December 14, 2012.
By letter dated December 14, 2012 (the “Letter”),[]
as supplemented by conversations with the staff of the Division of Trading and Markets, counsel for J.P. Morgan Commodity ETF Services LLC (“Sponsor”) on behalf of the Sponsor, JPM XF Physical Copper Trust (“Trust”), and persons or entities engaging in transaction in the shares of the Trust requested that the Securities and Exchange Commission (“Commission”) issue an exemption from Rules 101 and 102 of Regulation M in connection with secondary market transactions in the shares of the Trust, and the creation or redemption of shares of the Trust.[]
According to the Trust's registration statement, the Trust was formed as a Delaware statutory trust on October 15, 2010. The Trust, based on representations in the Letter, is a passive, unmanaged investment vehicle and will have no directors, officers, or employees. Additionally, the Letter represents that the Trust is an exchange-traded investment vehicle that will hold only Grade A Copper in physical form. The Letter also states that each share of the Trust represents a fractional undivided interest in the net assets of the Trust (“Share”). The Trust's investment objective, according to the Letter, is for the value of the Shares to reflect, at any given time, the value of copper owned by the Trust less the Trust's expenses and liabilities at that time.
The Letter contains the following representations:
- Shares of the Trust will trade on a national securities exchange.[]
- Shares will be issued and redeemed in basket-size aggregations (“Creation Units”) to registered broker-dealers or certain other persons that have entered into a participation agreement with the Trust and the Sponsor (“Authorized Participants”).
- Creation Units will be issued and redeemed daily in exchange for a specified amount of physical metal that represents a pro rata share of the metal then held in the Trust.
- The Sponsor does not expect the difference in price based on the locational premia to be significant.[]
- The Sponsor believes that the copper selection protocol,[]
the independent third-party valuation agent,[]
and information transparency measures []
will cause the price of Shares in the secondary market to closely track the net asset value per Share of the Trust.
- The Trust will continuously redeem baskets of Shares at net asset value expressed as a pro rata portion of the weight of copper held by the Trust.
- The Sponsor states that it believes that, because Authorized Participants have full, transparent information about the Trust's copper, including the locational premium and the brand for each lot of copper held by the Trust and whether the brand of any such lot is or has ceased to be an Acceptable Delivery Brand,[]
factors such as locational premia and de-registering of copper will not impair the price alignment process or the arbitrage mechanism.[]
- NYSE Arca will calculate and disseminate, approximately every 15 seconds during the Exchange's core trading session, two different intraday indicative values for the Shares: the First-Out IIV and the Liquidation IIV.[]
- Authorized Participants can generally expect to receive copper from the cheapest-to-deliver location whenever they redeem Creation Units of Shares and are expected to seek to create Creation Units of Shares by transferring copper from the cheapest-to-deliver location at which they have copper available.[]
- Arbitrage activity by Authorized Participants is expected to result in the Shares trading within a limited range, with the lower end of that range approximating the first-out intraday indicative value and the higher end of that range approximating the value of copper in the cheapest-to-deliver location at which the Authorized Participants have copper available.[]
Rule 101 of Regulation M
Generally, Rule 101 of Regulation M is an anti-manipulation regulation that, subject to certain exemptions, prohibits any “distribution participant” and its “affiliated purchasers” from bidding for, purchasing, or attempting to induce any person to bid for or purchase, any security which is the subject of a distribution until after the applicable restricted period, except as specifically permitted in the rule. Rule 100 of Regulation M defines “distribution” to mean any offering of securities that is distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods. The provisions of Rule 101 of Regulation M apply to underwriters, prospective underwriters, brokers, dealers, or other persons who have agreed to participate or are participating in a distribution of securities, and affiliated purchasers of such persons. Shares of the Trust are in a continuous distribution and, as such, the restricted period in which distribution participants and their affiliated purchasers are prohibited from bidding for, purchasing, or attempting to induce others to bid for or purchase extends indefinitely. As a result, absent an exemption from Rule 101 of Regulation M, the distribution participants would be prohibited from bidding for or purchasing Shares during the distribution without violating Rule 101 of Regulation M.
On the basis of the representations and the facts presented in the Letter, particularly that the Trust will continuously redeem baskets of Shares at net asset value expressed as a pro rata portion of the weight of copper held by the Trust and that the secondary market price of Shares is expected to trade within a limited range with the lower end of that range approximating the first-out intraday indicative value and the higher end of that range approximating the value of copper in the cheapest-to-deliver location at which the Authorized Participants have copper available, the Commission finds that it is appropriate in the public interest, and is consistent with the protection of investors, to grant the Shares of the Trust a limited exemption from Rule 101 of Regulation M pursuant to paragraph (d) thereof,[]
to permit persons participating in the distribution of Shares and their affiliated purchasers to bid for or purchase Shares during their participation in such distribution.[]
In particular, the price alignment process and arbitrage mechanism, which are expected to align the price of the Shares in the secondary market to the copper held by the Trust, should mitigate the potential manipulation concerns that Rule 101 of Regulation M is designed to prevent. Accordingly, granting such relief to the Shares to permit persons participating in the distribution of Shares and their affiliated purchasers to bid for or purchase Shares during their participation in such distribution is appropriate in the public interest, and is consistent with the protection of investors.
Rule 102 of Regulation M
Rule 102 of Regulation M prohibits issuers, selling security holders, or any affiliated purchaser of such persons from bidding for, purchasing, or attempting to induce any person to bid for or purchase a covered security []
during the applicable restricted period in connection with a distribution of securities effected by or on behalf of an issuer or selling security holder, except as specifically permitted in the rule. As a result, absent an exemption from Rule 102 of Regulation M, the Shares could not be redeemed by the Trust without violating Rule 102 of Regulation M.
On the basis of the representations and the facts presented in the Letter, particularly that the Trust will continuously redeem baskets of Shares at net asset value expressed as a pro rata portion of the weight of copper held by the Trust and that the secondary market price of Shares is expected to be within a limited range with the lower end of that range approximating the first-out intraday indicative value and the higher end of that range approximating the value of copper in the cheapest-to-deliver location at which the Authorized Participants have copper available, the Commission finds that it is appropriate in the public interest, and is consistent with the protection of investors, to grant the Shares of the Trust a limited exemption from Rule 102 of Regulation M, pursuant to paragraph (e) thereof,[]
to permit the Trust and any of its affiliated purchasers to redeem Shares during the distribution of the Shares.[]
In particular, the price alignment process and arbitrage mechanism, which are expected to align the price of the Shares in the secondary market to the copper held by the Trust, should mitigate the potential manipulation concerns that Rule 102 of Regulation M is designed to prevent. Accordingly, granting such relief to the Shares to permit the Trust and any of its affiliated purchasers to redeem Shares during the distribution of the Shares is appropriate in the public interest, and is consistent with the protection of investors.
Conclusion
It is hereby ordered, pursuant to Rule 101(d) of Regulation M, that, based on the representations and facts presented in the Letter, the Shares of the Trust are exempt from the requirements of Rule 101 to permit persons participating in the distribution of Shares of the Trust and their affiliated purchasers to bid for or purchase such Shares during their participation in such distribution.
It is further ordered, pursuant to Rule 102(e) of Regulation M, that, based on the representations and facts presented in the Letter, the Shares of the Trust are exempt from the requirements of Rule 102 to permit the Trust and any of its affiliated purchasers to redeem Shares of the Trust during the distribution of such Shares.
This exemptive relief is subject to modification or revocation at any time the Commission determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act. Persons participating in the distribution of Shares of the Trust shall discontinue creations and redemptions involving the Shares of the Trust, in the event that any material change occurs with respect to any of the facts or representations made by the Trust, the Sponsor, or its counsel. In addition, persons relying on this exemption are directed to the anti-fraud and anti-manipulation provisions of the Exchange Act, particularly Sections 9(a), 10(b), and Rule 10b-5 thereunder. Responsibility for compliance with these and any other applicable provisions of the federal securities laws and rules must rest with the persons relying on this exemption. This order does not represent the Commission views with respect to any other question that the proposed transactions may raise, including, but not limited to the adequacy of the disclosure concerning, and the applicability of other federal or state laws and rules to, the proposed transactions.
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30646 Filed 12-19-12; 8:45 am]
BILLING CODE 8011-01-P