Notice2024-27015
Precidian ETF Trust II, et al.
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 20, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 224 (Wednesday, November 20, 2024)</title>
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[Federal Register Volume 89, Number 224 (Wednesday, November 20, 2024)]
[Notices]
[Pages 91822-91824]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27015]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 35386; 812-15179-01]
Precidian ETF Trust II, et al.
November 14, 2024.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of an application to amend a prior order for exemptive
relief.
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Summary of Application: Applicants request an order (``Amended
Order'') that would amend a prior order to permit a Fund to use
Creation Baskets (as defined below) that include instruments that are
not included, or that are included with different weightings, in the
Fund's Pro Rata Basket (as defined below).
Applicants: Precidian ETF Trust II (``Trust''), Precidian Funds
LLC, and Foreside Fund Services, LLC (collectively, the
``Applicants'').
Filing Dates: The application was filed on November 24, 2020, and
amended on January 14, 2022, March 28, 2022, September 2, 2022,
December 13, 2023, April 15, 2024, and November 8, 2024.
Hearing or Notification of Hearing: An order granting the requested
relief will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by emailing the Commission's
Secretary at <a href="/cdn-cgi/l/email-protection#e0b3858392859481929993cdaf8686898385a0938583ce878f96"><span class="__cf_email__" data-cfemail="9fccfafcedfaebfeede6ecb2d0f9f9f6fcfadfecfafcb1f8f0e9">[email protected]</span></a> and serving Applicants with a
copy of the request by email, if an email address is listed for the
relevant Applicant below, or personally or by mail, if a physical
address is listed for the relevant Applicant below. Hearing requests
should be received by the Commission by 5:30 p.m. on December 9, 2024
and should be accompanied by proof of service on the Applicants in the
form of an affidavit, or, for lawyers, a certificate of service.
Pursuant to rule 0-5 under the Investment Company Act of 1940
(``Act''), hearing requests should state the nature of the writer's
interest, any facts bearing upon the desirability of a hearing on the
matter, the reason for the request, and the issues contested. Persons
who wish to be notified of a hearing may request notification by
emailing to the Commission's Secretary.
ADDRESSES:
The Commission: <a href="/cdn-cgi/l/email-protection#1b487e78697e6f7a69626836547d7d72787e5b687e78357c746d"><span class="__cf_email__" data-cfemail="41122422332435203338326c0e2727282224013224226f262e37">[email protected]</span></a>.
Applicants: <a href="/cdn-cgi/l/email-protection#bbd1d4d3d595d6d8dcced2c9defbd6d4c9dcdad5d7deccd2c895d8d4d6"><span class="__cf_email__" data-cfemail="f49e9b9c9ada999793819d8691b4999b8693959a9891839d87da979b99">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: Kris Easter Guidroz, Senior Counsel;
Trace Rakestraw, Senior Special Counsel, at (202) 551-6825 (Division of
Investment Management, Chief Counsel's Office).
SUPPLEMENTARY INFORMATION: For Applicants' representations, legal
analysis, and conditions, please refer to Applicants' sixth amended and
restated application, dated November 8, 2024, which may be obtained via
the Commission's website by searching for the file number at the top of
this document, or for an Applicant using the Company name search field
on the SEC's EDGAR system. The SEC's EDGAR system may be searched at
<a href="https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html">https://www.sec.gov/edgar/searchedgar/legacy/companysearch.html</a>. You
may also call the SEC's Public Reference Room at (202) 551-8090.
I. Introduction
1. On May 20, 2019, the Commission issued an order \1\ under
section 6(c) of the Act for an exemption from sections 2(a)(32),
5(a)(1), and 22(d) of the Act and rule 22c-1 under the Act, under
sections 6(c) and 17(b) of the Act for an exemption from sections
17(a)(1) and 17(a)(2) of the Act, and under section 12(d)(1)(J) of the
Act for an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of the
Act (the ``Prior Order'').\2\ The Prior Order permits Applicants to
operate actively-managed exchange-traded funds (``ETFs'') that are not
required to disclose their full portfolio holdings on a daily basis
(each, a ``Fund''). Rather, pursuant to the Prior Order, each Fund
disseminates a ``verified intraday indicative value,'' or
[[Page 91823]]
``VIIV,'' reflecting the value of its portfolio holdings, calculated
every second throughout the trading day.
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\1\ See Precidian ETFs Trust, et al., Investment Company Act
Release No. 33440 (April 8, 2019) (notice) and Investment Company
Act Release No. 33477 (May. 20, 2019) (order). Except as
specifically noted in the application for the Amended Order, all
representations and conditions contained in the application first
submitted with the Commission (File No. 812-14405), as amended and
restated, and filed with the Commission on April 4, 2019 (the
``First Application''), remain applicable to the operation of the
Funds and will apply to any Funds relying on the Amended Order.
\2\ The relief granted under section 12(d)(1)(J) of the Act for
an exemption from sections 12(d)(1)(A) and 12(d)(1)(B) of the Act
(the ``Section 12(d)(1) Relief''), and relief under sections 6(c)
and 17(b) of the Act for an exemption from sections 17(a)(1) and
17(a)(2) of the Act relating to the Section 12(d)(1) Relief, expired
on January 19, 2022. See Fund of Funds Arrangements, Investment
Company Act Rel. No. 10871 (Oct. 7, 2020), at III.
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2. Shares of each Fund are purchased and redeemed only in Creation
Units and generally on an in-kind basis. Purchasers acquire Creation
Units by transferring to the Fund Deposit Instruments \3\ and
shareholders redeeming their Shares receive from the Fund Redemption
Instruments (each, a ``Creation Basket''). Under the Prior Order, the
names and quantities of the instruments that constitute a Fund's
Creation Basket must be a pro rata slice of the Fund's actual portfolio
except for certain cash substitutions (``Pro Rata Basket'').
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\3\ All capitalized terms not otherwise defined in this notice
have the meanings ascribed to them in the First Application.
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3. Applicants now seek to amend the Prior Order to, in effect, give
the Funds the same flexibility with respect to Creation Basket
composition as afforded to ETFs relying on rule 6c-1 under the Act.\4\
More specifically, Applicants have requested that the Funds be allowed
to use Creation Baskets that include instruments that are not included,
or are included but in different weightings, in the Fund's Pro Rata
Basket. As part of Applicants' request, the Funds would comply with
additional requirements, including disclosing additional information.
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\4\ The Funds are not able to operate in reliance on rule 6c-11
because they do not disclose their portfolio holdings on a daily
basis as required by the rule. See rule 6c-11(c)(1)(i) (requiring an
ETF to disclose prominently on its website, publicly available and
free of charge, the portfolio holdings that will form the basis for
the Fund's calculation of per share NAV).
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II. The Application
A. Applicants' Proposal
4. Upon amending the Prior Order, each Fund would continue to offer
its Pro Rata Basket every Business Day but could also offer a Creation
Basket that differs from the Pro Rata Basket to provide Authorized
Participants the option to transact in either basket. Each Business
Day, before the open of trading on the Exchange where the Fund is
listed, the Fund will publish on its website the composition of any
Creation Basket exchanged with an Authorized Participant on the
previous Business Day that differed from such Business Day's Pro Rata
Basket other than solely with respect to cash substitutions.
5. Applicants represent that a Fund may determine that it is
desirable to use Creation Baskets that differ from a Pro Rata Basket.
For example, a Fund may use a Creation Basket that contains one or more
instruments that are not included in its Pro Rata Basket if the Adviser
or Sub-Adviser seeks to add an instrument to the Fund's portfolio
without incurring transaction costs associated with the purchase of the
instrument for cash. Similarly, if the Adviser or Sub-Adviser decides
to sell an instrument from a Fund's portfolio, the Fund may include the
instrument in a Creation Basket with the expectation that the Fund will
deliver it in-kind during a redemption transaction.
6. The Funds will use the requested basket flexibility only in
circumstances in which Applicants believe there will be no harm to the
Funds or their shareholders and in order to benefit the Funds and their
shareholders by reducing costs, increasing efficiency, and improving
trading. To ensure that there is effective arbitrage on Business Days
when the Adviser determines a Fund should use a Creation Basket that
differs from its Pro Rata Basket, the Adviser will cause the Fund to
disclose on its website that Business Day, before the opening of
regular trading on the primary listing Exchange of the Fund's Shares:
(i) that the Fund is accepting Creation Baskets that differ from the
Pro Rata Basket, (ii) a basket of securities and cash that is designed
to closely track the daily performance of the Fund (an ``Optimized
Basket''),\5\ and (iii) an Optimized Basket Overlap metric that
measures the overlap between the Optimized Basket and the Fund's actual
portfolio.
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\5\ A Fund's Optimized Basket will be comprised of: (i)
portfolio holdings; (ii) other securities that the Fund can
purchase, including U.S. listed ETFs; and (iii) cash and cash
equivalents.
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7. For at least the first three years after a Fund begins using
Creation Baskets that differ from its Pro Rata Basket, the Adviser will
promptly call a meeting of the Board, and the Board will promptly meet
to consider recommendations for appropriate remedial measures presented
by the Adviser, if the tracking error of the Optimized Basket exceeds
1% (i.e., the difference, in percentage terms, between the NAV per
share of the Optimized Basket and that of the actual portfolio at the
end of a trading day).
8. Pursuant to condition 6, each Fund will maintain and preserve a
copy of each Optimized Basket published on the Fund's website and a
copy of each Creation Basket made available.
9. In addition, pursuant to conditions 6 and 10, each Fund will
comply with the recordkeeping requirements of rule 6c-11 and will adopt
and implement written policies and procedures that govern the
construction of Creation Baskets as required under rule 6c-11 except
that only Creation Baskets different from a Fund's Pro Rata Basket will
be treated as a ``custom basket'' under subsections (d)(2)(ii) and
(c)(3) of rule 6c-11.
B. Considerations relating to the Requested Relief
10. Applicants represent that the ability to use a Creation Basket
that includes instruments that are not included, or are included with
different weightings, in a Fund's Pro Rata Basket, does not raise any
new policy concerns about reverse engineering of a Fund's portfolio,
self-dealing or overreaching, or selective disclosure beyond those
concerns addressed in connection with the Prior Order. Further, the
Fund will disclose additional information, as noted in paragraph 6
above, to ensure that there is effective arbitrage on Business Days
when the Adviser determines a Fund should use a Creation Basket that
differs from its Pro Rata Basket.
11. Reverse Engineering. Applicants acknowledge that, by using a
Creation Basket that includes instruments that are not included in a
Fund's Pro Rata Basket, or are included in different percentages, and
by publishing such Creation Basket on its website, the Fund would
provide market participants with additional information about which
instruments it adds or removes from the Fund's portfolio. However,
Applicants represent that they will operate the Funds in a manner
designed to minimize the risk of reverse engineering and, for the
reasons set forth in the Application, believe successful front-running
or free-riding is highly unlikely.
12. Self-Dealing or Overreaching. Applicants state their belief
that Authorized Participants and other market participants will not
have the ability to disadvantage the Funds by manipulating or
influencing the composition of Creation Baskets, including those that
differ from a Fund's Pro Rata Basket. Like the basket and custom basket
policies and procedures required of ETFs by rule 6c-11, the Funds will
adopt and implement written policies and procedures that govern the
construction of creation baskets and the process that will be used for
the acceptance of creation baskets to safeguard the best interests of
the Funds and their shareholders.\6\
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\6\ See Exchange-Traded Funds, Investment Company Act Release
No. 33646 (Sept. 25, 2019) (``ETF Adopting Release''), at 80-94
(discussion of rule 6c-11 requirement for ETF policies and
procedures concerning basket construction and acceptance and
heightened policies and procedures for custom baskets).
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13. Selective Disclosure. The Funds and each person acting on
behalf of the
[[Page 91824]]
Funds must continue to comply with Regulation Fair Disclosure as if it
applied to them (except that the exemptions provided in rule
100(b)(2)(iii) therein shall not apply). Applicants believe that the
creation basket flexibility they are seeking does not raise any new
concerns about selective disclosure of material non-public information.
First, a Fund's use of, or conversations with Authorized Participants
about, Creation Baskets that would result in such disclosure would
effectively be limited by the Funds' obligation to comply with
Regulation Fair Disclosure. Second, each Business Day before the open
of trading on the Exchange where a Fund is listed, the Fund will
publish on its website the composition of any basket accepted by the
Fund on the previous Business Day that differed from such Business
Day's Pro Rata Basket.
II. Requested Exemptive Relief
Applicants believe that the Prior Order continues to meet the
relevant standards for relief pursuant to section 6(c) of the Act for
an exemption from sections 2(a)(32), 5(a)(1), and 22(d) of the Act and
rule 22c-1 under the Act, and under sections 6(c) and 17(b) of the Act
for an exemption from sections 17(a)(1) and 17(a)(2) of the Act.\7\
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\7\ See supra note 2.
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III. Applicants' Conditions:
Applicants agree that any Order of the Commission granting the
requested relief will be subject to all of the conditions in the Prior
Order, except condition 2 and condition 6 which are replaced with new
conditions 2 and 6 below, as well as new condition 10:
2. The website for the Trust, which will be publicly accessible at
no charge, will contain, on a per Share basis for each Fund, the prior
Business Day's NAV and market closing price or Bid/Ask Price of the
Shares, a calculation of the premium or discount of the market closing
price or Bid/Ask Price against such NAV, and any other information
regarding premiums and discounts as may be required for other ETFs
under Rule 6c-11 under the 1940 Act. The website will also disclose the
median bid-ask spread for each Fund's most recent fiscal year based on
the National Best Bid and Offer at the time of calculation of NAV (or
such other spread measurement as may be required for other ETFs under
Rule 6c-11 under the 1940 Act). On each applicable Business Day, when
accepting orders involving a Creation Basket that differs from the
Fund's Pro Rata Basket, each Fund will publish on its website before
the opening of regular trading on the primary listing Exchange of the
Fund's Shares an Optimized Basket and Optimized Basket Overlap.
6. Each Fund will comply with the recordkeeping requirements of
Rule 6c-11 under the Act, except that for purposes of this condition,
only Creation Baskets different from the Fund's Pro Rata Basket will be
treated as a ``custom basket'' under Rule 6c-11(d)(2)(ii). In addition,
each Fund will maintain and preserve, for a period of not less than
five years, in an easily accessible place, (i) a copy of any Optimized
Basket published on the Fund's website for each Business Day; and (ii)
a copy of each Creation Basket made available on a given day. In
addition, each Fund will maintain and preserve, for a period of not
less than five years, in an easily accessible place, all written
agreements (or copies thereof) between the Fund and each AP
Representative related to the AP Representative's role as such.
10. Each Fund will adopt and implement written policies and
procedures that govern the construction of Creation Baskets, as
required under Rule 6c-11(c)(3) under the Act, except that for purposes
of this condition, any Creation Basket different from the Fund's Pro
Rata Basket will be treated as a ``custom basket.'' The Fund's basket
policies and procedures will be covered by the Fund's compliance
program and other requirements under Rule 38a-1 under the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-27015 Filed 11-19-24; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.