SEC Division of Trading and Markets no-action letter: NYSE Arca, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
DIVISION OF
TRADING AND MARKETS
September 3, 2013
Senior Vice President and Secretary
NYSE Euronext
20 Broad Street
New York, NY 10005
Dear Ms. McGinness:
In your letter dated September 3, 2013 ("Request Letter"), you requested on behalf of NYSE Area, Inc. ("NYSE Area" or the "Exchange"), through its wholly owned subsidiary NYSE Area Equities, Inc. ("NYSE Area Equities") that the staff of the Division of Trading and Markets ("Staff'') provide assurances that it would not recommend enforcement action to the Commission under Section 11(d)(l) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 11d1-2 thereunder, if certain broker-dealers participate in the Exchange's pilot program for certain exchange-traded products ("ETPs") listed on the Exchange and the related provisions of the Exchange's Trading Fee Schedule (together, the "Incentive Program"). 1 The Incentive Program is designed to encourage lead market makers ("LMMs") to take LMM assignments in certain lower volume ETPs by offering an alternative fee structure for those LMMs and "LMM Payments" that would be funded from the Exchange's general revenues if the LMM meets or exceeds certain perfom1ance standards set forth in Rule 8.800(c) that relate to the LMM's quoting activity in the ETP. The costs ofthe Incentive Program would be funded by charging participating issuers non-refundable "Optional Incentive Fees" which may be paid by sponsors on behalf of the issuer. In particular, you request assurances that the broker-dealers could rely on prior no-action positions pertaining to the application of Section 11 (d)( 1) and Rule 11 d 1-2 thereunder to commodity-based exchange traded trusts ("CBETTs"). 2 Background See Securities Exchange Act Release Nos. 69335 (AprilS, 2013), 78 FR 21681 (April11,
2013) (SR-NYSEArca-2013-34) (the "Notice") and 69706 (June 6, 2013), 78 FR 35340 (June
12, 2013) (SR-NYSEArca-2013-34) (the "Approval Order").
2 See No-Action Letter re: DB Commodity Index Tracking Fund and DB Commodity Services LLC (Jan. 19, 2006); No-Action Letter re: Rydex Specialized Products LLC (Dec. 5, 2005); No-Action Letter re: streetTRACKS Gold Trust (Dec. 12, 2005); and No-Action Letter re: iShares COMEX Gold Trust (Dec. 12, 2005) (collectively, the "CBETT No-Action Relief'').

NYSE Euronext
Section 11 (d)( 1) of the Exchange Act3 generally prohibits a broker-dealer from extending
or maintaining credit, or arranging for the extension or maintenance of credit, on shares of new issue securities, if the broker-dealer participated in the distribution ofthe new issue securities within the preceding 30 days. The Commission's view is that shares of open-end investment companies and unit investment trusts registered under the Investment Company Act of 1940, such as CBETT and exchange-traded fund shares, are distributed in a continuous manner, and broker-dealers that sell such securities are therefore participating in the "distribution" of a new issue for purposes of Section 11(d)(1).4 The Staff has provided no-action relief from Section 11 (d)( 1) to broker-dealers (other than the distributor) engaging in secondary market proprietary or customer transactions in securities ofCBETTs. 5 The CBETT No-Action Relief permits broker-dealers (other than the distributors) that do not create or redeem CBETT shares but engage in both proprietary and customer transactions in CBETT shares exclusively in the secondary market to extend or maintain or arrange for the extension or maintenance of credit on CBETT shares in connection with such secondary market transactions notwithstanding the general prohibition on new issue credit of Section 11 (d)(1) ofthe Exchange Act. The CBETT No-Action Relief also permits an "Authorized Participant"6 to extend or maintain or arrange for the extension or maintenance of credit on CBETT shares (other than any CBETT shares acquired by such Authorized Participant as part of a basket during the initial offering period for which the Authorized Participant receives an upfront selling commission) in reliance on the SIA Exemption. The CBETT No-Action Relief for Authorized Participants and other broker-dealers is conditioned on, among other things, the broker-dealer and any natural person associated with the broker-dealer not receiving from the fund complex, directly or indirectly, any payment, compensation or other economic incentive to promote or sell the CBETT's securities to persons outside ofthe fund complex, other than non-cash compensation permitted under NASD Rule 2830(1)(5)(A), (B), or (C). 3 15 U.S.C. 78k(d)(1). 4 See, e.g., Exchange Act Release Nos. 6726 (Feb. 8, 1962), 27 FR 1415 (Feb. 15, 1962) and 21577 (Dec. 18, 1984), 49 FR 50174 (Dec. 27, 1984). 5 See, e. g., No-Action Letter re: DB Commodity Index Tracking Fund and DB Commodity Services LLC (Jan. 19, 2006); No- Action Letter re: Rydex Specialized Products LLC (Dec. 5, 2005); No-Action Letter re: streetTRACKS Gold Trust (Dec. 12, 2005); and No￾Action Letter re: iShares COMEX Gold Trust (Dec. 12, 2005) (collectively, the "CBETT No￾Action Relief'). 6 The CBETT No-Action Relief provides that an "Authorized Participant" must: (1) be registered as a broker-dealer under the Exchange Act and regulated by FINRA, or else be exempt from being (or otherwise not required to be) so registered or regulated, and be qualified to act as a broker or dealer in the states or
other jurisdictions where the nature of its business so requires, and; (2) be participants in the Depository Trust Corporation, and (3) enter into a participant agreement with the CBETT and its managing owner setting forth certain procedures and fees by which the Authorized Participant may create and redeem CBETT shares.

NYSE Euronext
The Incentive Program will permit certain ETPs, including CBETTs and exchange-traded funds, to voluntarily incur increased listing fees payable to the Exchange. In tum, the Exchange will use the fees to make LMM Payments to market makers that improve the market quality of participating issuers' securities. LMM Payments will be accrued solely for quoting activity on the Exchange. Broker-dealers receiving the LMM Payments would not be in compliance with the condition of the CBETT No-Action Relief discussed above and, therefore, LMMs participating in the Incentive Program would not be eligible to rely on the CBETT No-Action Relief You maintain that a broker-dealer should be able to rely on the CBETT No-Action Relief notwithstanding the receipt ofLLM Payments under the Incentive Program. Among other things, you note that the LMM Payments are provided only to LMMs that meet or exceed market quality standards and that the Incentive Program will not provide an incentive for LMMs to "push" the securities of participating issuers. 7 You represent that the Incentive Program is intended to foster enhanced liquidity, robust quoting activity, narrowed spreads, and reduced transaction costs for investors in participating ETPs. You note that the LMM Payments are not attributable to LMMs executing transactions in securities, but only for LMMs' two-sided quoting activity. You also state that disclosure provisions ofthe Incentive Program will alert and educate investors about the program and the LMM Payments. 8 7 Congress adopted Section 11 (d)(1) in response to concems about potential conflicts of interest faced by persons acting as both brokers and dealers in the distribution of new issue securities. In a House report accompanying the Exchange Act, Congress noted:
It is difficult to serve two masters. And it is particularly difficult to give impartial advice to a client if the dealer-broker has his own securities to sell, particularly when they are new securities for which there is no ready market. H.R. Rep. No. 1383, 73d Cong., 2d Sess. 15 (1934). Congress concluded that forcing the separation of brokers and dealers would have led brokers to abandon their dealer business, impairing the mechanism to distribute new securities. In lieu ofthis measure, Congress required broker-dealers to disclose to customers the capacity in which they were acting and adopted
section 11 (d)(1) prohibiting broker-dealers from extending margin on new issue securities in the
distribution of which the broker-dealer had participated. I d.
8 Request Letter at 7. The Exchange notes that its new rules are designed to provide comprehensive and accessible disclosure to investors about the MQP Program through the Exchange's website or the websites ofthe participating issuers. New Rules 8.800(b)(6) and (7) require the Exchange to disclose on its website the following information with respect to the operation of the Incentive Program: (i) the ETPs participating in the Incentive Program and the LMM assigned to each participating ETP; (ii) the date a particular ETP begins participating or ceases participating in the Incentive Program; (iii) the date the Exchange receives written notice of an issuer's intent to withdraw its ETP from the Incentive Program, or an LMM's intent to withdraw from its ETP assignment(s) in the Incentive Program, and, in each case, the intended withdrawal date, if provided; and (iv) the amount of the Optional Incentive Fee for each ETP.

NYSE Euronext
You also assert that the Incentive Program's goal of enhancing market quality is most likely to be accomplished if the program attracts as many participating market makers as possible. In your view, eligible market makers may decline to participate in the program if the CBETT No-Action Relief is unavailable, either because the market makers may already extend credit to customers on the securities of participating issuers or because the value to market makers of offering credit services to customers on such securities may outweigh the value of participating in the Incentive Program.9 The Commission recognizes that broker-dealers that have to choose between participating in the Incentive Program and having the ability to offer credit services to customers in reliance on the CBETT No-Action Relief for business reasons may determine to continue to offer the credit services and decline to participate in the Incentive program. In other words, without the requested no-action relief from Section 11 (d)( 1) and Rule 11dl-2 thereunder, the number of market makers in the Incentive Program could be reduced. Response The Staff recognizes that broker-dealers that have to choose between participating in the Incentive Program and having the ability to offer credit services to customers in reliance on the CBETT No-Action Relief may determine for business reasons to continue to offer the credit services and decline to participate in the Incentive program. Therefore, we understand how the absence ofthe requested exemption from Section 11(d)(l) and rule 1ldl-2 thereunder could serve to reduce the number of market makers in the Incentive Program. The Staff recognizes the goals ofthe Incentive Program to improve market quality by promoting enhanced liquidity, reduced spreads, and reduced cost of investing in the securities of participating issuers. The Staff believes that granting the requested relief will encourage a larger number ofmarket makers to participate in the Incentive Program and that a larger number of participating market makers should create greater potential for the market quality improvements the Incentive Program aims to achieve. We note in particular that the Exchange will determine to pay an LMM Payment only if an LMM maintains certain minimum quoting standards. No portion of the LMM Payment is attributable to sales of CBETT securities and thus the LMM Payment should not provide the kind of incentive for "share-pushing" with which Congress was concerned when it enacted Section 11 (d). 10 Moreover, the required website disclosures, The Exchange also will include on its website a fair and balanced description of the Incentive Program, including a description of the potential benefits and risks that may be attendant with an ETP's participation in the program. An issuer of an ETP that is approved to participate in the Incentive Program will also be required to (i) issue a press release to the public when an ETP commences or ceases participation in the
Incentive Program, (ii) post such press release on its website, and (iii) provide on its website a hyperlink to the Exchange's webpage describing the Incentive Program. 9 Request Letter at 8. 10 See note 7, supra.

NYSE Euronext discussed above, 11 should help LMMs' customers understand the Program's effect on LMMs' incentives and thus should help investors to make informed decisions in light of the additional incentives LMMs may have in providing quotes for these securities. Accordingly, the Staff confirms that it would not recommend enforcement action to the Commission if a broker-dealer that participates in the Incentive Program relies on the CBETT No-Action Relief pertaining to Section ll(d)(l) and Rule lldl-2 thereunder, subject to the conditions provided in that relief, notwithstanding that the broker-dealer may receive LMM Payments for participating in the Incentive Program as described in your request. The foregoing no-action position will expire when the Incentive Program terminates and is subject to modification or revocation at any time. This no-action position does not represent the Staff's or the Commission's views with respect to any other question that the proposed activities may raise or the applicability of other federal or state laws and rules to the proposed activities. If you have any questions regarding this letter, please call me at (202) 551-5550. Sincerely, Gz::~ a__ <2rAJv---~ Paula Jenson / ( , Deputy Chief Counsel See note 8, supra. II

Legal & Government Affairs
EVP & Corporate Secretary
General Counsel, NYSE Markets
September 3, 2013
Chief Counsel and Associate Director
Division of Trading and Markets
100 F Street, NE
Washington, DC 20549
Re: Request for Exemptive Relief from Section 11(d)(1) of the Securities Exchange Act of 1934 and Rule 11d1-2 Thereunder for Broker-Dealers Participating in the NYSE Arca Incentive Program Dear Mr. Blass:
NYSE !rca, Inc. (“NYSE !rca” or the “Exchange”), through its wholly owned subsidiary NYSE Arca Equities, Inc. (“NYSE !rca Equities”), respectfully requests that the Securities and Exchange ommission (the “ommission”) grant an exemption from Section 11(d)(1) of the Securities Exchange !ct of 1934, as amended (the “!ct”),1 and Rule 11d1-2 thereunder,2 to the Exchange and certain broker-dealers that receive payments under NYSE Arca Equities Rule 8.800, which authorizes a pilot program for certain exchange-traded products (“ETPs”) listed on the Exchange, and the related provisions of the Exchange’s Trading Fee Schedule (together, the “Incentive Program”),3 subject to the conditions described below. NYSE !rca further requests that the staff of the Division of Trading and Markets (“Staff”) grant no-action relief to certain broker-dealers participating in the Incentive Program permitting them to rely on certain earlier no-action relief pertaining to the application of Section 11(d)(1) and Rule 11d1-2 thereunder to commodity-based exchange traded trusts (“ETTs”). In Section I below, the Exchange provides background on the Incentive Program and the application of
Section 11(d)(1) and Rule 11d1-2 to it. In Section II below, the Exchange sets forth its rationale for the
exemptive and no-action relief, specifically that they are necessary and appropriate in the public interest and are consistent with the protection of investors because (1) the Incentive Program is designed to enhance market quality, not to encourage “share pushing”- (2) absent exemptive and no-action relief, the Exchange may not attract a sufficient number of Lead Market Makers (“LMMs”) to participate in the Incentive Program to make it successful; (3) the exemptive and no-action relief will be limited in time and scope so its effect will be very narrow; and (4) investors will be further protected by substantial public disclosures made in connection with the Incentive Program. Finally, in Section III below, the 1 15 U.S.C. 78mm(a). 2 17 CFR 242.11d1-2. 3 See Securities Exchange Act Release Nos. 69335 (April 5, 2013), 78 FR 21681 (April 11, 2013) (SR￾NYSEArca-2013-34) (the “Notice”) and 69706 (June 6, 2013), 78 FR 35340 (June 12, 2013) (SR-NYSEArca￾2013-34) (the “!pproval Order”). !ll references to rules hereinafter are to NYSE Arca Equities rules unless otherwise noted. NYSE Euronext, 20 Broad Street, New York, NY 10005, United States T +1 212 656 2039 F +1 212 656 8101 www.nyx.com

September 3, 2013
Exchange sets forth the narrow and time-limited conditions under which it proposes that the relief be granted.4
I. Background
A. Overview of the Incentive Program
The Incentive Program is designed to enhance the market quality for ETPs by incentivizing Market Makers to take LMM assignments in certain lower-volume ETPs. The ETPs that are eligible to participate in the Incentive Program include ETPs listed on the Exchange that have fewer than one million shares in consolidated average daily volume (“!DV”). Participation in the Incentive Program will be entirely voluntary on the part of both LMMs and issuers. The costs of the Incentive Program will be offset by charging participating issuers non-refundable “Optional Incentive Fees,” which are determined by the issuer within a range of between $10,000 and $40,000 per year, paid quarterly, and credited to the Exchange’s general revenues. The Exchange will credit an LMM participating in the Incentive Program with an “LMM Payment,” the amount of which is determined solely by the Exchange, as set forth in the Exchange’s Trading Fee Schedule and paid by the Exchange from its general revenues, only if the LMM meets or exceeds certain “LMM Performance Standards” set forth in Rule 8.800(c) that relate to the LMM’s quoting activity in the ETP.5 The Incentive Program will operate for one year as a pilot program.6 B. Application of Section 11(d)(1) of the Act and Rule 11d1-2 to the Incentive Program In the Approval Order for the Incentive Program, the Commission discussed the application of Section 11(d)(1) and Rule 11d1-2 to the Incentive Program.7 Section 11(d)(1) generally prohibits a broker-dealer from extending or maintaining credit, or arranging for the extension or maintenance of credit, on shares 4 The Exchange notes that the ommission’s Division of Trading and Markets, pursuant to delegated authority, has granted an exemption from Section 11(d)(1) and Rule 11d1-2 to The NASDAQ Stock Market LL (“N!SD!Q”) related to its Market Quality Program (“MQP”). See Securities Exchange Act Release No. 69892 (June 28, 2013), 78 FR 40523 (July 5, 2013) (the “N!SD!Q Exemption”). The N!SD!Q MQP shares a similar purpose as the Incentive Program, although certain elements of the programs differ. The Exchange is requesting substantially the same exemptive relief as was granted to NASDAQ. 5 At the end of each quarter, the Exchange will credit an LMM with an LMM Payment for each month during such quarter that the LMM meets or exceeds its Incentive Program LMM Performance Standards for an assigned ETP. If an LMM does not meet or exceed the Incentive Program LMM Performance Standards for an assigned ETP for a particular month, or if the ETP is withdrawn from the Incentive Program, then the LMM Payment will be zero for such month. The amount of the LMM Payment for a particular month will not exceed one-third of the quarterly Optional Incentive Fee, less an Exchange administration fee of 5%. 6 The Incentive Program will be implemented no later than 90 days after its approval, which was June 6, 2013. 7 See Approval Order, supra note 3, at 35348.

September 3, 2013 of new issue securities, if the broker-dealer participated in the distribution of the new issue securities within the preceding 30 days. The ommission’s view is that shares of open-end investment companies and unit investment trusts registered under the Investment Company Act of 1940, such as exchange traded fund (“ETF”) shares, are distributed in a continuous manner, and broker-dealers that sell such securities are therefore participating in the “distribution” of a new issue for purposes of Section 11(d)(1).8 The Division of Trading and Markets, acting under delegated authority, granted an exemption from
Section 11(d)(1) and Rule 11d1-2 thereunder for broker-dealers that have entered into an agreement
with an ETF’s distributor to place orders with the distributor to purchase or redeem the ETF’s shares (“roker-Dealer !uthorized Participants” or “roker-Dealer !Ps”) (such exemption hereinafter referred to as the “SI! Exemption”).9 The SIA Exemption allows a Broker-Dealer AP to extend or maintain credit, or arrange for the extension or maintenance of credit, to or for customers on the shares of qualifying ETFs subject to the condition that neither the Broker-Dealer AP, nor any natural person associated with the Broker-Dealer AP, directly or indirectly (including through any affiliate of the Broker-Dealer AP), receives from the fund complex any payment, compensation, or other economic incentive to promote or sell the shares of the ETF to persons outside the fund complex, other than non cash compensation permitted under NASD Rule 2830(l)(5)(A), (B), or (C). This condition is intended to eliminate special incentives that Broker-Dealer !Ps and their associated persons might otherwise have to “push” ETF shares, i.e., induce customers to purchase newly issued shares in return for extensions of credit. The Incentive Program will permit certain issuers of ETPs to voluntarily incur increased listing fees payable to the Exchange. In turn, the Exchange will make LMM Payments to LMMs that meet LMM Performance Standards under Rule 8.800, and thus enhance the market quality for the participating issuers. According to the Commission, LMM Payments will be accrued for, among other things, executing purchases and sales on the Exchange,10 and thus their receipt by certain broker-dealers will 8 See, e.g., Securities Exchange Act Release Nos. 6726 (Feb. 8, 1962), 27 FR 1415 (Feb. 15, 1962) and 21577 (Dec. 18, 1984), 49 FR 50174 (Dec. 27, 1984). 9 See Letter from Catherine McGuire, Chief Counsel, Division of Trading and Markets, Securities and Exchange Commission to Securities Industry Association (Nov. 21, 2005). The SIA Exemption noted that the Commission Staff had confirmed on numerous prior occasions that it would not recommend enforcement action under Section 11(d)(1) to the Commission against broker-dealers that are not Broker￾Dealer APs in a particular ETF, but that effect transactions in shares of such ETF exclusively in the secondary market (“Non-AP Broker-Dealers”), and extend or maintain or arrange for the extension or maintenance of credit to or for customers on such ETF shares in connection with such secondary market transactions, as long as such Non-AP Broker-Dealers met such condition too. 10 Although the Approval Order stated that incentive payments will accrue for, among other things, executing purchases and sales on the Exchange, the Exchange respectfully notes that in contrast to the NASDAQ MQP, incentive payments will not accrue for executing purchases and sales on the Exchange, rather only for quoting activity. Under Rule 7.24, LMMs that are not participating in the Incentive Program are subject to minimum performance standards that include
percentage of executions that are better than the National est id (“N”) or National est Offer (“NO”) (collectively, “NO”). However,

September 3, 2013 implicate the conditions of the SIA Exemption from the new issue lending restriction in Section 11(d)(1) discussed above. The ommission’s view is that LMM Payments are indirect payments from the fund complex to the Market Maker and that those payments are compensation to promote or sell the shares of the ETP. Therefore, a Market Maker that is also a broker-dealer receiving the incentives will not be able to rely on the SIA Exemption from Section 11(d)(1). This does not mean that broker-dealers cannot participate in the Incentive Program; it merely means that they cannot rely on the SIA Exemption while doing so. Thus, broker-dealers that participate in the Incentive Program will need to comply with
Section 11(d)(1) unless there is another applicable exemption. As such, the Exchange is requesting that
the Commission grant such an exemption.
The Approval Order also discussed the application of Section 11(d)(1) and Rule 11d1-2 thereunder to CBETTs.11 The Staff has provided no-action relief from Section 11(d)(1) for certain broker-dealers transacting in CBETTs.12 Specifically, the CBETT No-Action Relief permits Non-AP Broker-Dealers (other than the distributor) that do not create or redeem CBETT shares but engage in both proprietary and customer transactions in CBETT shares exclusively in the secondary market to extend or maintain or arrange for the extension or maintenance of credit on CBETT shares in connection with such secondary market transactions notwithstanding the general prohibition on new issue credit of Section 11(d)(1) of the Act. The CBETT No-Action Relief further permits a Broker-Dealer AP to extend or maintain or arrange for the extension or maintenance of credit on CBETT shares (other than any CBETT shares acquired by such Broker-Dealer AP as part of a basket during the initial offering period for which the Broker-Dealer AP receives an upfront selling commission) in reliance on the SIA Exemption. In each case, the CBETT No-Action Relief is conditioned on, among other things, the broker-dealer and any natural person associated with the broker-dealer not receiving from the fund complex, directly or indirectly, any payment, compensation or other economic incentive to promote or sell the ETT’s securities to persons outside of the fund complex, other than non-cash compensation permitted under NASD Rule 2830(1)(5)(A), (B), or (). This condition is fundamentally the same as the SI! Exemption’s condition for ETFs. Rule 7.24 does not apply to LMMs in the Incentive Program, which are instead subject to Rule 7.23 and the specific performance standards under Rule 8.800(c), which relate only to quoting. See Notice, supra note 3, at 21862 n.8, and Section II.A, infra. In contrast, 25% of the credit provided to market makers under the NASDAQ MQP is attributable to sales, with the remainder attributable to purchases and quotes. See NASDAQ Exemption, supra note 4, at 40524, 5. 11 Approval Order, supra note 3, at n. 98. 12 See No-Action Letter re: DB Commodity Index Tracking Fund and DB Commodity Services LLC (Jan. 19, 2006); No-Action Letter re: Rydex Specialized Products LLC (Dec. 5, 2005); No-Action Letter re:
streetTRACKS Gold Trust (Dec. 12, 2005); and No-Action Letter re: iShares COMEX Gold Trust (Dec. 12,
2005) (collectively, the “ETT No-!ction Relief”). While the ETT No-Action Relief does not explicitly
use the terms “!P roker-Dealer” and “Non-AP Broker-Dealer” as found in the SI! Exemption, the Exchange believes that their usage herein is consistent with the substance of the relief granted in the CBETT No-Action Relief.

September 3, 2013
II. Rationale for Relief for Broker-Dealers Involved in the Incentive Program
The Exchange believes that it is necessary and appropriate in the public interest and is consistent with the protection of investors to provide exemptive and no-action relief from Section 11(d)(1) and Rule 11d1-2 thereunder to LMMs, including both Broker-Dealer APs and Non-AP Broker-Dealers, receiving an LMM Payment under the Incentive Program for the following reasons, which are set forth in more detail below. First, the Incentive Program is designed to enhance market quality, not push shares. Second, absent exemptive and no-action relief, the Exchange may not attract a sufficient number of LMMs to participate in the Incentive Program to make it successful. Third, the Incentive Program is limited in time and scope so that the effect of the requested exemptive and no-action relief will be very narrow. Finally, investors in ETPs participating in the Incentive Program will be further protected by substantial public disclosures made in connection with the Incentive Program. A. Incentive Program Is Designed to Enhance Market Quality, Not to Encourage “Share Pushing” As described at length in the Notice, the purpose of the Incentive Program is to improve market quality in low-volume ETPs by incentivizing Market Makers to serve as LMMs for such products.13 The Exchange believes that the presence of an obligated and accountable liquidity provider leads to superior market quality and thus benefits long-term investors, particularly in comparison to similar securities for which there are no LMMs assigned. The Exchange believes that the Incentive Program will help foster enhanced liquidity, robust quoting activity, narrowed spreads, and reduced transaction costs for investors in participating ETPs. The Exchange does not believe that the structure of the Incentive Program, or the payments thereunder, would lead to “share pushing” because all of the standards that an LMM must meet to receive an LMM Payment under the Incentive Program and maintain such status relate to maintaining rigorous two-sided quoting activity, not to execution activity. First, like all Exchange Market Makers, LMMs participating in the Incentive Program must satisfy the requirements of Rule 7.23 for maintaining continuous, two-sided trading interest where the price of the bid (offer) interest is not more than a designated percentage away from the then current NBBO. Second, LMMs must meet a “Market Wide Requirement,” under which an LMM must maintain quotes or orders at the NO or better (the “Inside”) during the month during Core Trading Hours in accordance with certain maximum width and minimum depth thresholds based on daily share volume and share price, as set forth in Commentary .01 to Rule 8.800, unless the thresholds are otherwise met by quotes or orders of all market participants across all markets trading the security. Third, LMMs must meet an “NYSE !rca-Specific Requirement” under which the LMM must maintain quotes or orders on NYSE Arca at the NBBO that meet either a
time-at-the-Inside requirement or a size-setting NBBO requirement. Fourth, for at least 90% of the time when quotes may be entered during Core Trading Hours each trading day, as averaged over the course of a month, an LMM must maintain: (A) at least 2,500 shares of attributable, displayed posted buy liquidity on the Exchange that is priced no more than 2% away from the NBB for the particular ETP; and (B) at least 2,500 shares of See Notice, supra note 3, at 21682-85. 13

September 3, 2013 attributable, displayed posted offer liquidity on the Exchange that is priced no more than 2% away from the NBO for the particular ETP. Finally, an LMM that does not meet these quoting requirements does not receive an LMM Payment, and an LMM that does not meet or exceed these performance standards for any two of the three months of a quarter or for five months during the pilot period is subject to losing its LMM status and having the ETP reallocated to another LMM. These substantial responsibilities for quoting on both sides of the market under both Rules 7.23 and 8.800 would be inconsistent with the actions of a broker-dealer pushing, i.e., just offering, shares. Furthermore, the Incentive Program will be administered by the staff of the Exchange, which is a self￾regulatory organization, and which will be interposed between LMMs and issuers. The Exchange will collect the Optional Incentive Fees from issuers and credit them to the Exchange’s general revenues. The Exchange will administer all aspects of the LMM Payments, and an LMM will be eligible to receive an LMM Payment, again from the Exchange’s general revenues, only after it meets the LMM Performance Standards set and monitored by the Exchange. Application to, continuation in, and withdrawal from the Incentive Program will be governed by published Exchange rules. B. Incentive Program Pilot Is Unlikely to Attract Sufficient LMMs Without Relief The Incentive Program’s goal of enhancing the market quality for ETPs is most likely to be accomplished by incentivizing as many Market Makers as possible to take LMM assignments in the Incentive Program. Based on discussions with potential LMMs, the Exchange believes that many otherwise eligible Market Makers will not apply to be an LMM in the Incentive Program if exemptive and no-action relief from
Section 11(d)(1) and Rule 11d1-2 is unavailable because such Market Makers already offer credit to their
customers. The Exchange believes that if these firms are forced to choose between an LMM assignment in the Incentive Program or continuing to offer credit under available exemptive and no-action relief, they will choose the latter because the LMM Payment would not be significant enough to outweigh the value of offering credit services to customers. Without the requested relief, the pool of eligible LMMs would be limited to broker-dealers that do not extend credit to customers. The Exchange believes that this pool may be so small that the Incentive Program may be unable to operate as intended without the requested relief from Section 11(d)(1) and Rule 11d1-2.14 The Exchange believes that the requested relief will encourage a larger number of Market Makers to participate in the Incentive Program as LMMs and thereby increase the potential for achieving the market quality improvement goals of the Incentive Program. Thus, the requested relief would permit all LMMs to have the opportunity to participate in the Incentive Program rather than excluding certain LMMs because they extend credit to customers. The Exchange notes that the Commission similarly granted exemptive relief from Regulation M and FINRA Rule 5250 in order to permit the Incentive Program to operate effectively. See Approval Order, supra note 3, at nn. 7 and 85. See also Securities Exchange Act Release Nos. 69707 (June 6, 2013), 78 FR 35330 (June 12, 2013) (Order Granting a Limited Exemption from Rule 102 of Regulation M Concerning the NYSE !rca, Inc.’s Exchange-Traded Product Incentive Program Pilot Pursuant to Regulation M Rule 102(e)) (the “Regulation M Exemption Order”) and 69398 (!pr. 18, 2013), 78 FR 24261 (!pr. 24, 2013) (SR-FINRA￾2013-020). 14

September 3, 2013
C. Incentive Program Is a Pilot That Is Limited in Time and Scope
The Exchange also believes that the requested exemptive and no-action relief is appropriate because the Incentive Program is a pilot program that is limited in both time and scope. The Incentive Program is limited to a one-year pilot period, which will allow for assessment of whether the Incentive Program is achieving its market quality improvement goals, and, prior to any proposal or determination to make the program permanent, whether the Incentive Program has any unintended impact on ETPs, other securities or market participants, generally. In connection with such evaluation, the Exchange will provide the Commission with periodic reports about market quality.15 In light of the pilot status of the Incentive Program, it will only be necessary for the requested relief to run concurrently with the pilot period during which the Incentive Program operates, which would include any extensions of the pilot period, if approved by the Commission. Moreover, the subset of ETPs that are eligible to participate in the Incentive Program is limited to those with a CADV of fewer than one million shares. The Incentive Program will terminate with respect to a participating ETP if the ETP sustains a CADV of one million shares or more for three consecutive months. D. Investors Will Be Protected by Significant Public Disclosure The Incentive Program also includes significant public disclosure provisions that will help to alert and educate potential and existing investors in the ETPs about the Incentive Program and the payments thereunder.16 Specifically, the Exchange will disclose on its website the following information with respect to the operation of the Incentive Program: (i) the ETPs participating in the Incentive Program and the LMM assigned to each participating ETP; (ii) the date a particular ETP begins participating or ceases participating in the Incentive Program; (iii) the date the Exchange receives written notice of an issuer’s intent to withdraw its ETP from the Incentive Program, or an LMM’s intent to withdraw from its ETP assignment(s) in the Incentive Program, and, in each case, the intended withdrawal date, if provided; and (iv) the amount of the Optional Incentive Fee for each ETP. The Exchange also will include on its website a fair and balanced description of the Incentive Program, including a description of the potential benefits and risks that may be attendant with an ETP’s participation in the program. !n issuer of an ETP that is approved to participate in the Incentive Program will also be required to (i) issue a press release to the public when an ETP commences or ceases participation in the Incentive Program, (ii) post such press release on its website, and (iii) provide on its website a hyperlink to the Exchange’s webpage describing the Incentive Program. The Exchange believes that these disclosures about the LMM Payments should allay concerns that a broker-dealer could push shares on uninformed investors. 15 See Approval Order, supra note
3, at 35346. 16 See Rule 8.800(b)(6) and (7).

September 3, 2013
III. Specific Request for Relief
For the reasons stated above, the Exchange respectfully requests that the Commission grant an exemption under Section 36(a) of the Act17 such that Broker-Dealer APs and Non-AP Broker-Dealers that participate in the Incentive Program may rely on the SIA Exemption pertaining to Section 11(d)(1) and Rule 11d1-2 thereunder, subject to the conditions provided in that exemption, notwithstanding that Broker-Dealer APs and Non-AP Broker-Dealers may receive LMM Payments as described in this request. Further, the Exchange requests that the Staff grant no-action relief from Section 11(d)(1) and Rule 11d1- 2 thereunder such that Broker-Dealer APs and Non-AP Broker-Dealers that participate in the Incentive Program may rely on the CBETT No-Action Relief pertaining to Section 11(d)(1) and Rule 11d1-2 thereunder, subject to the conditions provided in that exemption, notwithstanding that Broker-Dealer APs and Non-AP Broker-Dealers may receive LMM Payments as described in this request. The exemptive and no-action relief would expire when the Incentive Program terminates, and would be subject to modification or revocation at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Act.

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If you have any questions concerning this request, please contact Sudhir Bhattacharyya at 212.656.2920. Very truly yours, Executive Vice President and Secretary NYSE Euronext 15 U.S.C. 78mm(a). 17