weighting more liquid securities may not continue to be 
possible during stressed market conditions, however, if a large 
proportion of such an ETF's portfolio securities become less 
liquid.\635\ As a result, the gap between bid-ask spreads of some ETFs' 
shares during normal and stressed market periods may grow as a result 
of the rule, which some investors may not anticipate and fail to fully 
take into account when making their investment decisions.\636\
---------------------------------------------------------------------------

    \634\ This would be the case for those ETFs that hold less 
liquid securities in their portfolios.
    \635\ Under rule 22e-4 under the Act, an ETF is required to 
consider: (i) The relationship between portfolio liquidity and the 
way in which, and the prices and spreads at which, ETF shares trade, 
including, the efficiency of the arbitrage mechanism and the level 
of active participation by market participants (including authorized 
participants); and (ii) the effect of the composition of baskets on 
the overall liquidity of the ETF's portfolio as part of its 
assessment, management and review of liquidity risk. See LRM 
Adopting Release, supra footnote 123.
    \636\ Conversely, some ETFs may choose to decrease, rather than 
increase, the weight of more liquid securities and increase the 
weight of less liquid securities in their basket compared to their 
portfolio in order to reduce transaction costs borne by an ETF's 
existing/remaining shareholders when the ETF must buy and sell 
portfolio holdings. This would lead to a reduction in transaction 
costs for existing/remaining shareholders and to an increase in 
transactions costs for authorized participants and, ultimately, 
investors buying and selling ETF shares. We believe that most funds 
would choose to limit such behavior as they would likely find it to 
be in their best interest to balance costs imposed on transacting 
and existing/remaining shareholders.
---------------------------------------------------------------------------

    Finally, the amendments to Forms N-1A and N-8B-2 as well as the 
additional website disclosures required by rule 6c-11 we are adopting 
will allow investors and other market participants to better understand 
and compare ETFs using more relevant and standardized disclosure. For 
example, the amendments to Item 6 of Form N-1A will add a requirement 
for ETFs to include a statement that ETF investors may be subject to 
other expenses that are specific to ETF trading, including

[[Page 57220]]

bid-ask spreads.\637\ These costs are not currently required to be 
disclosed as part of the prospectus. Since these costs are incurred by 
ETF investors and not mutual fund investors, we believe that adding 
this disclosure requirement will help investors and other market 
participants better assess and compare fees and expenses between 
certain funds and fund types, such as ETFs and mutual funds. Thus, the 
final rule could help investors make more informed investment decisions 
that are more suited to their investment objectives. The degree to 
which investors will benefit from the ability to make more informed 
investment decisions is inherently difficult to quantify, so we are 
unable to estimate the size of this benefit.
---------------------------------------------------------------------------

    \637\ James J. Angel, Todd J. Broms, & Gary L. Gastineau, ETF 
Transaction Costs Are Often Higher Than Investors Realize, Journal 
of Portfolio Management, Spring 2016, at 65, find that the cost of 
trading ETF shares depends both on bid-ask spreads as well as 
premiums and discounts to NAV per share.
---------------------------------------------------------------------------

2. Competition
    The rule will likely increase competition among ETFs that can rely 
on the rule. The first channel through which the rule will likely 
foster competition is by reducing the costs for ETF sponsors to form 
new ETFs that comply with the conditions set by the rule. This cost 
reduction will lower the barriers to entering the ETF market, which 
will likely lead to increased competition among ETFs that can rely on 
the rule.
    In addition, new ETFs that enter the market in reliance on the 
rule, as well as those existing ETFs that will have their exemptive 
relief rescinded and replaced by the rule, will no longer be subject to 
requirements that vary among exemptive orders.\638\ Instead, these ETFs 
will operate under uniform requirements, which will help promote 
competition among ETFs that can rely on the rule. An increase in 
competition among ETFs that can rely on the rule will likely also lead 
to an increase in competition among those ETFs, ETFs that cannot rely 
on the rule, and other types of funds and products that investors may 
perceive to be substitutes for ETFs.\639\
---------------------------------------------------------------------------

    \638\ Some fund sponsors that operate ETFs outside the scope of 
rule 6c-11 may voluntarily decide to comply with certain provisions 
of the rule. For example, one sponsor that operates share class ETFs 
stated that it intends to modify its current practices, as 
necessary, to be consistent with the custom basket requirements 
contemplated by the proposed rule for all its U.S. ETFs. See 
Vanguard Comment Letter.
    \639\ The types of funds and products that investors may 
consider substitutes for ETFs would depend on an individual 
investor's preferences and investment objectives. Other types of 
products that some investors may consider to be substitutes for ETFs 
include mutual funds, closed-end funds, and other ETPs, such as 
exchange-traded notes and commodity pools.
---------------------------------------------------------------------------

    Furthermore, the new website disclosures and amendments to Forms N-
1A and N-8B-2 will allow investors to better compare ETFs and mutual 
funds, which can further foster competition among these types of funds 
as well as between these types of funds and other types of funds that 
investors may perceive to be substitutes for ETFs and mutual funds, 
such as closed-end funds and certain ETPs.
    Increased competition will likely lead to lower fees for investors, 
encourage financial innovation, and increase consumer choice in the 
markets for ETFs, mutual funds, and other types of funds that investors 
may perceive to be substitutes.\640\ Due to the limited availability of 
data, however, we are unable to quantify these effects.
---------------------------------------------------------------------------

    \640\ The rule will likely lead to increased competition both 
among ETFs that can rely on the rule. as well as between ETFs that 
can rely on the rule and those that cannot, to the extent that 
investors perceive these ETFs as substitutes. While we believe that 
increased competition generally is conducive to innovation, any 
increased competition in the ETF market resulting from the rule will 
be more likely to involve novel ETFs that will continue to need to 
obtain exemptive relief from the Commission.
---------------------------------------------------------------------------

    To the extent the rule will increase the number and total assets of 
ETFs, more authorized participants or other market participants that 
engage in ETF arbitrage, such as hedge funds and principal trading 
firms, may enter the market. This may lead to increased competition 
among authorized participants or other market participants and result 
in authorized participants or other market participants exploiting 
arbitrage opportunities sooner (i.e., when premiums/discounts to NAV 
per share are smaller). As a result, bid-ask spreads may tighten and 
premiums/discounts to NAV per share for ETF shares may decrease. We 
would expect new entries of authorized participants or other 
arbitrageurs as a result of the rule to be limited, however, and any 
effects on bid-ask spreads and premiums/discounts to NAV per share to 
be small.
3. Capital Formation
    The rule may lead to increased capital formation. Specifically, an 
increase in the demand for ETFs, to the extent that it increases demand 
for intermediated assets as a whole, will likely spill over into 
primary markets for equity and debt securities. As a consequence, 
companies may be able to issue new debt and equity at higher prices in 
light of the increased demand for these assets in secondary markets 
created by ETFs and the cost of capital for firms could fall, 
facilitating capital formation.
    The conclusion that an increase in the demand for ETFs may lower 
the firm's cost of capital is further supported by a paper \641\ that 
finds that bonds with a higher share of ETF ownership have lower 
expected returns.\642\ Due to the limited availability of data, 
however, we are unable to quantify these effects of the rule on capital 
formation.
---------------------------------------------------------------------------

    \641\ Dannhauser Article, supra footnote 632.
    \642\ We acknowledge that there is research (see Yakov Amihud & 
Haim Mendelson, Asset Pricing and the Bid-Ask Spread, 17 Journal of 
Financial Economics 223 (1986)) that provides evidence that expected 
returns of an asset are positively associated with its liquidity. As 
discussed above, the academic literature suggests that stocks with a 
higher share of ETF ownership have lower liquidity (whereas the 
evidence on the effect of underlying bonds is mixed). Thus, there 
may be an offsetting effect that could weaken the potential benefits 
of the rule for capital formation through new equity issuances by 
firms.
---------------------------------------------------------------------------

E. Reasonable Alternatives

1. Website Disclosure of Basket Information
    Rule 6c-11 does not include a basket publication requirement. As an 
alternative, we considered requiring an ETF to post on its website one 
``published'' basket each business day before the opening of trading of 
the ETF's shares, as we proposed. This disclosure would allow smaller 
institutional investors and retail investors that are not NSCC members 
and do not currently have access to basket information to compare the 
ETF's ``published basket'' with its portfolio holdings.\643\ However, 
we agree with commenters that the benefit of this information to these 
investors is likely to be limited, as secondary market arbitrage 
typically does not require information regarding an ETF's basket 
composition.\644\ In addition, ETFs would incur additional costs 
associated with this disclosure.\645\
---------------------------------------------------------------------------

    \643\ Commenters stated that authorized participants already 
have access to basket information through the daily portfolio 
composition file provided to NSCC. In addition, other institutional 
investors that use basket information for hedging purposes, such as 
an investor using an authorized participant as an agent, have access 
to this information through the NSCC, an intermediary (such as an 
authorized participant), or the ETF itself. See supra section 
II.C.5.c.
    \644\ See, e.g., CSIM Comment Letter; ICI Comment Letter.
    \645\ Our exemptive orders have not included requirements for 
daily website disclosures of ETF baskets, though some exemptive 
orders contemplate disclosure of daily basket assets through NSCC. 
Since specifying basket assets is part of the regular operation of 
an ETF, we believe that all ETFs already have the required data 
available to them. In addition, we believe that most ETFs already 
have systems (such as computer equipment, an internet connection, 
and a website) in place that can be used for processing this data 
and uploading it to their websites. However, these ETFs would still 
incur the costs associated with establishing and following 
(potentially automated) processes for processing and uploading this 
data to their websites.

---------------------------------------------------------------------------

[[Page 57221]]

    We also considered requiring an ETF to publish information 
regarding every custom basket used by the ETF after the close of 
trading on each business day. This information could reveal whether an 
authorized participant has pressured an ETF into accepting illiquid 
securities in exchange for liquid ETF shares (i.e., dumping) or into 
giving the authorized participant desirable securities in exchange for 
ETF shares tendered for redemption (i.e., cherry-picking) by comparing 
an ETF's portfolio assets and published basket to the baskets used by 
various authorized participants throughout the day.
    However, the rule contains conditions for basket policies and 
procedures, which seek to prevent overreaching. Moreover, the rule will 
require an ETF to maintain records regarding the baskets used, which 
will allow Commission staff to examine an ETF's use of basket 
flexibility. We also agree with commenters that requiring publication 
of all baskets could disadvantage an ETF and its shareholders by 
allowing market participants to front-run trades by authorized 
participants (or other arbitrageurs that use an authorized participant 
as an agent) in basket securities, particularly for those ETFs that 
have more frequent primary market transactions.\646\
---------------------------------------------------------------------------

    \646\ See, e.g., ICI Comment Letter; SSGA Comment Letter I; 
Vanguard Comment Letter.
---------------------------------------------------------------------------

    Consequently, we believe that the risk for abusive practices under 
the rule will be low while, at the same time, the rule will avoid 
additional operational and compliance costs for ETFs to post and review 
the information as well as potential costs associated with front-
running trades in basket securities under the alternative.
2. Disclosure of ETF Premiums or Discounts Greater Than 2%
    As proposed, the rule will require any ETF whose premium or 
discount was greater than 2% for more than seven consecutive trading 
days to post that information on its website, along with a discussion 
of the factors that are reasonably believed to have materially 
contributed to the premium or discount. One commenter suggested that we 
raise the threshold for the size of the premiums or discounts to five 
or ten percent while shortening the period over which the premium or 
discount has to be sustained for the requirement to trigger.\647\ Based 
on this suggestion, we considered an alternative that would require any 
ETF whose premium or discount was greater than five percent for more 
than three consecutive trading days to post that information on its 
website, along with a discussion as required under the rule.
---------------------------------------------------------------------------

    \647\ Nasdaq Comment Letter.
---------------------------------------------------------------------------

    Under both the rule and the alternative, ETFs with premiums or 
discounts greater than five percent for more than seven consecutive 
trading days would provide the disclosure. The disclosure threshold 
under the rule will also capture ETFs with premiums or discounts 
greater than two and up to five percent for more than seven consecutive 
trading days, which would not be captured under the alternative. 
Conversely, the disclosure threshold under the alternative would also 
capture ETFs with premiums or discounts greater than five percent for 
between three and six consecutive trading days, which will not be 
captured under the rule.
    We estimate that 1.7 percent of those ETFs that can rely on the 
rule would trigger the alternative disclosure threshold per year, 
compared to 4.5 percent under the rule. From 2008 and 2018, the 
percentage of ETFs that would have triggered the requirement would have 
been largest in 2008. In that year, 4.6 percent of ETFs that could have 
relied on the rule would have triggered the alternative threshold, 
compared to 10 percent under the rule.\648\ In addition, an ETF that 
triggers the reporting requirement under the alternative would make its 
disclosure sooner after the premium or discount first exceeds the 
threshold, as the measurement period is shorter compared to the rule.
---------------------------------------------------------------------------

    \648\ See supra footnote 598 and accompanying text. Our estimate 
of the percentage of ETFs that would have to satisfy the requirement 
under the alternative is based on the same methodology and data as 
our estimate for the rule's reporting threshold.
---------------------------------------------------------------------------

    The lower incidence of reporting under the alternative would 
decrease the costs incurred by ETFs associated with making the 
disclosure,\649\ but also reduce the reporting of persistent premiums 
and discounts available to investors in that it would eliminate 
reporting of discounts below the 5% threshold. While the shorter 
observation period under the alternative would make the information 
about premiums and discounts available to investors sooner, rule 6c-11 
will require ETFs to disclose the prior day's premium/discount to NAV 
per share on its website every day, so that timely information about 
the size of ETF's premiums/discounts will still be available to 
investors under the rule.
---------------------------------------------------------------------------

    \649\ We estimate a total annual industry cost of $47,457,745 (= 
1.7% x 1,735 ETFs x $1,609). This estimate uses the same assumptions 
as our estimate of the cost of this requirement under the rule. See 
supra footnote 600 and accompanying text.
---------------------------------------------------------------------------

    Another commenter suggested that we adopt a materiality standard 
rather than a fixed numerical threshold to trigger the reporting 
requirement.\650\ We considered an alternative under which each ETF 
would make its own determination as to when a premium/discount to NAV 
per share is material and thus would be reported. As a result, ETFs 
would almost certainly differ in the size and duration of a premium/
discount that they would consider to be material. In addition, ETFs 
might adopt varying criteria to determine whether a premium/discount is 
deemed material based on the asset class of the ETF or general market 
conditions. While we are unable to predict how the alternative would 
impact the frequency of reporting compared to the rule, we believe that 
the alternative might lead to inconsistent reporting practices among 
ETFs, which would likely reduce the usefulness of the requirement to 
investors, compared to the rule.
---------------------------------------------------------------------------

    \650\ John Hancock Comment Letter (recommending a materiality 
standard instead of a 2% threshold).
---------------------------------------------------------------------------

3. Website and Prospectus Disclosure of the Median Bid-Ask Spread 
Calculated Over the Most Recent 1-Year Period
    Rule 6c-11 will require an ETF to disclose the median bid-ask 
spread calculated over the most recent 30-day period on its 
website.\651\ As an alternative, we considered requiring an ETF to 
disclose the median bid-ask spread for the ETF's most recent fiscal 
year on its website and in its prospectus, as proposed.
---------------------------------------------------------------------------

    \651\ Our amendments to Form N-1A will provide ETFs that do not 
rely on rule 6c-11 with the option to provide the same information 
on its website or the median bid-ask spread over the ETF's most 
recent fiscal year in its prospectus. See supra section II.H.2.b.
---------------------------------------------------------------------------

    We agree with commenters that computing the median bid-ask spread 
over a 30-day rolling period, rather than over the proposed 1-year 
lookback period, may provide a more accurate predictor of trading costs 
for newly launched ETFs whose bid-ask spreads may tighten as the ETFs 
mature.\652\ In addition, as an ETF's prospectus cannot be updated 
every day, we believe it is appropriate to require ETFs to make this

[[Page 57222]]

disclosure on their websites. As a result, we believe that requiring 
ETFs to disclose the median bid-ask spread over the most recent 30-day 
period on their websites will increase the benefits of the bid-ask 
spread disclosure to investors compared to the alternative, 
particularly for newly-launched ETFs.
---------------------------------------------------------------------------

    \652\ See supra footnote 381 and accompanying text. Conversely, 
there may also be instances where future bid-ask spreads may be 
better predicted by the median bid-ask spread computed over a 1-year 
lookback period, as compared to a 30-day rolling period (e.g., when 
recent bid-ask spreads are not representative of how an ETF 
typically has traded.
---------------------------------------------------------------------------

4. Additional Disclosures Showing the Impact of Bid-Ask Spreads
    We considered amending Forms N-1A and N-8B-2 to require an ETF to 
provide: (1) Examples in the ETF's prospectus showing how bid-ask 
spreads impact the return on a hypothetical investment for both buy-
and-hold and frequent traders; and (2) an interactive calculator on the 
ETF's website that would allow an investor to customize the 
hypothetical bid-ask spread calculations to its specific investing 
situation, as proposed. Some investors may find the additional 
disclosures under this alternative useful to understand the effect of 
transaction costs resulting from bid-ask spreads on their investments; 
however, we agree with commenters that this benefit could be diminished 
by over-concentrating investor focus on bid-ask spreads, thereby 
potentially obscuring the importance of other components of ETF 
transaction costs (e.g., order size, market conditions, and the extent 
to which a broker-dealer improves upon quoted bid-ask spreads).\653\ In 
addition, the omission of these requirements will save ETFs the costs 
associated with providing examples showing how bid-ask spreads impact 
the return on a hypothetical investment and implementing the 
interactive calculator on its website.
---------------------------------------------------------------------------

    \653\ See, e.g., Vanguard Comment. See also Eaton Vance Comment 
Letter.
---------------------------------------------------------------------------

5. Website Disclosure of a Modified IIV
    As proposed, rule 6c-11 will not require ETFs to disseminate IIV as 
a condition for reliance on the rule. As an alternative, we considered 
requiring an ETF to publicly disseminate a modified IIV on its website 
on a real time basis as a condition to rule 6c-11, requiring ETFs to 
calculate IIVs more frequently and in a more accessible manner. We also 
considered creating a methodology that takes into account circumstances 
when market prices for underlying assets are not available or should 
not be used to reflect the ETF's intraday value. As we discussed above 
in section II.C.3, such a modified IIV would benefit retail and less 
sophisticated institutional investors by allowing them to better 
evaluate the value of an ETF intra-day. However, we are concerned that 
these modifications would not cure the shortcomings of IIV for ETFs in 
a uniform manner. We encourage the ETF industry to undertake efforts to 
develop intraday value metrics targeted at these investors as we 
believe that ETFs are in a position to consider and develop tailored 
metrics for ETFs holding different asset classes in a format that is 
useful for retail investors.
6. The Use of a Structured Format for Additional Website Disclosures 
and the Filing of Additional Website Disclosures in a Structured Format 
on EDGAR
    The rule will require ETFs to post on their websites certain 
disclosures to enable investors to more readily obtain certain key 
metrics for individual ETFs. As an alternative, we considered requiring 
ETFs to post the disclosures in a structured format on their websites. 
Structured disclosures are made machine-readable by having reported 
disclosure items labeled (tagged) using a markup language that can be 
processed by software for analysis.\654\ The resulting standardization 
under this alternative would allow for extraction, aggregation, 
comparison, and analysis of reported information through significantly 
more automated means than is possible with unstructured formats such as 
HTML.\655\ This alternative would facilitate the extraction and 
analysis through automated means of an individual fund's disclosures 
over time which would offer the greatest benefit for higher-frequency 
ETF disclosures and potentially the comparison of disclosures across a 
small number of ETFs. However, requiring a structured disclosure format 
would not lower the burden on investors and other data users of 
separately visiting each website to obtain each ETF's disclosure.
---------------------------------------------------------------------------

    \654\ Structured information can be stored, shared, and 
presented in different systems or platforms. Standardized markup 
languages, such as XML or XBRL, use sets of data element tags for 
each required reporting element, referred to as taxonomies.
    \655\ Several commenters agreed with our assessment of the 
benefits of a structured disclosure format. One commenter stated 
that ``having such information submitted in a standardized, 
structured format to the Commission and available publicly would aid 
comparison and analysis.'' The commenter further indicated that such 
information should be provided in the XBRL format on a daily basis. 
See Morningstar Comment Letter. Another commenter expressed general 
support for having ``standardized basket reporting in XBRL.'' See 
Angel Comment Letter. Another commenter recommended that ETFs ``be 
required to disclose their daily portfolio holdings using a common 
downloadable or machine[hyphen]readable format specified by the 
Commission.'' See Eaton Vance Comment Letter. A different commenter 
recommended that ``portfolio holdings information be supplied in a 
standard file format with comma-separated value.'' See SSGA Comment 
Letter I.
---------------------------------------------------------------------------

    The structured data requirement could impose a cost on ETFs of 
tagging the information in a structured format, particularly to the 
extent that ETFs do not otherwise structure this data in this manner 
for their own purposes.\656\ However, we believe that if the XML 
format, for example, were used for structuring the additional 
disclosure, the incremental cost of tagging information in each such 
disclosure would likely be relatively modest.\657\
---------------------------------------------------------------------------

    \656\ See, e.g., CSIM Comment Letter (stating that ``[t]he 
alternatives described in the proposal, including the use of 
structured disclosures, will not be user-friendly for individual 
investors and will incur unnecessary costs to the ETF.'').
    \657\ For example, based on staff experience with XML filings, 
the costs of tagging the information in XML are minimal given the 
technology that would be used to structure the data. XML is a widely 
used data format, and based on the Commission's understanding of 
current practices, most reporting persons and third party service 
providers have production systems already in place to report 
schedules of investments and other information. Therefore, we 
believe systems would be able to accommodate XML data without 
significant costs, and large-scale changes would likely not be 
necessary to output structured data files.
---------------------------------------------------------------------------

    As another alternative, we considered requiring ETFs to make the 
additional website disclosures available in a centralized repository in 
a structured format, such as by filing them on EDGAR.\658\ Making the 
information available in a structured format on EDGAR would likely 
improve its accessibility and the ability of investors, the Commission, 
and other data users, such as third-party data aggregators, to 
efficiently extract information for purposes of aggregation, 
comparison, and analysis of information across multiple funds and time 
periods.\659\ Requiring the information to be filed on EDGAR also would 
enable data users to retain access to such historical information in 
the event that such information is subsequently removed from the fund's 
website.\660\ We recognize that filers might incur

[[Page 57223]]

additional costs under this alternative, compared to the requirement in 
the rule to post the additional disclosures in an unstructured format 
on fund websites.\661\ Such costs would likely vary across filers, 
depending on the systems and processes they currently have in place, 
such as for internal reporting, posting of website updates, and 
submission of regulatory filings, and the manner in which filers 
currently maintain data required for the additional disclosures under 
the final rule.\662\
---------------------------------------------------------------------------

    \658\ The Commission has previously adopted rules requiring the 
structuring of certain information disclosed by funds. See, e.g., 
Reporting Modernization Adopting Release, supra footnote 263; Money 
Market Fund Reform, Investment Company Act Release No. 29132 (Feb. 
23, 2010) [75 FR 10059 (Mar. 4, 2010)]; Interactive Data for Mutual 
Fund Risk/Return Summary, Investment Company Act Release No. 28617 
(Feb. 11, 2009) [74 FR 7747 (Feb. 19, 2009)].
    \659\ One commenter agreed with the assessment in the 2018 ETF 
Proposing Release of the benefits of making the additional website 
disclosures available in a centralized repository in a structured 
format, stating that ``[a]ll holdings and basket information should 
be filed in a central location (such as EDGAR) in a common format. 
It is too difficult to search many funds groups for this information 
and then putting it in a common format for analysis.'' See Reagan 
Comment Letter.
    \660\ See Reagan Comment Letter.
    \661\ See Invesco Comment Letter (supporting dissemination via 
the ETF sponsor's website and opposing any additional dissemination 
requirements, such as filing on EDGAR, stating that building a 
separate data feed would involve additional costs and internal 
resources).
    \662\ Such costs would also depend on the specific nature of the 
EDGAR filing requirement under this alternative.
---------------------------------------------------------------------------

7. Pro Rata Baskets
    Rule 6c-11 will require ETFs relying on the rule to adopt and 
implement written policies and procedures that govern the construction 
of basket assets and the process that will be used for the acceptance 
of basket assets. As an alternative, we considered requiring that an 
ETF's basket generally correspond pro rata to its portfolio holdings, 
while identifying certain limited circumstances under which an ETF may 
use a non-pro rata basket, as we have done in our exemptive orders 
since approximately 2006.\663\
---------------------------------------------------------------------------

    \663\ ETFs whose orders we are rescinding and that are operating 
under exemptive orders issued before approximately 2006, which 
included few explicit restrictions, would have reduced basket 
flexibility under the alternative compared to the baseline in that 
they are required to adopt custom basket policies and procedures 
under rule 6c-11.
---------------------------------------------------------------------------

    The requirement included in these orders was designed to address 
the risk that an authorized participant or other market participant 
could take advantage of its relationship with the ETF (i.e., engage in 
cherry picking or dumping). However, we believe that the rule's 
additional policies and procedures requirements for custom baskets will 
provide a principles-based approach that is designed to limit potential 
abuses so that they would be unlikely to cause significant harm to 
investors. In addition, we believe that the increased basket 
flexibility under the rule will benefit the effective functioning of 
the arbitrage mechanism, particularly benefiting fixed-income, 
international, and actively managed ETFs.\664\
---------------------------------------------------------------------------

    \664\ Section IV.C.1.b.i supra discusses the possibility that 
some ETFs may use the increased basket flexibility of the rule to 
over- or under-weight securities in their baskets compared to their 
portfolios based on the liquidity of these securities. Such a 
practice would not be possible under the alternative that would 
require an ETF's basket to generally correspond pro rata to its 
portfolio holdings.
---------------------------------------------------------------------------

8. Treatment of Existing Exemptive Relief
    As proposed, we will rescind the exemptive relief we have issued to 
ETFs that will be permitted to rely on the rule. As an alternative, we 
considered allowing ETFs with existing exemptive relief in orders that 
do not contain a self-termination clause to continue operating under 
their relief rather than requiring them to operate in reliance on the 
rule.
    The Commission believes that allowing ETFs to continue operating 
under their existing relief would create differences in the conditions 
under which funds that would otherwise be subject to rule 6c-11 
operate. Specifically, some ETFs that determine they do not need the 
additional flexibility (e.g., basket flexibility) the rule will provide 
could choose to continue operating under their existing relief rather 
than in reliance on conditions of the rule, such as standardized 
presentation of portfolio holdings. This self-selection would 
perpetuate existing disparity in the conditions under which these ETFs 
are allowed to operate.
    Measured against the baseline, the alternative would thus have 
smaller benefits arising from improved disclosure. For example, an ETF 
that chose to continue to operate under its existing exemptive relief 
would not be required to present its portfolio holdings in the 
standardized format prescribed by rule 6c-11. As discussed in section 
IV.C.1.b.i above, we believe that this requirement will benefit 
investors of ETFs that are subject to rule 6c-11 by allowing them to 
more easily identify arbitrage opportunities and compare ETFs that have 
similar investment objectives. In addition, the alternative would not 
level the playing field among ETFs subject to rule 6c-11 with regard to 
these conditions and thus not be as effective at promoting product 
competition as the rule. One commenter agreed, stating that the 
rescission of the orders will further the Commission's regulatory goal 
of creating a consistent regulatory framework for ETFs.\665\ In 
addition, it would be more difficult for the Commission to evaluate 
compliance with applicable law under the alternative compared to the 
rule, as some of the ETFs whose exemptive relief we will rescind could 
choose to continue to operate under their exemptive relief. The 
Commission also believes that the costs to funds associated with 
rescinding the existing exemptive relief would be minimal, as we 
anticipate that substantially all ETFs whose relief will be rescinded 
will be able to continue operating with only minor adjustments, other 
than being required to develop basket asset policies and 
procedures.\666\
---------------------------------------------------------------------------

    \665\ See supra footnote 455 and accompanying text.
    \666\ Under the alternative, some ETFs may volunarily change 
operational or compliance functions in order to be able to operate 
under the rule, if this provides the ETFs increased basket 
flexibility compared to operating under their existing exemptive 
orders.
---------------------------------------------------------------------------

9. ETFs Organized as UITs
    Rule 6c-11 will be available only to ETFs that are organized as 
open-end funds.\667\ As an alternative, we considered including ETFs 
organized as UITs in the scope of the rule. However, as discussed above 
in section II.A.1, we believe that the terms and conditions of the 
existing exemptive orders for UITs are appropriately tailored to 
address the unique features of the UIT structure.
---------------------------------------------------------------------------

    \667\ While the vast majority of ETFs currently in operation are 
organized as open-end funds, some early ETFs, which currently have a 
significant amount of assets, are organized as UITs. Examples 
include SPDR S&P 500 ETF Trust (SPY) and PowerShares QQQ Trust, 
Series 1 (QQQ).
---------------------------------------------------------------------------

    In addition, as ETFs have greater investment flexibility under the 
open-end fund structure than the UIT structure, we believe that most 
new ETFs entering into the market will prefer to operate under the 
open-end fund structure rather than the UIT structure. No new UIT ETFs 
have come to market in recent years, and we do not think that there 
would be significant economic benefits to including UITs in the scope 
of the rule.\668\
---------------------------------------------------------------------------

    \668\ ETFs sponsors that plan to launch a new ETF organized as a 
UIT will continue to be able to rely on the exemptive order process.
---------------------------------------------------------------------------

10. Treatment of Leveraged/Inverse ETFs
    As discussed in section II.A.3 above, leveraged/inverse ETFs will 
not be able to rely on final rule 6c-11. As an alternative, we 
considered permitting leveraged/inverse ETFs to rely on the rule, while 
maintaining the status quo of existing exemptive orders with respect to 
the amount of leveraged market exposure that leveraged/inverse ETFs may 
obtain (i.e., 300% of the return or inverse return).\669\
---------------------------------------------------------------------------

    \669\ See supra footnote 72.
---------------------------------------------------------------------------

    This alternative could benefit competition among leveraged/inverse 
ETFs as compared to the baseline, as fund sponsors that currently do 
not have an exemptive order permitting them to operate this type of ETF 
could enter the market. As a result, fees for leveraged/inverse ETFs 
would likely decrease and their assets could increase.

[[Page 57224]]

However, as discussed in detail in section II.A.3 above, while 
leveraged/inverse ETFs are structurally and operationally similar to 
other types of ETFs within the scope of rule 6c-11, we believe it is 
premature to permit sponsors to form and operate leveraged/inverse ETFs 
in reliance on the rule without first addressing the investor 
protection purposes and concerns underlying section 18 of the Act. We 
therefore believe that the Commission should first complete its broader 
consideration of the use of derivatives by registered funds before 
considering allowing leveraged/inverse ETFs to rely on the rule.

V. Paperwork Reduction Act

A. Introduction

    Rule 6c-11 will result in new ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\670\ In addition, the amendments to Form N-1A, Form N-8B-2, 
and Form N-CEN will impact the collection of information burden under 
those forms and Form S-6.\671\ Rule 6c-11 also will impact the current 
collection of information burden of rule 0-2 under the Act.\672\
---------------------------------------------------------------------------

    \670\ 44 U.S.C. 3501-3520.
    \671\ 17 CFR 274.11A; 17 CFR 274.12; 17 CFR part 101; 17 CFR 
239.16.
    \672\ 17 CFR 270.0-2.
---------------------------------------------------------------------------

    The titles for the existing collections of information are: ``Form 
N-1A under the Securities Act of 1933 and under the Investment Company 
Act of 1940, Registration Statement for Open-End Management Companies'' 
(OMB No. 3235-0307); ``Form N-8B-2 under the Investment Company Act of 
1940, Registration Statement of Unit Investment Trusts Which are 
Currently Issuing Securities'' (OMB No. 3235-0186); ``Form S-6 [17 CFR 
239.19], for registration under the Securities Act of 1933 of Unit 
Investment Trusts registered on Form N-8B-2'' (OMB Control No. 3235-
0184); ``Form N-CEN'' (OMB Control No. 3235-0730); and ``Rule 0-2 under 
the Investment Company Act of 1940, General Requirements of Papers and 
Applications'' (OMB Control No. 3235-0636). The title for the new 
collection of information would be: ``Rule 6c-11 under the Investment 
Company Act of 1940, `Exchange-traded funds.' '' The Commission is 
submitting these collections of information to the Office of Management 
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) 
and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person 
is not required to respond to, a collection of information unless it 
displays a currently valid control number.
    We published notice soliciting comments on the collection of 
information requirements in the 2018 ETF Proposing Release and 
submitted the proposed collections of information to OMB for review and 
approval in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. We 
received no comments on the collection of information requirements. We 
discuss below the collection of information burdens associated with 
rule 6c-11 and its impact on rule 0-2 as well as the amendments to 
Forms N-1A, N-8B-2, S-6 and N-CEN.

B. Rule 6c-11

    Rule 6c-11 will permit ETFs that satisfy certain conditions to 
operate without first obtaining an exemptive order from the Commission. 
The rule is designed to create a consistent, transparent, and efficient 
regulatory framework for such ETFs and facilitate greater competition 
and innovation among ETFs. The rule attempts to eliminate historical 
distinctions and conditions that we no longer believe are necessary and 
thus appropriately level the playing field for open-end ETFs that 
pursue the same or similar investment strategies.
    Rule 6c-11 will require an ETF to disclose certain information on 
its website, to maintain certain records, and to adopt and implement 
written policies and procedures governing its constructions of baskets, 
as well as written policies and procedures that set forth detailed 
parameters for the construction and acceptance of custom baskets that 
are in the best interests of the ETF and its shareholders. These 
requirements are collections of information under the PRA.
    The respondents to rule 6c-11 will be ETFs registered as open-end 
management investment companies other than share class ETFs, leveraged/
inverse ETFs, or non-transparent ETFs. This collection will not be 
mandatory, but will be necessary for those ETFs seeking to operate 
without individual exemptive orders, including all ETFs whose existing 
exemptive orders will be rescinded. In the 2018 ETF Proposing Release, 
we estimated that 1,635 ETFs would likely rely on rule 6c-11.\673\ We 
did not receive public comment on this estimate, but are updating the 
estimate to 1,735 ETFs to reflect industry data as of December 31, 
2018.\674\ Information provided to the Commission in connection with 
staff examinations or investigations will be kept confidential subject 
to the provisions of applicable law.
---------------------------------------------------------------------------

    \673\ 2018 ETF Proposing Release, supra footnote 7, at section 
IV.B. This estimate did not include UIT ETFs, share class ETFs, 
leveraged/inverse ETFs, or non-transparent ETFs. Id.
    \674\ This figure is based on a staff analysis of Bloomberg 
data.
---------------------------------------------------------------------------

1. Website Disclosures
    Rule 6c-11 will require an ETF to disclose on its website, each 
business day, the portfolio holdings that will form the basis for each 
calculation of NAV per share.\675\ The rule will require that the 
portfolio holdings information contain specified information, including 
description and amount of each position.\676\ Additionally, the rule 
will require an ETF to disclose on its website: (i) The ETF's NAV per 
share, market price, and premium or discount, each as of the end of the 
prior business day; (ii) a tabular chart and line graph showing the 
ETF's premiums and discounts for the most recently completed calendar 
year and the most recently completed calendar quarters of the current 
year (or for the life of the fund if shorter); and (iii) the ETF's 
median bid-ask spread over the last thirty calendar days.\677\
---------------------------------------------------------------------------

    \675\ Rule 6c-11(c)(1)(i).
    \676\ Rule 6c-11(c)(1)(i).
    \677\ Rule 6c-11(c)(1)(ii)-(v).
---------------------------------------------------------------------------

    Rule 6c-11(c)(1)(vi) also will require any ETF whose premium or 
discount was greater than 2% for more than seven consecutive trading 
days to post that information on its website, along with a discussion 
of the factors that are reasonably believed to have materially 
contributed to the premium or discount.\678\ Given the threshold for 
this requirement, we do not believe that many ETFs will be required to 
disclose this information on a routine basis. In the 2018 ETF Proposing 
Release, we estimated that all ETFs will be required to make this 
disclosure only once in their lifetime.\679\ Therefore, we believed 
that this requirement will impose only initial costs and that there 
will be no ongoing costs associated with it.\680\
---------------------------------------------------------------------------

    \678\ Rule 6c-11(c)(1)(vi). This information would be posted on 
the trading day immediately following the eighth consecutive trading 
day on which the ETF had a premium or discount greater than 2% and 
be maintained on the ETF's website for at least one year following 
the first day it was posted. See supra section II.C.6.c.
    \679\ 2018 ETF Proposing Release, supra footnote 7, at section 
IV.B.1.
    \680\ For purposes of this analysis, we estimate that 1,735 ETFs 
would be required to make this disclosure at least once in their 
lifetime.

[[Page 57225]]



                                                       Table 11--Website Disclosure PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Internal time      Initial  external     Annual external
                                 Initial hours    Annual hours \1\         Wage rate \2\          costs             cost burden          cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Website development...........             7.5  2.5 hours...........  x  $274 (senior      $685...............  $2,000.............  $666.65
                                                                          systems
                                                                          analyst).
                                           7.5  2.5 hours...........  x  $319 (senior      $797.50............
                                                                          programmer).
Review of website disclosures.               5  1.7 hours...........  x  $298 (compliance  $506.60............
                                                                          manager).
                                             5  1.7 hours...........  x  $352 (compliance  $598.40............
                                                                          attorney).
Website updates...............  ..............  1 hour..............  x  $274 (senior      $274...............
                                                                          systems
                                                                          analyst).
                                                1 hour..............  x  $319 (senior      $319...............
                                                                          programmer).
Review of updated website       ..............  1.25 hours..........  x  $298 (compliance  $372.50............
 disclosure.                                                              manager).
                                                1.25 hours..........  x  $352 (compliance  $440...............
                                                                          attorney).
                               -------------------------------------------------------------------------------------------------------------------------
    Total annual burden per                 25  13.3 hours                                 $3,971.30..........  $2,000.............  $666.65
     ETF.
    Number of ETFs............  ..............  x 1,635                                    x 1,635............  x 1,635............  x 1,635
                               -------------------------------------------------------------------------------------------------------------------------
        Total annual burden...  ..............  21,745.5 hours                             $6,493,075.50......  $3,270,000.........  $1,089,972.75
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Final Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Website development...........       \4\ 11.25  3.75 hours..........  x  $284 (senior      $1,065.............  $3,000 \4\.........  $1,000
                                                                          systems
                                                                          analyst) \5\.
                                     \4\ 11.25  3.75 hours..........  x  $331 (senior      $1,241.25..........
                                                                          programmer) \5\.
Review of website disclosures.         \4\ 7.5  2.5 hours...........  x  $309 (compliance  $772.50............
                                                                          manager) \5\.
                                       \4\ 7.5  2.5 hours...........  x  $365 (compliance  $912.50............
                                                                          attorney) \5\.
Website updates...............  ..............  1.5 hours \4\.......  x  $284 (senior      $426...............
                                                                          systems
                                                                          analyst) \5\.
                                                1.5 hours \4\.......  x  $331 (senior      $496.50............
                                                                          programmer) \5\.
Review of updated website       ..............  1.875 hours \4\.....  x  $309 (compliance  $579.38............
 disclosure.                                                              manager) \5\.
                                                1.875 hours \4\.....  x  $365 (compliance  $684.36............
                                                                          attorney) \5\.
                               -------------------------------------------------------------------------------------------------------------------------
    Total annual burden per               37.5  19.25 hours                                $6,177.49..........  $3,000.............  $1,000
     ETF.
    Number of ETFs............  ..............  x 1,735 \5\                                x 1,735 \5\........  x 1,735 \5\........  x 1,735 \5\
                               -------------------------------------------------------------------------------------------------------------------------
        Total annual burden...  ..............  33,398.75 hours.....                       $10,717,945.15.....  $5,205,000.........  $1,735,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a three-year period.
\2\ See supra footnote 568.
\3\ 2018 Proposing Release, supra footnote 7, at section IV.B.1.
\4\ Estimate revised to reflect modifications from the proposal.
\5\ Estimate revised to reflect updated industry data.

    Table 11 above summarizes the proposed PRA estimates included in 
the 2018 ETF Proposing Release and the final PRA estimates associated 
with the website disclosures in rule 6c-11.\681\ We did not receive 
public comment on our proposed estimates, but we have revised them as a 
result of updated industry data and modifications from the proposal. 
Specifically, we are increasing the initial and ongoing internal and 
external burden estimates by 50 percent each to account for our 
modification to the proposal that will require ETFs to disclose median 
bid-ask spread information on their websites as part of rule 6c-11, 
partially offset by the elimination of the proposed published basket 
requirement and the modification to the proposed requirement to 
disclose portfolio holdings related to timing and presentation of those 
holdings.\682\ In addition, we are revising the estimated wage rates 
and estimated number of ETFs that will be subject to the rule to 
reflect updated industry data.
---------------------------------------------------------------------------

    \681\ 2018 ETF Proposing Release, supra footnote 7, at section 
IV.B.1.
    \682\ See supra section II.C.6.d, section II.C.5.c.
---------------------------------------------------------------------------

2. Recordkeeping
    Rule 6c-11 will require an ETF to preserve and maintain copies of 
all written authorized participant agreements.\683\ Additionally, the 
rule will require ETFs to maintain records setting forth the following 
information for each basket exchanged with an authorized participant: 
(i) Ticker symbol, CUSIP or other identifier, description of holding, 
quantity of each holding, and percentage weight of each holding 
composing the basket; (ii) if applicable, identification of the basket 
as a ``custom basket'' and a record stating that the custom basket 
complies with the ETF's custom basket policies and procedures (if 
applicable); (iii) cash balancing amounts (if any); and (iv) the 
identity of the authorized participant conducting the transaction.\684\ 
ETFs would have to maintain these records for at least five years, the 
first two years in an easily accessible place.\685\
---------------------------------------------------------------------------

    \683\See rule 6c-11(d).
    \684\ See supra footnote 411 and accompanying text. Although we 
have modified the recordkeeping requirement from the proposal, we do 
not believe the modified requirements would increase the time or 
cost burdens set forth in the 2018 ETF Proposing Release. See 2018 
ETF Proposing Release, supra footnote 7, at section IV.B.2.
    \685\ Id.

[[Page 57226]]



                                                          Table 12--Recordkeeping PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Internal time      Initial  external     Annual external
                                 Initial hours      Annual hours           Wage rate \1\          costs             cost burden          cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Proposed Estimates \2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recordkeeping.................               0  2.5 hours...........  x  $60 (general      $150...............
                                                                          clerk).
                                             0  2.5 hours...........  x  $92 (senior       $230...............
                                                                          computer
                                                                          operator).
                               -------------------------------------------------------------------------------------------------------------------------
    Total annual burden per                  0  5 hours.............                       $380...............
     ETF.
    Number of ETFs............  ..............  x 1,635.............                       x 1,635............
                               -------------------------------------------------------------------------------------------------------------------------
        Total annual burden...               0  8,175 hours.........                       $621,300.00........  $0.................  $0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Final Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Recordkeeping.................               0  2.5 hours...........  x  $62 (general      $155...............
                                                                          clerk) \3\.
                                             0  2.5 hours...........  x  $95 (senior       $237.50............
                                                                          computer
                                                                          operator) \3\.
                               -------------------------------------------------------------------------------------------------------------------------
    Total annual burden per                  0  5 hours.............                       $392.50............
     ETF.
    Number of ETFs............  ..............  x 1,735 \3\.........                       x 1,735............
                               -------------------------------------------------------------------------------------------------------------------------
        Total annual burden...  ..............  8,675 hours                                $680,987.50........  $0.................  $0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Based on SIFMA Report, supra footnote 568, as modified by Commission staff.
\2\ See 2018 ETF Proposing Release at section IV.B.2.
\3\ Estimate revised to reflect updated industry data.

    Table 12 above summarizes the proposed PRA estimates included in 
the 2018 ETF Proposing Release and the final PRA estimates associated 
with the recordkeeping requirements in rule 6c-11.\686\ We did not 
receive public comment on our proposed estimates, but we have revised 
the estimates as a result of updated industry data. Specifically, we 
have updated the estimated wage rates and the estimated number of ETFs 
that will be subject to the rule and thus the recordkeeping 
requirement. We do not estimate that there will be any initial or 
ongoing external costs associated with the recordkeeping requirement.
---------------------------------------------------------------------------

    \686\ See 2018 ETF Proposing Release, supra footnote 7, at 
section IV.B.2.
---------------------------------------------------------------------------

3. Policies and Procedures
    As proposed, rule 6c-11 will require ETFs relying on the rule to 
adopt and implement written policies and procedures that govern the 
construction of baskets and the process that will be used for the 
acceptance of basket assets.\687\ Additionally, to use custom baskets, 
an ETF would be required to adopt and implement written policies and 
procedures setting forth detailed parameters for the construction and 
acceptance of custom baskets that are in the best interests of the ETF 
and its shareholders.\688\ These policies and procedures also may 
include a periodic review requirement in order to ensure that the ETF's 
custom basket procedures are being consistently followed.\689\ Finally, 
as discussed above, an ETF using custom baskets would be required to 
maintain records detailing the composition of each custom basket.
---------------------------------------------------------------------------

    \687\ See rule 6c-11(c)(3).
    \688\ See rule 6c-11(c)(3).
    \689\ See supra text following footnote 294.

                                                     Table 13--Policies and Procedures PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                  Initial external     Annual external
                                 Initial hours    Annual hours \1\         Wage rate \2\   Internal time costs      cost burden          cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Establishing and implementing                3  1 hour..............  x  $317 (senior      $317...............
 standard baskets policies and                                            manager).
 procedures.
                                             2  .67 hours...........  x  $511 (chief       $340.67............
                                                                          compliance
                                                                          officer).
                                             1  .33 hours...........  x  $352 (compliance  $117.33............
                                                                          attorney).
Establishing and implementing                9  3 hours.............  x  $317 (senior      $951...............
 custom baskets policies and                                              manager).
 procedures.
                                             5  1.67 hours..........  x  $449 (ass't       $748.33............
                                                                          general
                                                                          counsel).
                                             5  1.67 hours..........  x  $511 (chief       $851.67............
                                                                          compliance
                                                                          officer).
                                             1  .33 hours...........  x  $352 (compliance  $117.33............
                                                                          attorney).
Reviewing and updating baskets  ..............  5 hours.............  x  $317 (senior      $1,585.............
 policies and procedures.                                                 manager).
                                                2.5 hours...........  x  $449 (ass't       $1,122.50..........
                                                                          general
                                                                          counsel).
                                                2.5 hours...........  x  $511 (chief       $1,277.50..........
                                                                          compliance
                                                                          officer).

[[Page 57227]]

 
    Total annual burden per     ..............  18.67 hours.........                       $7,428.33..........
     ETF.
                               -------------------------------------------------------------------------------------------------------------------------
    Number of ETFs............  ..............  x 1,635.............                       x 1,635............
        Total annual burden...  ..............  30,525 hours \4\....                       $12,145,320 \4\....  $0.................  $0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Final Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Establishing and implementing                3  1 hour..............  x  $329 (senior      $329...............
 standard baskets policies and                                            manager) \5\.
 procedures.
                                             2  .67 hours...........  x  $530 (chief       $353.33............
                                                                          compliance
                                                                          officer) \5\.
                                             1  .33 hours...........  x  $365 (compliance  $121.67............
                                                                          attorney) \5\.
Establishing and implementing                9  3 hours.............  x  $329 (senior      $987...............
 custom baskets policies and                                              manager) \5\.
 procedures.
                                             5  1.67 hours..........  x  $466 (ass't       $776.67............
                                                                          general
                                                                          counsel) \5\.
                                             5  1.67 hours..........  x  $530 (chief       $883.33............
                                                                          compliance
                                                                          officer) \5\.
                                             1  .33 hours...........  x  $365 (compliance  $121.67............
                                                                          attorney) \5\.
Reviewing and updating baskets                  5 hours.............  x  $329 (senior      $1,645.............
 policies and procedures.                                                 manager) \5\.
                                                2.5 hours...........  x  $466 (ass't       $1,165.............
                                                                          general
                                                                          counsel) \5\.
                                                2.5 hours...........  x  $530 (chief       $1,325.............
                                                                          compliance
                                                                          officer) \5\.
                               -------------------------------------------------------------------------------------------------------------------------
    Total annual burden per                     18.67 hours.........                       $7,707.67..........  $0.................  $0
     ETF.
                               -------------------------------------------------------------------------------------------------------------------------
    Number of ETFs............                  x 1,735 \5\.........                       x 1,735............
        Total annual burden...                  32,392.45 hours.....                       $13,372,807.45.....                       ...................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a three-year period.
\2\ Based on SIFMA Report, supra footnote 568, as modified by Commission staff.
\3\ See 2018 ETF Proposing Release at section IV.B.3.
\4\ The proposed estimates shown here for the total annual hour and cost burdens (30,525 hours and $12,145,320) are not identical to the totals provided
  in the 2018 ETFs Proposing Release. See supra footnote 7, at section IV.B.2 (estimating total hour and cost burdens of 30,520 hours and $12,111,525).
  This discrepancy is due to our calculation of the annual hours in the 2018 ETF Proposing Release, in which the total initial burden hours were
  calculated before being amortized over 3 years (i.e., divided by 3). Here, the initial burden hours were amortized over 3 years before we calculated
  the total annual hour and cost burdens, resulting in slightly higher totals. This does not affect the final estimates set forth above.
\5\ Estimate revised to reflect updated industry data.

    Table 13 above summarizes the proposed PRA estimates included in 
the 2018 ETF Proposing Release and the final PRA estimates associated 
with the policies and procedures requirements in rule 6c-11.\690\ We 
did not receive public comment on our proposed estimates, but we are 
revising the estimates as a result of updated industry data. 
Specifically, we have updated the estimated wage rates and the 
estimated number of ETFs that will be subject to the rule and thus the 
policies and procedures requirement. We do not estimate that there will 
be any initial or ongoing external costs associated with this 
requirement.
---------------------------------------------------------------------------

    \690\ See 2018 ETF Proposing Release, supra footnote 7, at 
section IV.B.2.
---------------------------------------------------------------------------

4. Estimated Total Burden

                                                        Table 14--Rule 6c-11 Total PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Internal  hour burden                Internal  burden time cost               External  cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Website disclosure.................  33,398.75 hours......................  $10,717,945.15.......................  $1,735,000
Recordkeeping......................  8,675 hours..........................  $680,987.50..........................  $0
Developing policies and procedures.  32,392.45 hours......................  $13,372,807.45.......................  $0
                                    --------------------------------------------------------------------------------------------------------------------
    Total annual burden............  74,466.2 hours.......................  $24,771,740.10.......................  $1,735,000
    Number of ETFs.................  / 1,735..............................  / 1,735..............................  / 1,735
                                    --------------------------------------------------------------------------------------------------------------------
        Average annual burden per    42.92 hours..........................  $14,277.66...........................  $1,000
         ETF.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As summarized in Table 14 above, we estimate that the total hour 
burdens and time costs associated with rule 6c-11, including the burden 
associated with website disclosure, recordkeeping, and developing 
policies and procedures will result in an average aggregate annual 
burden of 74,466.2 hours and an average aggregate time cost of 
$24,771,740.10. We also estimate that there are external costs of 
$1,735,000 associated with this collection of information. Therefore,

[[Page 57228]]

each ETF will incur an annual burden of approximately 42.92 hours, at 
an average time cost of approximately $14,277.66, and an external cost 
of $1,000 to comply with rule 6c-11.

C. Rule 0-2

    Section 6(c) of the Act provides the Commission with authority to 
conditionally or unconditionally exempt persons, securities or 
transactions from any provision of the Act if and to the extent that 
such exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act. Rule 0-2 under the 
Act, entitled ``General Requirements of Papers and Applications,'' 
prescribes general instructions for filing an application seeking 
exemptive relief with the Commission.\691\
---------------------------------------------------------------------------

    \691\ See Supporting Statement of Rule 0-2 under the Investment 
Company Act of 1940, General Requirements of Paper Applications 
(Nov. 23, 2016), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=201602-3235-008 (summarizing how applications are 
filed with the Commission in accordance with the requirements of 
rule 0-2).
---------------------------------------------------------------------------

    As discussed above, rule 6c-11 will permit ETFs that satisfy the 
conditions of the rule to operate without the need to obtain an 
exemptive order from the Commission under the Act. Therefore, rule 6c-
11 will alleviate some of the burdens associated with rule 0-2 because 
it will reduce the number of entities that require exemptive relief in 
order to operate.\692\ Based on staff experience, we estimate that 
approximately one-third (rounded in the 2018 ETF Proposing Release and 
here to 30%) of the annual burdens associated with rule 0-2 are 
attributable to ETF applications.
---------------------------------------------------------------------------

    \692\ We expect to continue to receive applications for complex 
or novel ETF exemptive relief that are beyond the scope of the rule. 
See supra at text following footnote 570.

                                                            Table 15--Rule 0-2 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  Annual hours                    Annual internal time cost             Annual external cost burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
Rule 0-2 burdens currently approved  x = 5,340............................  y = $2,029,200.60....................  z = $14,090,000
Estimated effect of rule 6c-11 on    -0.3(x)..............................  -0.3(y)..............................  -0.3(z)
 rule 0-2 burdens.
                                    --------------------------------------------------------------------------------------------------------------------
    Revised estimated burden.......  3,738 hours..........................  $1,420,440.42........................  $9,863,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Table 15 above summarizes the proposed estimates included in the 
2018 ETF Proposing Release.\693\ We did not receive public comment on 
these estimates, and we have not revised them.
---------------------------------------------------------------------------

    \693\ See 2018 ETF Proposing Release, supra footnote 7, at 
section IV.B.2.
---------------------------------------------------------------------------

D. Form N-1A

    Form N-1A is the registration form used by open-end management 
investment companies. The respondents to the amendments to Form N-1A 
are open-end management investment companies registered or registering 
with the Commission. Compliance with the disclosure requirements of 
Form N-1A is mandatory for open-end funds (to the extent applicable) 
including all ETFs organized as open-end funds. Responses to the 
disclosure requirements are not confidential. We currently estimate for 
Form N-1A a total hour burden of 1,642,490 burden hours and external 
cost of $131,139,208.\694\
---------------------------------------------------------------------------

    \694\ This estimate is based on the last time the form's 
information collection was submitted for PRA approval in 2019. When 
we issued the 2018 ETF Proposing Release, the current estimate for 
Form N-1A was a total burden hour of 1,579,974 burden hours, with an 
estimated internal cost of $129,338,408, and external cost of 
$124,820,197.
---------------------------------------------------------------------------

    We are adopting amendments to Form N-1A designed to provide 
investors who purchase open-end ETF shares in secondary market 
transactions with tailored information regarding ETFs, including 
information regarding purchasing and selling shares of ETFs.\695\ 
Specifically, the amendments to Form N-1A will require new narrative 
disclosures regarding ETF trading and associated costs.\696\ In 
addition, we are requiring an ETF that does not rely on rule 6c-11 to 
disclose median bid-ask spread information on their websites or in 
their prospectuses.\697\ The amendments also exclude ETFs that provide 
premium/discount disclosures on their websites in accordance with rule 
6c-11 from the premium discount disclosure requirements in Form N-
1A.\698\ We also are adopting amendments to Form N-1A designed to 
eliminate certain disclosures for ETFs that are no longer 
necessary.\699\
---------------------------------------------------------------------------

    \695\ See supra section II.H.
    \696\ See supra section II.H.2.a.
    \697\ See supra section II.H.2.b.
    \698\ See supra section 0.
    \699\ See supra section II.H.3.
---------------------------------------------------------------------------

    Form N-1A generally imposes two types of reporting burdens on 
investment companies: (i) The burden of preparing and filing the 
initial registration statement; and (ii) the burden of preparing and 
filing post-effective amendments to a previously effective registration 
statement (including post-effective amendments filed pursuant to rule 
485(a) or 485(b) under the Securities Act, as applicable).

[[Page 57229]]



                                                            Table 16--Form N-1A PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   Annual external cost
                                     Initial hours      Annual hours \1\             Wage rate \2\        Internal time costs             burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Draft and finalize disclosure and   ..............  1.67 hours..............  x  $352 (compliance       $587.84................
 amend registration statement.                                                    attorney).
                                                 5  1.67 hours..............  x  $319 (senior           532.73.................
                                                                                  programmer).
Bid-ask spread and interactive                   5  1.67 hours..............  x  $352 (compliance       587.84.................
 calculator requirements.                                                         attorney).
                                                 5  1.67 hours..............  x  $319 (senior           532.73.................
                                                                                  programmer).
Review and update disclosures.....  ..............  2.5 hours...............  x  $352 (compliance       880....................
                                                                                  attorney).
                                    ..............  2.5 hours...............  x  $319 (senior           797.50.................
                                                                                  programmer).
Maintain bid-ask spread and         ..............  2.5 hours...............  x  $352 (compliance       880....................
 interactive calculator.                                                          attorney).
                                    ..............  2.5 hours...............  x  $319 (senior           797.50.................
                                                                                  programmer).
                                   ---------------------------------------------------------------------------------------------------------------------
    Total new annual burden per                 20  16.67 hours.............  .  .....................  5,591.67...............
     ETF.                                           x 1,892.................                            x 1,892................
    Number of ETFs................
                                   ---------------------------------------------------------------------------------------------------------------------
        Total new annual burden...  ..............  31,596.4 hours..........  .  .....................  10,579,307.20..........
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Final Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Draft and finalize disclosure and                5  1.67 hours..............  x  $365 (compliance       609.55.................
 amend registration statement.                                                    attorney) \4\.
                                                 5  1.67 hours..............  x  $331 (senior           552.77.................
                                                                                  programmer) \4\.
Bid-ask spread and premium or                \5\ 1  0.33 hours..............  x  $365 (compliance       121.67.................
 discount requirements.                                                           attorney) \4\.
                                             \5\ 1  0.33 hours..............  x  $331 (senior           110.33.................
                                                                                  programmer) \4\.
Review and update disclosures.....  ..............  2.5 hours...............  x  $365 (compliance       912.50.................
                                                                                  attorney) \4\.
                                    ..............  2.5 hours...............  x  $331 (senior           827.50.................
                                                                                  programmer) \4\.
Maintain bid-ask spread             ..............  0.5 hours \5\...........  x  $365 (compliance       182.50.................
 requirements.                                                                    attorney) \4\.
                                    ..............  0.5 hours \5\...........  x  $331 (senior           165.50.................
                                                                                  programmer) \4\.
                                   ---------------------------------------------------------------------------------------------------------------------
    Total new annual burden per                  7  10 hours................  .  .....................  3,482.32...............
     ETF.                                           x 1,970 \4\.............                            x 1,970 \4\............
    Number of ETFs................
                                   ---------------------------------------------------------------------------------------------------------------------
        Total new annual burden...  ..............  19,700 hours............  .  .....................  6,860,170.40...........  $ 0
        Current burden estimates..  ..............  + 1,642,490 hours.......  .  .....................  .......................  + $131,139,208
                                   ---------------------------------------------------------------------------------------------------------------------
            Revised burden          ..............  1,662,190 hours.........  .  .....................  .......................  $131,139,208
             estimates.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a three-year period.
\2\ See supra footnote 568.
\3\ 2018 Proposing Release, supra footnote 7, at section IV.D.
\4\ Estimate revised to reflect updated industry data.
\5\ Estimate revised to reflect modifications from the proposal.

    Table 16 above summarizes the proposed PRA estimates included in 
the 2018 ETF Proposing Release and the final PRA estimates associated 
Form N-1A as amended.\700\ We did not receive public comment on our 
proposed PRA estimates, but we are revising our estimates as a result 
of updated industry data and modifications from the proposal. 
Specifically, we are decreasing the initial and ongoing internal and 
external burden estimates associated with the bid-ask spread and 
interactive calculator requirements by 80 percent each to account for 
our elimination of the hypothetical example and interactive calculator 
requirements and our decision to apply the prospectus bid-ask spread 
requirements only to those ETFs that do not comply with the website 
disclosure requirements in rule 6c-11, partially offset by the 
additional premium or discount requirements.\701\ In addition, we are 
revising the estimated wage rates and estimated number of ETFs that 
will be subject to the rule to reflect updated industry data.
---------------------------------------------------------------------------

    \700\ 2018 Proposing Release, supra footnote 7, at section 
IV.B.1.
    \701\ See supra sections II.H.
---------------------------------------------------------------------------

    As summarized in Table 16 above, we estimate that the total hour 
burdens and time costs associated with the amendments to Form N-1A will 
result in an average aggregate annual burden of 19,700 hours at an 
average aggregate time cost of $6,860,170.40. We do not estimate any 
change in external cost. Therefore the revised aggregate estimates for 
Form N-1A, including the new amendments, are 1,662,190 hours and 
$131,338,208 in external costs.

E. Forms N-8B-2 and S-6

    Form N-8B-2 is used by UITs to initially register under the 
Investment Company Act pursuant to section 8 thereof.\702\ UITs are 
required to file Form S-6 in order to register offerings of securities 
with the Commission under the Securities Act.\703\ As a result, UITs 
file Form N-8B-2 only once when the UIT is initially created and then 
use Form S-6 to file all post-effective amendments to their 
registration statements in order to update their prospectuses.\704\ We 
currently estimate for Form S-6 a total burden of 107,245

[[Page 57230]]

hours, with an internal cost burden of approximately $34,163,955, and 
an external cost burden estimate of $68,108,956.\705\ Additionally, we 
currently estimate for Form N-8B-2 a total burden of 10 hours, with an 
internal cost burden of approximately $3,360, and an external burden 
estimate of $10,000.\706\
---------------------------------------------------------------------------

    \702\ See Form N-8B-2 [17 CFR 274.12].
    \703\ See Form S-6 [17 CFR 239.16]. Form S-6 is used for 
registration under the Securities Act of securities of any UIT 
registered under the Act on Form N-8B-2.
    \704\ Form S-6 incorporates by reference the disclosure 
requirements of Form N-8B-2 and allows UITs to meet the filing and 
disclosure requirements of the Securities Act.
    \705\ This estimate is based on the last time the form's 
information collection was submitted for PRA revision in 2019.
    \706\ This estimate is based on the last time the form's 
information collection was submitted for PRA renewal in 2018.
---------------------------------------------------------------------------

    To assist investors with better understanding the total costs of 
investing in a UIT ETF, we are adopting disclosure requirements in Form 
N-8B-2 that mirror those disclosures we are adopting for Form N-
1A.\707\ All UIT ETFs will be subject to these disclosure requirements. 
For existing UIT ETFs, the one-time and ongoing costs of complying with 
the amendments to Form N-8B-2 will accrue on Form S-6.
---------------------------------------------------------------------------

    \707\ See supra section II.I.

                                                            Table 17--Form S-6 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                  Annual external  cost
                                     Initial hours      Annual hours \1\             Wage rate \2\        Internal time  costs            burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Draft and finalize disclosure and               10  3.33 hours..............  x  $352 (compliance       $1,173.32..............  .......................
 amend Form S-6.                                                                  attorney).
                                                10  3.33 hours..............  x  $319 (senior           1,063.33...............  .......................
                                                                                  programmer).
Review and update disclosures on    ..............  5 hours.................  x  $352 (compliance       1,760..................  .......................
 Form S[dash]6.                                                                   attorney).
                                    ..............  5.......................  x  $319 (senior           1,595..................  .......................
                                                                                  programmer).
                                   ---------------------------------------------------------------------------------------------------------------------
    Total new annual burden per                 20  16.67 hours.............  .  .....................  5,591.65...............  .......................
     UIT ETF.
                                   ---------------------------------------------------------------------------------------------------------------------
    Number of UIT ETFs............  ..............  x 8.....................  .  .....................  x 8....................  .......................
                                   ---------------------------------------------------------------------------------------------------------------------
        Total new annual burden...  ..............  133.36 hours............  .  .....................  44,733.20..............  .......................
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Final Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Draft and finalize disclosure and           \4\ 12  4 hours.................  x  $365 (compliance       1,460..................  .......................
 amend Form S[dash]6.                                                             attorney) \5\.
                                            \4\ 12  4 hours.................  x  $331 (senior           1,324..................  .......................
                                                                                  programmer) \5\.
Review and update disclosures on    ..............  5 hours.................  x  $365 (compliance       1,825..................  .......................
 Form S[dash]6.                                                                   attorney) \5\.
                                    ..............  5 hours.................  x  $331(senior            $1,655.................  .......................
                                                                                  programmer) \5\.
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total new annual burden per                 24  18 hours................                            $6,264.................  .......................
     ETF.
    Number of UIT ETFs............  ..............  x 8.....................                            x 8....................  .......................
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
        Total new annual burden...  ..............  114 hours...............                            $50,112................  $ 0
        Current burden estimates..                  + 107,245 hours.........                                                     + $68,108,956
            Revised burden          ..............  107,359 hours...........                            .......................  $68,108,956
             estimates.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a three-year period.
\2\ See supra footnote 568.
\3\ 2018 Proposing Release, supra footnote 7, at Section IV.E.
\4\ Estimate revised to reflect modifications from the proposal.
\5\ Estimate revised to reflect updated industry data.


                                                           Table 18--Form N-8B-2 PRA Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                  Annual external  cost
                                     Initial hours      Annual hours \1\             Wage rate \2\        Internal time  costs            burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Proposed Estimates \3\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Draft and finalize disclosure and               10  3.33 hours..............  x  $352 (compliance       $1,173.32..............  .......................
 file Form N-8B-2.                                                                attorney).
                                                10  3.33 hours..............  x  $319 (senior           $1,063.33..............  .......................
                                                                                  programmer).
Complete Form N-8B-2..............  ..............  5 hours.................  x  $352 (compliance       $1,760.................  .......................
                                                                                  attorney).
                                    ..............  5 hours.................  x  $319 (senior           $1,595.................  .......................
                                                                                  programmer).
                                   ---------------------------------------------------------------------------------------------------------------------
    Total new annual burden per                 20  16.67 hours.............  .  .....................  $5,591.65..............  .......................
     UIT ETF.
    Number of new UIT ETFs........  ..............  x 1.....................  .  .....................  x 1....................  .......................
                                   ---------------------------------------------------------------------------------------------------------------------
        Total new annual burden...  ..............  16.67 hours.............  .  .....................  $5,591.65..............  .......................
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Final Estimates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Draft and finalize disclosure and           \4\ 12  4 hours.................  x  $365 (compliance       $1,460.................  .......................
 file Form N-8B-2.                                                                attorney) \5\.
                                            \4\ 12  4 hours.................  x  $331 (senior           $1,324.................  .......................
                                                                                  programmer) \5\.
Complete Form N-8B-2..............  ..............  5 hours.................  x  $365 (compliance       $1,825.................  .......................
                                                                                  attorney) \5\.
                                    ..............  5 hours.................  x  $331 (senior           $1,655.................  .......................
                                                                                  programmer) \5\.
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
    Total new annual burden per                 24  18 hours................                            $6,264.................
     UIT ETF.
    Number of new UIT ETFs........  ..............  x 1.....................                            x 1....................
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr

[[Page 57231]]

 
        Total new annual burden...  ..............  18 hours................                            $6,264.................  $0
        Current burden estimates..  ..............  +10 hours...............                                                     + $10,000
            Revised burden          ..............  28 hours................                                                     $10,000
             estimates.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes:
\1\ Includes initial burden estimates annualized over a three-year period.
\2\ See supra footnote 568.
\3\ 2018 Proposing Release, supra footnote 7, at section IV.E.
\4\ Estimate revised to reflect modifications from the proposal.
\5\ Estimate revised to reflect updated industry data.

    Table 17 and Table 18 above summarize the proposed PRA estimates 
included in the 2018 ETF Proposing Release and the final PRA estimates 
associated with Forms S-6 and N-8B-2, respectively.\708\ We did not 
receive public comment on our proposed estimates, but we are revising 
our estimates as a result of updated industry data and modifications 
from the proposal. Specifically, we are increasing the initial internal 
burden estimate for both Form S-6 and Form N-8B-2 by 20 percent to 
account for the additional premium and discount requirement, partially 
offset by the modifications to the proposed fee and expense 
requirements, including those relating to bid-ask spreads.\709\ In 
addition, we are revising the estimated wage rates to reflect updated 
industry data.\710\
---------------------------------------------------------------------------

    \708\ 2018 ETF Proposing Release, supra footnote 7, at section 
IV.E.
    \709\ See supra section II.I.
    \710\ After reviewing updated industry data, no revisions to the 
estimated number of UIT ETFs that will be subject to the form are 
necessary.
---------------------------------------------------------------------------

    As summarized in Table 17 above, we estimate that the total hour 
burdens and time costs associated with the amendments to Form S-6 will 
result in an average aggregate annual burden of 114 hours at an average 
aggregate time cost of $50,112. We do not estimate any change in 
external cost. Therefore, the revised aggregate estimates for Form S-6, 
including the new amendments, are 107,359 hours and $68,108,956 in 
external costs.
    As summarized in Table 18 above, we estimate that the total hour 
burdens and time costs associated with the amendments affecting Form N-
8B-2 will result in an average aggregate annual burden of 18 hours at 
an average aggregate time cost of $6,264. We do not estimate any change 
in external cost. Therefore, the revised aggregate estimates for Form 
N-8B-2, including the new amendments, are 28 hours and $10,000 in 
external costs.

F. Form N-CEN

    As discussed above, Form N-CEN is a structured form that requires 
registered funds to provide census-type information to the Commission 
on an annual basis.\711\ Today, the Commission is adopting amendments 
to Form N-CEN to require ETFs to report if they are relying on rule 6c-
11.\712\ We currently estimate for Form N-CEN total burden hours of 
74,425 and external costs of $2,088,176.\713\
---------------------------------------------------------------------------

    \711\ See Reporting Modernization Adopting Release, supra 
footnote 263.
    \712\ See supra section II.J.
    \713\ This estimate is based on the last time the form's 
information collection was submitted for PRA approval in 2017.

                   Table 19--Form N-CEN PRA Estimates
------------------------------------------------------------------------
                                                        Annual external
                                       Annual hours       cost burden
------------------------------------------------------------------------
                         Proposed Estimates \1\
------------------------------------------------------------------------
Report reliance on rule 6c-11.....          0.1 hours  .................
Number of ETFs....................            x 1,635  .................
                                   -------------------------------------
    Total new annual burden.......        163.5 hours  .................
------------------------------------------------------------------------
                             Final Estimates
------------------------------------------------------------------------
Report reliance on rule 6c-11.....          0.1 hours  .................
Number of ETFs....................        x 1,735 \2\  .................
    Total new annual burden.......        173.5 hours                $ 0
    Current burden estimates......     + 74,425 hours       + $2,088,176
        Revised burden estimates..       74,598 hours         $2,088,176
------------------------------------------------------------------------
Notes:
\1\ 2018 Proposing Release, supra footnote 7, at section IV.F.
\2\ Estimate revised to reflect updated industry data.

    Table 19 above summarizes the proposed estimates included in the 
2018 ETF Proposing Release and the final PRA estimates associated with 
Form N-CEN as amended.\714\ We did not receive public comment on these 
estimates, but we are revising our proposed estimates as a result of 
updated industry data. Specifically, we are revising the estimated 
number of ETFs that will be subject to the rule to reflect updated 
industry data. As summarized in Table 19, we estimate that the total 
hour burdens and time costs associated with the amendments to Form N-
CEN will result in an average aggregate annual burden of 173.5 hours. 
We do not estimate any change in external cost.

[[Page 57232]]

Therefore the revised aggregate estimates for Form N-CEN, including the 
new amendments, are 74,598 hours and $2,088,176 in external costs.
---------------------------------------------------------------------------

    \714\ 2018 ETF Proposing Release, supra footnote 7, at section 
IV.F.
---------------------------------------------------------------------------

VI. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with section 4(a) of the 
Regulatory Flexibility Act (``RFA''),\715\ regarding new rule 6c-11 and 
amendments to Form N-1A, Form N-8B-2, and Form N-CEN. An Initial 
Regulatory Flexibility Analysis (``IRFA'') was prepared in accordance 
with the RFA and included in the 2018 ETF Proposing Release.\716\
---------------------------------------------------------------------------

    \715\ See 5 U.S.C. 603.
    \716\ See 2018 ETF Proposing Release, supra footnote 7, at 
section V.
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule and Form Amendments

    As described more fully above, rule 6c-11 will allow ETFs that meet 
the conditions of the rule to form and operate without the expense and 
delay of obtaining an exemptive order from the Commission. The 
Commission's objective is to create a consistent, transparent and 
efficient regulatory framework for ETFs and to facilitate greater 
competition and innovation among ETFs. The Commission also believes the 
amendments to Forms N-1A and N-8B-2 will provide useful information to 
investors who purchase and sell ETF shares in secondary markets. 
Finally, the Commission believes the amendments to Form N-CEN will 
allow the Commission to better monitor reliance on rule 6c-11 and will 
assist the Commission with its accounting, auditing and oversight 
functions.
    All of these requirements are discussed in detail in section II 
above. The costs and burdens of these requirements on small ETFs are 
discussed below as well as above in our Economic Analysis and Paperwork 
Reduction Act Analysis, which discuss the costs and burdens on all 
ETFs.

B. Significant Issues Raised by Public Comments

    In the 2018 ETF Proposing Release, we requested comment on every 
aspect of the IRFA, including the number of small entities that would 
be affected by the proposed rule and amendments, the existence or 
nature of the potential impact of the proposals on small entities 
discussed in the analysis and how to quantify the impact of the 
proposed rule and amendments. We also requested comment on the broader 
impact of the proposed rule and amendments on all relevant entities, 
regardless of size. After consideration of the comments we received on 
the proposed rule and amendments, we are adopting the rule and 
amendments with several modifications that are designed to reduce 
certain operational challenges that commenters identified, while 
maintaining protections for investors and providing investors with 
useful information regarding ETFs. However, none of the modifications 
were significant to the small-entity cost burden estimates discussed 
below. Revisions to the estimates are instead based on updated figures 
regarding the number of small entities impacted by the new rule and 
amendments and updated estimated wage rates.

C. Small Entities Subject to the Rule

    An investment company is a small entity if, together with other 
investment companies in the same group of related investment companies, 
it has net assets of $50 million or less as of the end of its most 
recent fiscal year.\717\ Commission staff estimates that, as of 
December 2018, there are approximately 9 open-end ETFs that may be 
considered small entities.\718\ Commission staff estimates there are no 
UIT ETFs that would be considered small entities subject to the 
proposed disclosures for Form N-8B-2.\719\
---------------------------------------------------------------------------

    \717\ 17 CFR 270.0-10(a).
    \718\ This estimate is derived from an analysis of data reported 
on Form N-1A with the Commission for the period ending December, 
2018.
    \719\ This estimate is derived from an analysis of data reported 
on Forms S-6 and N-8B-2 with the Commission for the period ending 
December 2018.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The new rule and amendments will impact current reporting, 
recordkeeping and other compliance requirements for ETFs considered 
small entities.
1. Rule 6c-11
    Rule 6c-11 will require an ETF to disclose on its website: (i) 
Portfolio holding information each business day; (ii) the ETF's current 
NAV per share, market price, and premium or discount, each as of the 
end of the prior business day; (iii) if an ETF's premium or discount is 
greater than 2% for more than seven consecutive trading days, to post 
that information and a discussion of the factors that are reasonably 
believed to have materially contributed to the premium or discount; 
(iv) a table and line graph showing the ETF's premiums and discounts; 
and (v) the ETF's median bid-ask spread over the last thirty calendar 
days.\720\ The new rule also will require that ETFs preserve and 
maintain copies of all written authorized participant agreements, as 
well as records setting forth the following information for each basket 
exchanged with an authorized participant: (i) Ticker symbol, CUSIP or 
other identifier, description of holding, quantity of each holding, and 
percentage weight of each holding composing the basket; (ii) 
identification of the basket as a ``custom basket'' and a record 
stating that the custom basket complies with the ETF's policies and 
procedures (if applicable); (iii) cash balancing amounts (if any); and 
(iv) the identity of the authorized participant conducting the 
transaction.\721\ Additionally, rule 6c-11 will require ETFs relying on 
the rule to adopt and implement written policies and procedures that 
govern the construction of baskets and the process that will be used 
for the acceptance of basket assets.\722\ ETFs using custom baskets 
under the rule must adopt custom basket policies and procedures that 
include certain enumerated requirements.\723\
---------------------------------------------------------------------------

    \720\ See rule 6c-11(c)(1).
    \721\ See rule 6c-11(d).
    \722\ Rule 6c-11(c)(3).
    \723\ Rule 6c-11(c)(3).
---------------------------------------------------------------------------

    We estimate that approximately 9 ETFs are small entities that will 
comply with rule 6c-11, and we do not believe that their costs would 
differ from other ETFs. As discussed above, we estimate that an ETF 
will incur an annual burden of approximately 36.97 hours, at an average 
time cost of approximately $11,758.97, and an external cost of 
$1,000.00.\724\
---------------------------------------------------------------------------

    \724\ See supra Table 13.
---------------------------------------------------------------------------

    As we discuss in greater detail in section IV.C.1 above, we expect 
rule 6c-11 to have other, generally unquantifiable economic effects. 
For example, by eliminating the need for ETFs that can rely on the rule 
to seek an exemptive order from the Commission, the rule will also 
eliminate certain indirect costs associated with the exemptive 
application process.\725\ Specifically, ETFs that apply for an order 
forgo potential market opportunities until they receive the order, 
while others forgo the market opportunity entirely rather than seek an 
exemptive order because they have concluded that the cost of seeking an 
exemptive order would exceed the anticipated benefit of the market 
opportunity.\726\ We also believe that the rule could increase 
competition in the

[[Page 57233]]

ETF market as a whole, which could also lead to lower fees.\727\
---------------------------------------------------------------------------

    \725\ See supra section IV.C.1.
    \726\ See id.
    \727\ See id.
---------------------------------------------------------------------------

2. Other Disclosure and Reporting Requirements
    The amendments to Form N-1A and Form N-8B-2 are designed to provide 
investors who purchase ETF shares in secondary market transactions with 
tailored information regarding ETFs, including information regarding 
costs associated with an investment in ETFs. Specifically, the 
amendments to Form N-1A will: (i) Require new disclosure regarding ETF 
trading and associated costs; (ii) require ETFs that are not subject to 
rule 6c-11 to disclose median bid-ask spread information on their 
websites or in their prospectuses; and (iii) exclude ETFs that provide 
premium/discount disclosures in accordance with rule 6c-11 from the 
premium and discount disclosure requirements in the form.\728\ 
Amendments to Form N-8B-2 mirror proposed disclosures for Form N-1A. In 
addition, amendments to Form N-CEN will require ETFs to report on Form 
N-CEN whether they are relying on rule 6c-11 to assist us with 
monitoring reliance on rule 6c-11 as well with our accounting, auditing 
and oversight functions, including compliance with the PRA.
---------------------------------------------------------------------------

    \728\ See supra section II.H.2.
---------------------------------------------------------------------------

    All ETFs (including ETFs that do not rely on rule 6c-11) will be 
subject to the amended Form N-1A or Form N-8B-2 (depending on the ETF's 
structure as an open-end fund or UIT), and Form N-CEN disclosure and 
reporting requirements, including ETFs that are small entities. We 
estimate that 9 ETFs are small entities that will be required to comply 
with the requirements on Form N-1A and Form N-CEN.\729\ We estimate 
that each ETF, including ETFs that are small entities, will incur a 
one-time burden of 7 hours, at a time cost of $4,176 to draft and 
finalize the required disclosure and amend its registration 
statement.\730\ We also estimate that each ETF, including ETFs that are 
small entities, will incur an ongoing burden of an additional 3 hours, 
at a time cost of an additional $2,088, to comply with the Form N-1A 
disclosure requirements.\731\ We do not estimate any change to the 
external costs associated with the amendments to Form N-1A.\732\ The 
total administrative cost for of the Form N-CEN disclosure requirement 
to ETFs is .1 hours.\733\
---------------------------------------------------------------------------

    \729\ See supra footnotes 720 and 721. As discussed above, the 
amendments to Form N-8B-2 mirror those made to Form N-1A. We 
therefore believe that UIT ETFs will incur the same costs as all 
ETFs associated with updating their registration statements. 
However, none of the UIT ETFs are small entities.
    \730\ See supra Table 16.
    \731\ See id.
    \732\ See id.
    \733\ See supra Table 19.
---------------------------------------------------------------------------

    As we discuss in greater detail in section IV.C.2 above, we expect 
the new disclosure amendments to have other, generally unquantifiable 
economic effects. For example, we believe that the new disclosures will 
benefit investors by helping them better understand and compare 
specific funds, potentially resulting in more informed investment 
decisions, more efficient allocation of investor capital, and greater 
competition for investor capital among funds.\734\ We also believe the 
amendment to Form N-CEN will allow the Commission to better monitor 
reliance on rule 6c-11 and assist us with our accounting, auditing, and 
oversight functions, including compliance with the Paperwork Reduction 
Act.\735\
---------------------------------------------------------------------------

    \734\ See supra section IV.C.2.
    \735\ See id.
---------------------------------------------------------------------------

E. Agency Action To Minimize Effect on Small Entities

    The RFA directs the Commission to consider significant alternatives 
that would accomplish our stated objectives, while minimizing any 
significant economic impact on small entities. We considered the 
following alternatives for small entities in relation to the adopted 
regulations:
     Exempting ETFs that are small entities from the 
disclosure, reporting or recordkeeping requirements, to account for 
resources available to small entities;
     establishing different disclosure, reporting or 
recordkeeping requirements or different frequency of these 
requirements, to account for resources available to small entities;
     clarifying, consolidating, or simplifying the compliance 
requirements under the amendments for small entities; and
     using performance rather than design standards.
    We do not believe that exempting any subset of ETFs, including 
small entities, from rule 6c-11 or the related form amendments will 
permit us to achieve our stated objectives. Nor do we believe 
establishing different disclosure, reporting or recordkeeping 
requirements or different frequency of these requirements for small 
entities would permit us to achieve our stated objectives. Similarly, 
we do not believe that we can establish simplified or consolidated 
compliance requirements for small entities under the rule without 
compromising our objectives. As discussed above, the conditions 
necessary to rely on rule 6c-11 and the reporting, recordkeeping and 
disclosure requirements are designed to provide investor protection 
benefits, including, among other things, tailored information regarding 
ETFs, including information regarding costs associated with an 
investment in ETFs. These benefits should apply to investors in smaller 
funds as well as investors in larger funds. Similarly, we do not 
believe it would be in the interest of investors to exempt small ETFs 
from the disclosure and reporting requirements or to exempt small ETFs 
from the recordkeeping requirements. We believe that all ETF investors, 
including investors in small ETFs, will benefit from disclosure and 
reporting requirements that permit them to make investment choices that 
better match their risk tolerances. Additionally, the current 
disclosure requirements for reports on Form N-1A and Form N-8B-2 do not 
distinguish between small entities and other funds.\736\
---------------------------------------------------------------------------

    \736\ See Reporting Modernization Adopting Release, supra 
footnote 263, at section V.E (noting that small entities currently 
follow the same requirements that large entities do when filing 
reports on Form N-SAR, Form N-CSR, and Form N-Q, and stating that 
the Commission believes that establishing different reporting 
requirements or frequency for small entities (including with respect 
to proposed Form N-PORT and proposed Form N-CEN) would not be 
consistent with the Commission's goal of industry oversight and 
investor protection).
---------------------------------------------------------------------------

    Finally, we believe that rule 6c-11 and related disclosure and 
reporting requirements appropriately use a combination of performance 
and design standards. Rule 6c-11 provides ETFs that satisfy the 
requirements of the rule with exemptions from certain provisions of the 
Act necessary for ETFs to operate. Because the provisions of the Act 
from which ETFs would be exempt provide important investor and market 
protections, the conditions of the rule must be specifically designed 
to ensure that these investor and market protections are maintained. 
However, where we believe that flexibility is beneficial, we adopted 
performance-based standards that provide a regulatory framework, rather 
than prescriptive requirements, to give funds the opportunity to adopt 
policies and procedures tailored to their specific needs without 
raising investor or market protection concerns.\737\
---------------------------------------------------------------------------

    \737\ See e.g., supra section II.C.5. (noting that rule 6c-11 
will provide an ETF with the flexibility to use ``custom baskets'' 
if the ETF has adopted written policies and procedures that set 
forth detailed parameters for the construction and acceptance of 
custom baskets that are in the best interests of the ETF and its 
shareholders).

---------------------------------------------------------------------------

[[Page 57234]]

VII. Statutory Authority

    The Commission is adopting new rule 6c-11 pursuant to the authority 
set forth in sections 6(c), 22(c), and 38(a) of the Investment Company 
Act [15 U.S.C. 80a-6(c), 80a-22(c), and 80a-37(a)]. The Commission is 
adopting amendments to registration Forms N-1A and N-CSR under the 
authority set forth in sections 6, 7(a), 10 and 19(a) of the Securities 
Act of 1933 [15 U.S.C. 77f, 77g(a), 77j, 77s(a)], and sections 8(b), 
24(a), and 30 of the Investment Company Act [15 U.S.C. 80a-8(b), 80a-
24(a), and 80a-29]. The Commission is adopting amendments to 
registration Form N-8B-2 under the authority set forth in section 8(b) 
and 38(a) of the Investment Company Act [15 U.S.C. 80a-8(b) and 80a-
37(a)]. The Commission is adopting amendments to Form N-CEN and Form N-
PORT under the authority set forth sections 8(b), 30(a), and 38(a) of 
the Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(a), and 80a-
37(a)]. The Commission is adopting amendments to Regulation S-X under 
the authority set forth in sections 7, 8, 10, and 19 of the Securities 
Act [15 U.S.C. 77g, 77h, 77j, 77s], and sections 8(b), 30(a), 31, and 
38(a) of the Investment Company Act [15 U.S.C. 80a-8(b), 80a-29(a), 
80a-30, and 80a-37(a)]. The Commission is providing relief in Section 
II.G, permitting ETFs relying on rule 6c-11 to enter into fund of funds 
arrangements, pursuant to the authority set forth in sections 6(c), 
12(d)(1)(J) and 17(b).

List of Subjects

17 CFR Part 210

    Accounting, Investment companies, Reporting and recordkeeping 
requirements, Securities.

17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rules and Form Amendments

Correction

0
In final rule FR Doc. 2016-25349, published in the issue of Friday, 
November 18, 2016 (81 FR 81870), make the following correction:
    On page 82019, in the second column, remove amendatory instruction 
23 for Sec.  232.401, which was to be effective August 1, 2019, but was 
delayed until May 1, 2020, in a rule published on December 14, 2017 (82 
FR 58731).
    For reasons set out in the preamble, title 17, chapter II of the 
Code of Federal Regulations is amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n, 
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c), 
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.


Sec.  210.12-14  [Amended]

0
2. Amend Sec.  210.12-14 by removing the phrase in footnote 1 ``(5) 
balance at close of period as shown in Column E'' and adding in its 
place ``(5) balance at close of period as shown in Column F''.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
3. The authority citation for part 239 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37; and sec. 107 Pub. L. 112-106, 126 Stat. 
312, unless otherwise noted.
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
4. The authority citation for part 270 is revised by adding a sectional 
authority for Sec.  270.6c-11 in numerical order to read in part as 
follows:

    Authority:  15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376 (2010), unless 
otherwise noted.
* * * * *
    Section 270.6c-11 is also issued under 15 U.S.C. 80a-6(c) and 
80a-37(a).
* * * * *


0
5. Section 270.6c-11 is added to read as follows:


Sec.  270.6c-11  Exchange-traded funds.

    (a) Definitions. (1) For purposes of this section:
    Authorized participant means a member or participant of a clearing 
agency registered with the Commission, which has a written agreement 
with the exchange-traded fund or one of its service providers that 
allows the authorized participant to place orders for the purchase and 
redemption of creation units.
    Basket means the securities, assets or other positions in exchange 
for which an exchange-traded fund issues (or in return for which it 
redeems) creation units.
    Business day means any day the exchange-traded fund is open for 
business, including any day when it satisfies redemption requests as 
required by section 22(e) of the Act (15 U.S.C. 80a-22(e)).
    Cash balancing amount means an amount of cash to account for any 
difference between the value of the basket and the net asset value of a 
creation unit.
    Creation unit means a specified number of exchange-traded fund 
shares that the exchange-traded fund will issue to (or redeem from) an 
authorized participant in exchange for the deposit (or delivery) of a 
basket and a cash balancing amount if any.
    Custom basket means:
    (A) A basket that is composed of a non-representative selection of 
the exchange-traded fund's portfolio holdings; or
    (B) A representative basket that is different from the initial 
basket used in transactions on the same business day.
    Exchange-traded fund means a registered open-end management 
company:
    (A) That issues (and redeems) creation units to (and from) 
authorized participants in exchange for a basket and a cash balancing 
amount if any; and
    (B) Whose shares are listed on a national securities exchange and 
traded at market-determined prices.
    Exchange-traded fund share means a share of stock issued by an 
exchange-traded fund.
    Foreign investment means any security, asset or other position of 
the ETF issued by a foreign issuer as that term is defined in Sec.  
240.3b-4 of this title, and that is traded on a trading market outside 
of the United States.
    Market price means:
    (A) The official closing price of an exchange-traded fund share; or
    (B) If it more accurately reflects the market value of an exchange-
traded fund share at the time as of which the exchange-traded fund 
calculates current net asset value per share, the price that is the 
midpoint between the national best bid and national best offer as of 
that time.
    National securities exchange means an exchange that is registered 
with the

[[Page 57235]]

Commission under section 6 of the Securities Exchange Act of 1934 (15 
U.S.C. 78f).
    Portfolio holdings means the securities, assets or other positions 
held by the exchange-traded fund.
    Premium or discount means the positive or negative difference 
between the market price of an exchange-traded fund share at the time 
as of which the current net asset value is calculated and the exchange-
traded fund's current net asset value per share, expressed as a 
percentage of the exchange-traded fund share's current net asset value 
per share.
    (2) Notwithstanding the definition of exchange-traded fund in 
paragraph (a)(1) of this section, an exchange-traded fund is not 
prohibited from selling (or redeeming) individual shares on the day of 
consummation of a reorganization, merger, conversion or liquidation, 
and is not limited to transactions with authorized participants under 
these circumstances.
    (b) Application of the Act to exchange-traded funds. If the 
conditions of paragraph (c) of this section are satisfied:
    (1) Redeemable security. An exchange-traded fund share is 
considered a ``redeemable security'' within the meaning of section 
2(a)(32) of the Act (15 U.S.C. 80a-2(a)(32)).
    (2) Pricing. A dealer in exchange-traded fund shares is exempt from 
section 22(d) of the Act (15 U.S.C. 80a-22(d)) and Sec.  270.22c-1(a) 
with regard to purchases, sales and repurchases of exchange-traded fund 
shares at market-determined prices.
    (3) Affiliated transactions. A person who is an affiliated person 
of an exchange-traded fund (or who is an affiliated person of such a 
person) solely by reason of the circumstances described in paragraphs 
(b)(3)(i) and (ii) of this section is exempt from sections 17(a)(1) and 
17(a)(2) of the Act (15 U.S.C. 80a-17(a)(1) and (a)(2)) with regard to 
the deposit and receipt of baskets:
    (i) Holding with the power to vote 5% or more of the exchange-
traded fund's shares; or
    (ii) Holding with the power to vote 5% or more of any investment 
company that is an affiliated person of the exchange-traded fund.
    (4) Postponement of redemptions. If an exchange-traded fund 
includes a foreign investment in its basket, and if a local market 
holiday, or series of consecutive holidays, or the extended delivery 
cycles for transferring foreign investments to redeeming authorized 
participants prevents timely delivery of the foreign investment in 
response to a redemption request, the exchange-traded fund is exempt, 
with respect to the delivery of the foreign investment, from the 
prohibition in section 22(e) of the Act (15 U.S.C. 80a-22(e)) against 
postponing the date of satisfaction upon redemption for more than seven 
days after the tender of a redeemable security if the exchange-traded 
fund delivers the foreign investment as soon as practicable, but in no 
event later than 15 days after the tender of the exchange-traded fund 
shares.
    (c) Conditions. (1) Each business day, an exchange-traded fund must 
disclose prominently on its website, which is publicly available and 
free of charge:
    (i) Before the opening of regular trading on the primary listing 
exchange of the exchange-traded fund shares, the following information 
(as applicable) for each portfolio holding that will form the basis of 
the next calculation of current net asset value per share:
    (A) Ticker symbol;
    (B) CUSIP or other identifier;
    (C) Description of holding;
    (D) Quantity of each security or other asset held; and
    (E) Percentage weight of the holding in the portfolio;
    (ii) The exchange-traded fund's current net asset value per share, 
market price, and premium or discount, each as of the end of the prior 
business day;
    (iii) A table showing the number of days the exchange-traded fund's 
shares traded at a premium or discount during the most recently 
completed calendar year and the most recently completed calendar 
quarters since that year (or the life of the exchange-traded fund, if 
shorter);
    (iv) A line graph showing exchange-traded fund share premiums or 
discounts for the most recently completed calendar year and the most 
recently completed calendar quarters since that year (or the life of 
the exchange-traded fund, if shorter);
    (v) The exchange-traded fund's median bid-ask spread, expressed as 
a percentage rounded to the nearest hundredth, computed by:
    (A) Identifying the exchange-traded fund's national best bid and 
national best offer as of the end of each 10 second interval during 
each trading day of the last 30 calendar days;
    (B) Dividing the difference between each such bid and offer by the 
midpoint of the national best bid and national best offer; and
    (C) Identifying the median of those values; and
    (vi) If the exchange-traded fund's premium or discount is greater 
than 2% for more than seven consecutive trading days, a statement that 
the exchange-traded fund's premium or discount, as applicable, was 
greater than 2% and a discussion of the factors that are reasonably 
believed to have materially contributed to the premium or discount, 
which must be maintained on the website for at least one year 
thereafter.
    (2) The portfolio holdings that form the basis for the exchange-
traded fund's next calculation of current net asset value per share 
must be the ETF's portfolio holdings as of the close of business on the 
prior business day.
    (3) An exchange-traded fund must adopt and implement written 
policies and procedures that govern the construction of baskets and the 
process that will be used for the acceptance of baskets; provided, 
however, if the exchange-traded fund utilizes a custom basket, these 
written policies and procedures also must:
    (i) Set forth detailed parameters for the construction and 
acceptance of custom baskets that are in the best interests of the 
exchange-traded fund and its shareholders, including the process for 
any revisions to, or deviations from, those parameters; and
    (ii) Specify the titles or roles of the employees of the exchange-
traded fund's investment adviser who are required to review each custom 
basket for compliance with those parameters.
    (4) The exchange-traded fund may not seek, directly or indirectly, 
to provide investment returns that correspond to the performance of a 
market index by a specified multiple, or to provide investment returns 
that have an inverse relationship to the performance of a market index, 
over a predetermined period of time.
    (d) Recordkeeping. The exchange-traded fund must maintain and 
preserve for a period of not less than five years, the first two years 
in an easily accessible place:
    (1) All written agreements (or copies thereof) between an 
authorized participant and the exchange-traded fund or one of its 
service providers that allows the authorized participant to place 
orders for the purchase or redemption of creation units;
    (2) For each basket exchanged with an authorized participant, 
records setting forth:
    (i) The ticker symbol, CUSIP or other identifier, description of 
holding, quantity of each holding, and percentage weight of each 
holding composing the basket exchanged for creation units;
    (ii) If applicable, identification of the basket as a custom basket 
and a record stating that the custom basket complies with policies and 
procedures that the exchange-traded fund adopted pursuant to paragraph 
(c)(3) of this section;

[[Page 57236]]

    (iii) Cash balancing amount (if any); and
    (iv) Identity of authorized participant transacting with the 
exchange-traded fund.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
6. The general authority citation for part 274 continues to read as 
follows:

    Authority:  15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and Pub. L. 111-203, 
sec. 939A, 124 Stat. 1376 (2010), unless otherwise noted.
* * * * *

0
7. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is amended 
as follows:
0
a. In General Instruction A, revising the definition of ``Exchange-
Traded Fund.''
0
b. In General Instruction A, revising the definition of ``Market 
Price.''
0
c. In General Instruction B.4.(a), removing the phrases ``[17 CFR 
230.400-230.497]'' and ``rules 480-485 and 495-497 of Regulation C'' 
and adding in their place ``[17 CFR 230.400-230.498]'' and ``rules 480-
485 and 495-498 of Regulation C.''
0
d. In General Instruction B.4.(d), removing the phrase ``Regulation S-T 
[17 CFR 232.10-232.903]'' and adding in its place ``Regulation S-T [17 
CFR 232.10-232.501].''
0
e. In Item 3, revising the first paragraph under the heading ``Fees and 
Expenses of the Fund''.
0
f. Revising Instruction 1(e) of Item 3, Item 6(c), and Items 11(a)(1) 
and 11(g).
0
g. In instruction 4(b) to Item 13, removing the sentence ``If a change 
in the methodology for determining the ratio of expenses to average net 
assets results from applying paragraph 2(g) of rule 6-07, explain in a 
note that the ratio reflects fees paid with brokerage commissions and 
fees reduced in connection with specific agreements only for periods 
ending after September 1, 1995.''
0
h. Revising Item 27(b)(7)(iv), Instruction 1(e)(ii) of Item 27(d)(1), 
and Item 27(d)(3).
    The additions and revisions read as follows:

    Note:  The text of Form N-1A does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *
    GENERAL INSTRUCTIONS
* * * * *

A. Definitions

* * * * *
    ``Exchange-Traded Fund'' means a Fund or Class, the shares of 
which are listed and traded on a national securities exchange, and 
that has formed and operates under an exemptive order granted by the 
Commission or in reliance on rule 6c-11 [17 CFR 270.6c-11] under the 
Investment Company Act.
* * * * *
    ``Market Price'' has the same meaning as in rule 6c-11 [17 CFR 
270.6c-11] under the Investment Company Act.
* * * * *

Item 3. Risk/Return Summary: Fee Table

* * * * *

Fees and Expenses of the Fund

    This table describes the fees and expenses that you may pay if 
you buy, hold, and sell shares of the Fund. You may pay other fees, 
such as brokerage commissions and other fees to financial 
intermediaries, which are not reflected in the tables and examples 
below. You may qualify for sales charge discounts if you and your 
family invest, or agree to invest in the future, at least $[ ] in 
[name of fund family] funds. More information about these and other 
discounts is available from your financial intermediary and in 
[identify section heading and page number] of the Fund's prospectus 
and [identify section heading and page number] of the Fund's 
statement of additional information.
* * * * *

Instructions

* * * * *
    1. General
* * * * *
    (e) If the Fund is an Exchange-Traded Fund, exclude any fees 
charged for the purchase and redemption of the Fund's creation 
units.
* * * * *

Item 6. Purchase and Sale of Fund Shares

* * * * *
    (c) Exchange-Traded Funds. If the Fund is an Exchange-Traded 
Fund, the Fund may omit the information required by paragraphs (a) 
and (b) of this Item and must disclose:
    (1) That Individual Fund shares may only be bought and sold in 
the secondary market through a broker or dealer at a market price;
    (2) That because ETF shares trade at market prices rather than 
net asset value, shares may trade at a price greater than net asset 
value (premium) or less than net asset value (discount);
    (3) That an investor may incur costs attributable to the 
difference between the highest price a buyer is willing to pay to 
purchase shares of the Fund (bid) and the lowest price a seller is 
willing to accept for shares of the Fund (ask) when buying or 
selling shares in the secondary market (the ``bid-ask spread'');
    (4) If applicable, how to access recent information, including 
information on the Fund's net asset value, Market Price, premiums 
and discounts, and bid-ask spreads, on the Exchange-Traded Fund's 
website; and
    (5) The median bid-ask spread for the Fund's most recent fiscal 
year.

Instructions

    1. A Fund may omit the information required by paragraph (c)(5) 
of this Item if it satisfies the requirements of paragraph (c)(1)(v) 
of Rule 6c-11 [17 CFR 270.6c-11(c)(1)(v)] under the Investment 
Company Act.
    2. An Exchange-Traded Fund that had its initial listing on a 
national securities exchange at or before the beginning of the most 
recently completed fiscal year must include the median bid-ask 
spread for the Fund's most recent fiscal year. For an Exchange-
Traded Fund that had an initial listing after the beginning of the 
most recently completed fiscal year, explain that the Exchange-
Traded Fund did not have a sufficient trading history to report 
trading information and related costs. Information should be based 
on the most recently completed fiscal year end.
    3. Bid-Ask Spread (Median). Calculate the median bid-ask spread 
by dividing the difference between the national best bid and 
national best offer by the mid-point of the national best bid and 
national best offer as of the end of each ten-second interval 
throughout each trading day of the Exchange-Traded Fund's most 
recent fiscal year. Once the bid-ask spread for each ten-second 
interval throughout the fiscal year is determined, sort the spreads 
from lowest to highest. If there is an odd number of spread 
intervals, then the median is the middle number. If there is an even 
number of spread intervals, then the median is the average between 
the two middle numbers. Express the spread as a percentage, rounded 
to the nearest hundredth percent.
    4. A Fund may combine the information required by Item 6(c)(4) 
into the information required by Item 1(b)(1) and Rule 498(b)(1)(v) 
[17 CFR 230.498(b)(1)(v)] under the Securities Act.
* * * * *
    Item 11. Shareholder Information
    (a) Pricing of Fund Shares. Describe the procedures for pricing 
the Fund's shares, including:
    (1) An explanation that the price of Fund shares is based on the 
Fund's net asset value and the method used to value Fund shares 
(market price, fair value, or amortized cost); except that if the 
Fund is an Exchange-Traded Fund, an explanation that the price of 
Fund shares is based on a market price.
* * * * *
    (g) Exchange-Traded Funds. If the Fund is an Exchange-Traded 
Fund:
    (1) The Fund may omit from the prospectus the information 
required by Items 11(a)(2), (b), and (c).
    (2) Provide a table showing the number of days the Market Price 
of the Fund shares was greater than the Fund's net asset value and 
the number of days it was less than the Fund's net asset value 
(i.e., premium or discount) for the most recently completed calendar 
year, and the most recently completed calendar quarters since that 
year (or the life of the Fund, if shorter). The Fund may omit the 
information required by this paragraph if it satisfies the 
requirements of paragraphs (c)(1)(ii)-(iv) and (c)(1)(vi) of Rule 
6c-11 [17 CFR 270.6c-11(c)(1)(ii)-(iv) and

[[Page 57237]]

(c)(1)(vi)] under the Investment Company Act.
* * * * *
    Item 27. Financial Statements
* * * * *
    (b) * * *
    (7) * * *
* * * * *
    (iv) Provide a table showing the number of days the Market Price 
of the Fund shares was greater than the Fund's net asset value and 
the number of days it was less than the Fund's net asset value 
(i.e., premium or discount) for the most recently completed calendar 
year, and the most recently completed calendar quarters since that 
year (or the life of the Fund, if shorter). The Fund may omit the 
information required by this paragraph if it satisfies the 
requirements of paragraphs (c)(1)(ii)-(iv) and (c)(1)(vi) of Rule 
6c-11 [17 CFR 270.6c-11(c)(1)(ii)-(iv) and (c)(1)(vi)] under the 
Investment Company Act.
* * * * *
    (d) * * *
    (1) * * *

Instructions

* * * * *
    1. General.
* * * * *
    (e) If the fund is an Exchange-Traded Fund:
* * * * *
    (ii) Exclude any fees charged for the purchase and redemption of 
the Fund's creation units.
* * * * *
    (3) * * *

Instruction

    A Money Market Fund will omit the statement required by Item 
27(d)(3) and instead provide a statement that (i) the Money Market 
Fund files its complete schedule of portfolio holdings with the 
Commission each month on Form N-MFP; (ii) the Money Market Fund's 
reports on Form N-MFP are available on the Commission's website at 
http://www.sec.gov; and (iii) the Money Market Fund makes portfolio 
holdings information available to shareholders on its website.
* * * * *


0
8. Form N-8B-2 (referenced in Sec. Sec.  239.16 and 274.12) is amended 
as follows:
0
a. In the General Instructions, revising the definitions of ``Exchange-
Traded Fund'' and ``Market Price''.
0
b. In Item 13, adding paragraphs (h), (i), and (j).
0
 c. In Item IX, adding an undesignated paragraph following the heading.
    The additions and revisions read as follows:

    Note:  The text of Form N-8B-2 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form N-8B-2

* * * * *
GENERAL INSTRUCTIONS FOR FORM N-8B-2
* * * * *

Definitions

* * * * *
    Exchange-Traded Fund (ETF): The term ``Exchange-Traded Fund'' means 
a Fund or Class, the shares of which are listed and traded on a 
national securities exchange, and that has formed and operates under an 
exemptive order granted by the Commission.
* * * * *
    Market Price. The term ``Market Price'' has the same meaning as in 
rule 6c-11 [17 CFR 270.6c-11] under the Investment Company Act.
* * * * *

Information Concerning Loads, Fees, Charges, and Expenses

    13.
* * * * *
    (h) If the trust is an Exchange-Traded Fund, furnish an explanation 
indicating that an ETF investor may pay additional fees not described 
by any other item in this form, such as brokerage commissions and other 
fees to financial intermediaries.
    (i) If the trust is an Exchange-Traded Fund, furnish the 
disclosures and information set forth in Item 6(c) of Form N-1A 
[referenced in 17 CFR 274.11A]. Provide information specific to the 
trust as necessary, utilizing the ETF-specific methodology set forth in 
the Instructions to Form N-1A Item 6(c). The Fund may omit the 
information required by Item 6(c)(5) of Form N-1A if it satisfies the 
requirements of paragraph (c)(1)(v) of Rule 6c-11 [17 CFR 270.6c-
11(c)(1)(v)] under the Investment Company Act.
    (j) If the trust is an Exchange-Traded Fund, provide a table 
showing the number of days the Market Price of the Fund shares was 
greater than the Fund's net asset value and the number of days it was 
less than the Fund's net asset value (i.e., premium or discount) for 
the most recently completed calendar year, and the most recently 
completed calendar quarters since that year (or the life of the Fund, 
if shorter). The Fund may omit the information required by this 
paragraph if it satisfies the requirements of paragraphs (c)(1)(ii)-
(iv) and (c)(1)(vi) of Rule 6c-11 [17 CFR 270.6c-11(c)(1)(ii)-(iv) and 
(c)(1)(vi)] under the Investment Company Act.
* * * * *
IX
EXHIBITS
    Subject to General Instruction 2(d) regarding incorporation by 
reference and rule 483 under the Securities Act, file the exhibits 
listed below as part of the registration statement. Letter or number 
the exhibits in the sequence indicated, unless otherwise required by 
rule 483. Reflect any exhibit incorporated by reference in the list 
below and identify the previously filed document containing the 
incorporated material.
* * * * *

0
9. Amend Form N-CEN (referenced in Sec.  274.101) as follows:
0
a. Adding Item C.7.k.
0
b. Revising the Instruction to Item E.2.
    The addition and revision read as follows:

    Note:  The text of Form N-CEN does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-CEN
ANNUAL REPORT FOR REGISTERED INVESTMENT COMPANIES
* * * * *
Part C. Additional Questions for Management Investment Companies
    * * *

Item C.7.

    * * *
    k. Rule 6(c)-11 (17 CFR 270.6c-11): __
    * * *
Part E. Additional Questions for Exchange-Traded Funds and Exchange-
Traded Managed Funds
    * * *

Item E.2.

    * * *
    Instruction. The term ``authorized participant'' means a member or 
participant of a clearing agency registered with the Commission, which 
has a written agreement with the Exchange-Traded Fund or Exchange-
Traded Managed Fund or one of its service providers that allows the 
authorized participant to place orders for the purchase and redemption 
of creation units.
    * * *

0
10. Amend Form N-CSR (referenced in Sec.  274.128) as follows:
0
a. In General Instruction D, remove the phrase ``Item 12(a)(1)'' and 
add in its place ``Item 13(a)(1)''.
0
b. In the instruction to Item 13, remove the phrase ``Instruction to 
Item 11'' and add in its place ``Instruction to Item 13''.

0
11. Amend Form N-PORT (referenced in Sec.  274.150) by revising the 
first paragraph of General Instruction F to read as follows:


[[Page 57238]]


    Note:  The text of Form N-PORT does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-PORT
MONTHLY PORTFOLIO INVESTMENTS REPORT
    * * *
GENERAL INSTRUCTIONS
    * * *
F. Public Availability
    With the exception of the non-public information discussed below, 
the information reported on Form N-PORT for the third month of each 
Fund's fiscal quarter will be made publicly available upon filing.
* * * * *

    By the Commission.

    Dated: September 25, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-21250 Filed 10-23-19; 8:45 am]
 BILLING CODE 8011-01-P