Self-Regulatory Organizations; BATS Exchange, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3 Thereto, To List and Trade Shares of the Elkhorn S&P GSCI Dynamic Roll Commodity ETF of Elkhorn ETF Trust, 20016-20021 [2016-07832]
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asabaliauskas on DSK3SPTVN1PROD with NOTICES
20016
Federal Register / Vol. 81, No. 66 / Wednesday, April 6, 2016 / Notices
8. Each Underlying Fund will
maintain and preserve permanently in
an easily accessible place a written copy
of the procedures described in the
preceding condition, and any
modifications to such procedures, and
will maintain and preserve for a period
of not less than six years from the end
of the fiscal year in which any purchase
in an Affiliated Underwriting occurred,
the first two years in an easily accessible
place, a written record of each purchase
of securities in Affiliated Underwritings
once an investment by a Fund of Funds
in the securities of the Underlying Fund
exceeds the limit of section
12(d)(1)(A)(i) of the Act, setting forth
from whom the securities were
acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the determinations of the Board of the
Underlying Fund were made.
9. Before investing in an Underlying
Fund in excess of the limit in section
12(d)(1)(A), a Fund of Funds and the
Trust will execute a FOF Participation
Agreement stating, without limitation,
that their respective boards of directors
or trustees and their investment
advisers, or trustee and Sponsor, as
applicable, understand the terms and
conditions of the order, and agree to
fulfill their responsibilities under the
order. At the time of its investment in
Underlying Fund Shares in excess of the
limit in section 12(d)(1)(A)(i), a Fund of
Funds will notify the Underlying Fund
of the investment. At such time, the
Fund of Funds will also transmit to the
Underlying Fund a list of the names of
each Fund of Funds Affiliate and
Underwriting Affiliate. The Fund of
Funds will notify the Underlying Fund
of any changes to the list of the names
as soon as reasonably practicable after a
change occurs. The Underlying Fund
and the Fund of Funds will maintain
and preserve a copy of the order, the
FOF Participation Agreement, and the
list with any updated information for
the duration of the investment and for
a period of not less than six years
thereafter, the first two years in an
easily accessible place.
10. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company
including a majority of the disinterested
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
under the advisory contract(s) of any
Underlying Fund in which the Investing
Management Company may invest.
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These findings and their basis will be
fully recorded in the minute books of
the appropriate Investing Management
Company.
11. Any sales charges and/or service
fees charged with respect to shares of a
Fund of Funds will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
12. No Underlying Fund will acquire
securities of an investment company or
company relying on section 3(c)(1) or
3(c)(7) of the Act in excess of the limits
contained in section 12(d)(1)(A) of the
Act, except to the extent the Underlying
Fund acquires securities of another
investment company pursuant to
exemptive relief from the Commission
permitting the Underlying Fund to
acquire securities of one or more
investment companies for short-term
cash management purposes.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–07835 Filed 4–5–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77487; File No. SR–BATS–
2015–105]
Self-Regulatory Organizations; BATS
Exchange, Inc.; Order Granting
Approval of Proposed Rule Change, as
Modified by Amendment Nos. 1, 2, and
3 Thereto, To List and Trade Shares of
the Elkhorn S&P GSCI Dynamic Roll
Commodity ETF of Elkhorn ETF Trust
March 31, 2016.
I. Introduction
On December 18, 2015, BATS
Exchange, Inc. (‘‘Exchange’’ or ‘‘BATS’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the Elkhorn S&P GSCI
Dynamic Roll Commodity ETF (‘‘Fund’’)
of Elkhorn ETF Trust (‘‘Trust’’) under
BATS Rule 14.11(i). The proposed rule
change was published for comment in
the Federal Register on January 4,
2016.3 On February 17, 2016, pursuant
to Section 19(b)(2) of the Act,4 the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 76776
(Dec. 28, 2015), 81 FR 120 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
2 17
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Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On February 18,
2016, the Exchange filed Amendment
No. 1 to the proposed rule change.6 On
February 24, 2016, the Exchange filed
Amendment No. 2 to the proposed rule
change.7 On March 22, 2016, the
Exchange filed Amendment No. 3 to the
proposed rule change.8 The Commission
received no comments on the proposal.
This order grants approval of the
proposed rule change, as modified by
Amendment Nos. 1, 2, and 3 thereto.
5 See Securities Exchange Act Release No. 77159,
81 FR 9041 (Feb. 23, 2016). The Commission
designated April 1, 2016 as the date by which the
Commission shall either approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change. See id.
6 In Amendment No. 1, which amended and
replaced the proposed rule change in its entirety,
the Exchange clarified the scope of the nonexchange-traded investment companies, futures,
and exchange-traded options on futures to be held
by the Fund and the Subsidiary. Because
Amendment No. 1 to the proposed rule change does
not materially alter the substance of the proposed
rule change or raise unique or novel regulatory
issues, Amendment No. 1 is not subject to notice
and comment (Amendment No. 1 to the proposed
rule change is available at: https://www.sec.gov/
comments/sr-bats-2015–105/bats2015105–2.pdf).
7 In Amendment No. 2, which amended and
replaced the proposed rule change, as modified by
Amendment No. 1 thereto, in its entirety, the
Exchange clarified: (a) That the Fund and the
Subsidiary would not invest in leveraged or inverse
leveraged securities of investment companies; (b)
that the commodity-linked instruments in which
the Fund invests will be listed and traded in the
U.S. on registered exchanges; (c) that, for
surveillance, the Exchange would be able to obtain
information regarding trading in the underlying
commodity-linked instruments; and (d) the scope of
exchange-traded options on futures contracts to be
held by the Fund and Subsidiary. Because
Amendment No. 2 to the proposed rule change does
not materially alter the substance of the proposed
rule change or raise unique or novel regulatory
issues, Amendment No. 2 is not subject to notice
and comment (Amendment No. 2 to the proposed
rule change is available at: https://www.sec.gov/
comments/sr-bats-2015–105/bats2015105–1.pdf).
8 In Amendment No. 3 to the proposed rule
change, the Exchange clarified that: (a) All
statements and representations made in the
proposal shall constitute continued listing
requirements for listing the Shares on the Exchange;
(b) the issuer will advise the Exchange of any
failure by the Fund to comply with the continued
listing requirements; (c) pursuant to its obligations
under Section 19(g)(1) of the Act, the Exchange will
surveil for compliance with the continued listing
requirements; and (d) if the Fund is not in
compliance with the applicable listing
requirements, the Exchange will commence
delisting procedures under Exchange Rule 14.12.
Because Amendment No. 3 does not materially alter
the substance of the proposed rule change or raise
unique or novel regulatory issues, Amendment No.
3 is not subject to notice and comment
(Amendment No. 3 to the proposed rule change is
available at: https://www.sec.gov/comments/sr-bats2015-105/bats2015105-3.pdf).
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Federal Register / Vol. 81, No. 66 / Wednesday, April 6, 2016 / Notices
II. Exchange’s Description of the
Proposed Rule Change
The Exchange proposes to list and
trade the Shares of the Fund pursuant
to BATS Rule 14.11(i), which governs
the listing and trading of Managed Fund
Shares on the Exchange. The Shares will
be offered by the Trust, which was
established as a Massachusetts business
trust on December 12, 2013.9 Elkhorn
Investments, LLC will be the investment
adviser (‘‘Adviser’’) to the Fund. It is
currently anticipated that day-to-day
portfolio management for the Fund will
be provided by the Adviser. However,
the Fund and the Adviser may contract
with an investment sub-adviser (‘‘SubAdviser’’) to provide day-to-day
portfolio management for the Fund.
ALPS Distributors, Inc. will be the
principal underwriter and distributor of
the Fund’s Shares. The Fund will
contract with unaffiliated third parties
to provide administrative, custodial and
transfer agency services to the Fund.
The Exchange represents the Adviser is
not a broker-dealer, but is affiliated with
a broker-dealer, and it has implemented
a fire wall with respect to its brokerdealer affiliate regarding access to
information concerning the composition
of, or changes to, the Fund’s portfolio.10
A. Exchange’s Description of the Fund’s
Investments 11
According to the Exchange, the
Fund’s investment objective will be to
provide total return which exceeds that
of the S&P GSCI Dynamic Roll Index
asabaliauskas on DSK3SPTVN1PROD with NOTICES
9 The
Exchange represents that the Trust is
registered under the Investment Company Act of
1940 (‘‘1940 Act’’). See Registration Statement on
Form N–1A for the Trust, dated November 10, 2015
(File Nos. 333–201473 and 811–22926)
(‘‘Registration Statement’’). The Exchange further
states that the Trust has obtained certain exemptive
relief under the 1940 Act.
10 See BATS Rule 14.11(i)(7). The Exchange
further represents that, in the event that (a) the
Adviser or a Sub-Adviser becomes, or becomes
newly affiliated with, a broker-dealer or registers as
a broker-dealer, or (b) any new adviser or subadviser is a registered broker-dealer or becomes
affiliated with a broker-dealer, it will implement a
fire wall with respect to its relevant personnel or
such broker-dealer affiliate, as applicable, regarding
access to information concerning the composition
of, or changes to, the portfolio, and will be subject
to procedures designed to prevent the use and
dissemination of material, non-public information
regarding such portfolio.
11 The Commission notes that additional
information regarding the Fund, the Trust, the
Subsidiary (as defined herein), and the Shares,
including investment strategies, risks, creation and
redemption procedures, fees, portfolio holdings
disclosure policies, calculation of net asset value
(‘‘NAV’’), distributions, and taxes, among other
things, can be found in the Notice and the
Registration Statement, as applicable. See Notice
and Registration Statement, supra notes 3 and 9,
respectively.
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(‘‘Benchmark’’) 12 consistent with
prudent investment management.13 The
Fund will seek excess return above the
Benchmark through the active
management of a short duration
portfolio of highly liquid, high quality
bonds.
The Fund will be an actively managed
fund that seeks to achieve its investment
objective by investing, under normal
market conditions,14 in exchange-traded
commodity futures contracts, centrally
cleared and non-centrally cleared
swaps,15 exchange-traded options on
futures contracts, and exchange-traded
commodity-linked instruments 16
(collectively, ‘‘Commodities’’) through a
wholly-owned subsidiary controlled by
the Fund and organized under the laws
of the Cayman Islands (‘‘Subsidiary’’),
thereby obtaining exposure to the
commodities markets.
The Fund’s Commodities
investments, in part, will be comprised
of exchange-traded futures contracts on
commodities that comprise the
12 The Benchmark is developed, maintained, and
sponsored by S&P Dow Jones Indices LLC (‘‘S&P
Indices’’).
13 According to the Exchange, the Benchmark
currently contains 24 commodity futures on
physical commodities across five sectors: energy,
agriculture; livestock; industrial metals; and
precious metals. See Notice, supra note 3
(providing additional information regarding the
Benchmark and its components, including a table
describing each of the commodities underlying the
futures contracts included in the Benchmark as of
October 31, 2015, and each instrument’s trading
hours, exchange, and ticker symbol).
14 The term ‘‘under normal market conditions’’
includes, but is not limited to, the absence of
extreme volatility or trading halts in the fixed
income markets, futures markets or the financial
markets generally; operational issues causing
dissemination of inaccurate market information; or
force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed
conflict, act of terrorism, riot or labor disruption, or
any similar intervening circumstance.
15 Investments in non-centrally cleared swaps
(through the Subsidiary) will not represent more
than 20% of the Fund’s net assets. When investing
in non-centrally cleared swaps, the Subsidiary will
seek, where possible, to use counterparties, as
applicable, whose financial status is such that the
risk of default is reduced; however, the risk of
losses resulting from default is still possible. The
Adviser and/or a Sub-Adviser will evaluate the
creditworthiness of counterparties on an ongoing
basis. In addition to information provided by credit
agencies, the Adviser’s and/or a Sub-Adviser’s
analysis will evaluate each approved counterparty
using various methods of analysis and may consider
such factors as the counterparty’s liquidity, its
reputation, the Adviser’s and/or a Sub-Adviser’s
past experience with the counterparty, its known
disciplinary history and its share of market
participation.
16 Exchange-traded commodity-linked
instruments include only the following: (1) Funds
that provide exposure to commodities as would be
listed under Exchange Rules 14.11(b), (c), and (i);
and (2) pooled investment vehicles that invest
primarily in commodities and commodity-linked
instruments as would be listed under Exchange
Rules 14.11(d) and 14.11(e)(2), (4), (6), (7), (8), (9),
and (10).
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20017
Benchmark. Although the Fund,
through the Subsidiary, will generally
hold many of the futures contracts
included in the Benchmark, the Fund
and the Subsidiary will be actively
managed and will not be obligated to
invest in all of (or to limit investments
solely to) such futures contracts. In
addition, with respect to investments in
exchange-traded futures contracts, the
Fund and the Subsidiary will not be
obligated to invest in the same amount
or proportion as the Benchmark, or be
obligated to track the performance of the
Benchmark. In addition to exchangetraded futures contracts, the Fund’s
Commodities investments will also be
comprised of the following: centrally
cleared and non-centrally cleared swaps
on commodities; exchange-traded
options on futures contracts that
provide exposure to the investment
returns of the commodities markets; and
exchange-traded commodity-linked
instruments, without investing directly
in physical commodities.
The Fund will invest in Commodities
through investments in the Subsidiary
and will not invest directly in physical
commodities. The Fund’s investment in
the Subsidiary may not exceed 25% of
the Fund’s total assets. In addition to
Commodities, the Fund’s assets will be
invested in: (1) short-term, investment
grade fixed income securities, including
only the following instruments: U.S.
government and agency securities,17
corporate debt obligations,18 and
repurchase agreements;19 (2) money
market instruments; 20 (3) investment
17 Such securities are securities that are issued or
guaranteed by the U.S. Treasury, by various
agencies of the U.S. government, or by various
instrumentalities, which have been established or
sponsored by the U.S. government. U.S. Treasury
obligations are backed by the ‘‘full faith and credit’’
of the U.S. government. Securities issued or
guaranteed by federal agencies and U.S.
government-sponsored instrumentalities may or
may not be backed by the full faith and credit of
the U.S. government.
18 At least 75% of corporate debt obligations will
have a minimum principal amount outstanding of
$100 million or more.
19 The Fund intends to enter into repurchase
agreements only with financial institutions and
dealers believed by the Adviser and/or a SubAdviser to present minimal credit risks in
accordance with criteria approved by the Trust’s
Board of Trustees (‘‘Board’’). The Adviser and/or a
Sub-Adviser will review and monitor the
creditworthiness of such institutions. The Adviser
and/or a Sub-Adviser will monitor the value of the
collateral at the time the transaction is entered into
and at all times during the term of the repurchase
agreement.
20 For the Fund’s purposes, money market
instruments will include only the following
instruments: short-term, high-quality securities
issued or guaranteed by non-U.S. governments,
agencies and instrumentalities; non-convertible
corporate debt securities with remaining maturities
of not more than 397 days that satisfy ratings
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06APN1
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Federal Register / Vol. 81, No. 66 / Wednesday, April 6, 2016 / Notices
companies (other than those that are
commodity-linked instruments),21
including both exchange traded and
non-exchange-traded investment
companies, that provide exposure to
commodities, equity securities, and
fixed income securities to the extent
permitted under the 1940 Act and any
applicable exemptive relief; 22 (4)
certain bank instruments; 23 and (5) cash
and other cash equivalents (collectively,
‘‘Other Investments’’). The Fund will
use the Other Investments as
investments, to provide liquidity, and to
collateralize the Subsidiary’s
commodity exposure on a day-to-day
basis.
The Fund’s investment in the
Subsidiary will be designed to help the
Fund achieve exposure to commodity
returns in a manner consistent with the
federal tax requirements applicable to
the Fund and other regulated
investment companies. The Fund
intends to qualify for, and to elect to be
treated as, a separate regulated
investment company under Subchapter
M of the Internal Revenue Code.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
B. Exchange’s Description of the
Subsidiary’s Investments
The Subsidiary will generally seek to
make investments in Commodities, and
requirements under Rule 2a-7 under the 1940 Act;
money market mutual funds; and deposits and
other obligations of U.S. and non-U.S. banks and
financial institutions. In addition, the Fund may
invest in commercial paper (short-term unsecured
promissory notes), but only if the commercial paper
has received the highest rating from at least one
nationally recognized statistical rating organization
or, if unrated, has been judged by the Adviser and/
or a Sub-Adviser to be of comparable quality.
21 According to the Exchange, the Fund may
invest in the securities of certain other investment
companies in excess of the limits imposed under
the 1940 Act pursuant to an exemptive order
obtained by the Trust and the Adviser from the
Commission. The exchange-traded investment
companies in which the Fund may invest include
Index Fund Shares (as described in Rule 14.11(c)),
Portfolio Depository Receipts (as described in Rule
14.11(b)), and Managed Fund Shares (as described
in Rule 14.11(i)). The non-exchange-traded
investment companies in which the Fund may
invest include all non-exchange-traded investment
companies that are not money market mutual funds,
as described above. While the Fund and the
Subsidiary may invest in inverse commodity-linked
instruments and securities of investment
companies, the Fund and the Subsidiary will not
invest in leveraged or inverse leveraged (e.g., 2X or
-3X) commodity-linked instruments or securities of
investment companies.
22 The exchange-traded investment companies
and commodity-linked instruments in which the
Fund invests will be listed and traded in the U.S.
on registered exchanges.
23 The term ‘‘certain bank instruments’’ includes
only the following instruments: certificates of
deposit issued against funds deposited in a bank or
savings and loan association; bankers’ acceptances,
which are short-term credit instruments used to
finance commercial transactions; and bank time
deposits, which are monies kept on deposit with
banks or savings and loan associations for a stated
period of time at a fixed rate of interest.
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Jkt 238001
its portfolio will be managed by the
Adviser or a Sub-Adviser.24 The Adviser
or a Sub-Adviser will use its discretion
to determine the percentage of the
Fund’s assets allocated to the
Commodities held by the Subsidiary
that will be invested in exchange-traded
commodity futures contracts, centrally
cleared and non-centrally cleared
swaps, exchange-traded options on
futures contracts, and exchange-traded
commodity-linked instruments. In this
regard, under normal market conditions,
the Subsidiary is expected, as a general
matter, to invest in futures contracts in
proportional weights and allocations
that are similar to the Benchmark, as
well as in the other Commodities.
Additionally, the Subsidiary, like the
Fund, may invest in Other Investments
(e.g., as investments, to serve as margin
or collateral, or to otherwise support the
Subsidiary’s positions in Commodities).
The Fund’s investment in the
Subsidiary is intended to provide the
Fund with exposure to commodity
markets within the limits of current
federal income tax laws applicable to
investment companies such as the
Fund, which limit the ability of
investment companies to invest directly
in the derivative instruments. The
Subsidiary will have the same
investment objective as the Fund, but
unlike the Fund, it may invest without
limitation in Commodities. The
Subsidiary’s investments will provide
the Fund with exposure to domestic and
international markets.
C. Exchange’s Description of
Commodities Regulation
The Commodity Futures Trading
Commission (‘‘CFTC’’) has adopted
substantial amendments to CFTC Rule
4.5 relating to the permissible
exemptions and conditions for reliance
on exemptions from registration as a
commodity pool operator. As a result of
the instruments that will be indirectly
held by the Fund, the Adviser will
register as a commodity pool operator
and will also become a member of the
24 The Exchange states that the Subsidiary will
not be registered under the 1940 Act and will not
be directly subject to its investor protections, except
as noted in the Registration Statement. However,
the Subsidiary will be wholly-owned and
controlled by the Fund. Therefore, the Fund’s
ownership and control of the Subsidiary will
prevent the Subsidiary from taking action contrary
to the interests of the Fund or its shareholders. The
Board will have oversight responsibility for the
investment activities of the Fund, including its
expected investment in the Subsidiary, and the
Fund’s role as the sole shareholder of the
Subsidiary. The Subsidiary will also enter into
separate contracts for the provision of custody,
transfer agency, and accounting agent services with
the same or with affiliates of the same service
providers that provide those services to the Fund.
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Frm 00068
Fmt 4703
Sfmt 4703
National Futures Association (‘‘NFA’’).
Any Sub-Adviser will register as a
commodity pool operator or commodity
trading adviser, as required by CFTC
regulations. The Fund and the
Subsidiary will be subject to regulation
by the CFTC and NFA and additional
disclosure, reporting, and recordkeeping
rules imposed upon commodity pools.
D. Exchange’s Description of the Fund’s
Investment Restrictions
While the Fund will be permitted to
borrow as permitted under the 1940 Act,
the Fund’s investments will not be used
to seek performance that is the multiple
or inverse multiple (i.e., 2X and –3X) of
the Benchmark. In addition, the Fund
may not invest more than 25% of the
value of its total assets in securities of
issuers in any one industry or group of
industries. This restriction will not
apply to obligations issued or
guaranteed by the U.S. government, its
agencies or instrumentalities, or
securities of other investment
companies.
The Subsidiary’s shares will be
offered only to the Fund, and the Fund
will not sell shares of the Subsidiary to
other investors. The Fund and the
Subsidiary will not invest in any nonU.S. equity securities (other than shares
of the Subsidiary). The Fund will not
purchase securities of open-end or
closed-end investment companies,
except in compliance with the 1940 Act
or any applicable exemptive relief. In
addition, the Exchange represents that,
with respect to the futures contracts and
exchange-traded options on futures
contracts in which the Subsidiary
invests, not more than 10% of the
weight (to be calculated as the value of
the contract divided by the total
absolute notional value of the
Subsidiary’s futures and options
contracts) of the futures and options
contracts held by the Subsidiary, in the
aggregate, shall consist of instruments
whose principal trading market is a
market from which the Exchange may
not obtain information regarding trading
in the futures contracts and exchangetraded options on futures contracts by
virtue of: (a) Its membership in the
Intermarket Surveillance Group (‘‘ISG’’);
or (b) a comprehensive surveillance
sharing agreement.
The Fund may hold up to an aggregate
amount of 15% of its net assets in
illiquid assets (calculated at the time of
investment), including securities
deemed illiquid by the Adviser.25 The
25 In reaching liquidity decisions, the Adviser
may consider the following factors: The frequency
of trades and quotes for the security; the number of
dealers wishing to purchase or sell the security and
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06APN1
Federal Register / Vol. 81, No. 66 / Wednesday, April 6, 2016 / Notices
Fund will monitor its portfolio liquidity
on an ongoing basis to determine
whether, in light of current
circumstances, an adequate level of
liquidity is being maintained, and will
consider taking appropriate steps in
order to maintain adequate liquidity if,
through a change in values, net assets,
or other circumstances, more than 15%
of the Fund’s net assets are held in
illiquid assets. Illiquid assets include
securities subject to contractual or other
restrictions on resale and other
instruments that lack readily available
markets, as determined in accordance
with Commission staff guidance.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
III. Discussion and Commission’s
Findings
The Commission has carefully
reviewed the proposed rule change and
finds that it is consistent with the
requirements of Section 6 of the Act 26
and the rules and regulations
thereunder applicable to a national
securities exchange.27 In particular, the
Commission finds that the proposal is
consistent with Section 6(b)(5) of the
Act,28 which requires, among other
things, that the Exchange’s rules be
designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The Commission also finds that the
proposal is consistent with Section
11A(a)(1)(C)(iii) of the Act,29 which sets
forth the finding of Congress that it is in
the public interest and appropriate for
the protection of investors and the
maintenance of fair and orderly markets
to assure the availability to brokers,
dealers, and investors of information
with respect to quotations for, and
transactions in, securities. Quotation
and last-sale information for the Shares
will be available on the facilities of the
Consolidated Tape Association
(‘‘CTA’’). An estimated value, defined in
BATS Rule 14.11(i)(3)(C) as the Intraday
the number of other potential purchasers; dealer
undertakings to make a market in the security; and
the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose
of the security, the method of soliciting offers, and
the mechanics of transfer).
26 15 U.S.C. 78f.
27 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
28 15 U.S.C. 78f(b)(5).
29 15 U.S.C. 78k–1(a)(1)(C)(iii).
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Indicative Value (‘‘IIV’’), that reflects an
estimated intraday value of the Fund’s
portfolio (including the Subsidiary’s
portfolio), will be disseminated. The IIV
will be based upon the current value for
the components of the Disclosed
Portfolio (as defined below) and will be
updated and widely disseminated by
one or more major market data vendors
and broadly displayed at least every 15
seconds during the Exchange’s Regular
Trading Hours.30 On each business day,
before commencement of trading in
Shares during Regular Trading Hours,31
the Fund will disclose on its Web site
the identities and quantities of the
portfolio of securities, Commodities,
and other assets (‘‘Disclosed Portfolio’’
as defined in Rule 14.11(i)(3)(B)) held
by the Fund and the Subsidiary that will
form the basis for the Fund’s calculation
of NAV at the end of the business day.32
The NAV of the Fund’s Shares generally
will be calculated once daily Monday
through Friday as of the close of regular
trading on the New York Stock
Exchange, generally 4:00 p.m. Eastern
Time.33 Additionally, information
30 According to the Exchange, several major
market data vendors display and/or make widely
available Intraday Indicative Values published via
the CTA or other data feeds.
31 Regular Trading Hours are 9:30 a.m. to 4:00
p.m. Eastern Time.
32 According to the Exchange, the Fund’s
disclosure of derivative positions in the Disclosed
Portfolio will include information that market
participants can use to value these positions
intraday. On a daily basis, the Disclosed Portfolio
displayed on the Fund’s Web site will include the
following information regarding each portfolio
holding, as applicable to the type of holding: Ticker
symbol, CUSIP number or other identifier, if any;
a description of the holding (including the type of
holding, such as the type of swap), the identity of
the security, commodity, or other asset or
instrument underlying the holding, if any; for
options, the option strike price; quantity held (as
measured by, for example, par value, notional
value, or number of shares, contracts, or units);
maturity date, if any; coupon rate, if any; effective
date, if any; market value of the holding; and
percentage weighting of the holding in the Fund’s
portfolio. The Web site and information will be
publicly available at no charge.
33 In determining the value of the assets held by
the Fund and the Subsidiary, the Fund’s and the
Subsidiary’s investments will be generally valued
using market valuations. A market valuation
generally means a valuation (i) obtained from an
exchange, a pricing service, or a major market
maker (or dealer), (ii) based on a price quotation or
other equivalent indication of value supplied by an
exchange, a pricing service, or a major market
maker (or dealer), or (iii) based on amortized cost.
The Fund and the Subsidiary may use various
pricing services or discontinue the use of any
pricing service. A price obtained from a pricing
service based on such pricing service’s valuation
matrix may be considered a market valuation. If
available, debt securities and money market
instruments with maturities of more than 60 days
will typically be priced based on valuations
provided by independent, third party pricing
agents. Such values will generally reflect the last
reported sales price if the security is actively
traded. The third party pricing agents may also
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20019
regarding market price and volume of
the Shares will be continually available
on a real-time basis throughout the day
on brokers’ computer screens and other
electronic services. The previous day’s
closing price and trading volume
information for the Shares will also be
published daily in the financial section
of newspapers. Intra-day executable
price quotations on the securities and
other assets held by the Fund and the
Subsidiary will be available from major
broker-dealer firms or on the exchange
on which they are traded, as applicable.
Intra-day price information on the
securities and other assets held by the
Fund and the Subsidiary will also be
available through subscription services,
value debt securities at an evaluated bid price by
employing methodologies that utilize actual market
transactions, broker supplied valuations, or other
methodologies designed to identify the market
value for such securities. Debt obligations with
remaining maturities of 60 days or less may be
valued on the basis of amortized cost, which
approximates market value. If such prices are not
available, the security will be valued based on
values supplied by independent brokers or by fair
value pricing, as described below. Futures contracts
will be valued at the settlement price established
each day by the board or exchange on which they
are traded. Exchange-traded options will be valued
at the closing price in the market where such
contracts are principally traded. Swaps will be
valued based on valuations provided by
independent, third-party pricing agents. Securities
of non-exchange-traded investment companies will
be valued at NAV. Equity securities listed on a
securities exchange (including exchange-traded
commodity linked instruments and exchangetraded investment companies), market or automated
quotation system for which quotations are readily
available (except for securities traded on The
NASDAQ Stock Market LLC (‘‘NASDAQ’’) and the
London Stock Exchange Alternative Investment
Market (‘‘LSE AIM’’)) will be valued at the last
reported sale price on the primary exchange or
market on which they are traded on the valuation
date (or at approximately 4:00 p.m. Eastern Time if
a security’s primary exchange is normally open at
that time). For a security that trades on multiple
exchanges, the primary exchange will generally be
considered to be the exchange on which the
security generally has the highest volume of trading
activity. If it is not possible to determine the last
reported sale price on the relevant exchange or
market on the valuation date, the value of the
security will be taken to be the most recent mean
between the bid and asked prices on such exchange
or market on the valuation date. Absent both bid
and asked prices on such exchange, the bid price
may be used. For securities traded on NASDAQ or
LSE AIM, the official closing price will be used. If
such prices are not available, the security will be
valued based on values supplied by independent
brokers or by fair value pricing, as described below.
The prices for foreign instruments will be reported
in local currency and converted to U.S. dollars
using currency exchange rates. Exchange rates will
be provided daily by recognized independent
pricing agents. In the event that current market
valuations are not readily available or such
valuations do not reflect current market values, the
affected investments will be valued using fair value
pricing pursuant to the pricing policy and
procedures approved by the Board in accordance
with the 1940 Act. Fair value pricing may require
subjective determinations about the value of an
asset and may result in prices that differ from the
value that would be realized if the asset was sold.
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asabaliauskas on DSK3SPTVN1PROD with NOTICES
such as Bloomberg and Thomson
Reuters, which can be accessed by
authorized participants and other
investors.34 Daily trading volume
information for the Fund will also be
available in the financial section of
newspapers, through subscription
services such as Bloomberg, Thomson
Reuters, and International Data
Corporation, which can be accessed by
authorized participants and other
investors, as well as through other
electronic services, including major
public Web sites. The Fund’s Web site
will include a form of the prospectus for
the Fund and additional data relating to
NAV and other applicable quantitative
information. Information relating to the
Benchmark, including its constituents,
weightings, and changes to its
constituents, will be available on the
Web site of S&P Indices.
The Commission further believes that
the proposal to list and trade the Shares
is reasonably designed to promote fair
disclosure of information that may be
necessary to price the Shares
appropriately and to prevent trading
when a reasonable degree of
transparency cannot be assured. The
Commission notes that the Exchange
will obtain a representation from the
issuer of the Shares that the NAV per
Share will be calculated daily, and that
the NAV and the Disclosed Portfolio
will be made available to all market
participants at the same time.35 Trading
in the Shares also will be subject to
BATS Rule 14.11(i)(4)(B)(iv), which sets
forth circumstances under which Shares
of the Fund may be halted.36 The
Exchange may halt trading in the Shares
if trading is not occurring in the
securities, Commodities, or other assets
constituting the Disclosed Portfolio of
the Fund and the Subsidiary, or if other
unusual conditions or circumstances
detrimental to the maintenance of a fair
34 More specifically, the Exchange represents that
pricing information for exchange-traded commodity
futures contracts, exchange-traded options on
futures contracts, exchange-traded commoditylinked instruments, exchange-traded investment
companies other than exchange-traded commoditylinked instruments will be available on the
exchanges on which they are traded and through
subscription services. Pricing information for
securities of non-exchange-traded investment
companies will be available through the applicable
fund’s Web site or major market data vendors.
Pricing information for swaps, fixed income
securities, and money market instruments will be
available through subscription services, brokerdealer firms, and/or pricing services. Additionally,
the Trade Reporting and Compliance Engine
(‘‘TRACE’’) of the Financial Industry Regulatory
Authority (‘‘FINRA’’) will be a source of price
information for certain fixed income securities held
by the Fund.
35 See BATS Rule 14.11(i)(4)(A)(ii).
36 See BATS Rule 14.11(i)(4)(B)(iv).
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and orderly market are present.37
Further, the Commission notes that the
Reporting Authority that provides the
Disclosed Portfolio must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material, non-public
information regarding the actual
components of the portfolio.38 The
Exchange states that it prohibits the
distribution of material, non-public
information by its employees. The
Exchange also represents that the
Adviser is affiliated with a brokerdealer, and the Adviser has
implemented a fire wall with respect to
that broker-dealer affiliate regarding
access to information concerning the
composition of, or changes to, the
Fund’s portfolio.39 Moreover, the
Exchange represents that it may obtain
information regarding trading in the
Shares and the underlying shares in
exchange-traded investment companies,
commodity-linked instruments, futures,
and options on futures via ISG, from
other exchanges who are members or
affiliates of ISG, or with which the
Exchange has entered into a
comprehensive surveillance sharing
agreement.
The Exchange further represents that
the Shares are deemed to be equity
37 See BATS Rule 14.11(i)(4)(B)(iii) (providing
additional considerations for the suspension of
trading in or removal from listing of Managed Fund
Shares on the Exchange). With respect to trading
halts, the Exchange may consider all relevant
factors in exercising its discretion to halt or
suspend trading in the Shares of the Fund. The
Exchange will halt trading in the Shares under the
conditions specified in BATS Rule 11.18. Trading
also may be halted because of market conditions or
for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
38 See BATS Rule 14.11(i)(4)(B)(ii)(B).
39 See supra note 10 and accompanying text. An
investment adviser to an open-end fund is required
to be registered under the Investment Advisers Act
of 1940 (‘‘Advisers Act’’). As a result, the Adviser
and any Sub-Adviser and their related personnel
are subject to the provisions of Rule 204A–1 under
the Advisers Act relating to codes of ethics. This
Rule requires investment advisers to adopt a code
of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with
other applicable securities laws. Accordingly,
procedures designed to prevent the communication
and misuse of non-public information by an
investment adviser must be consistent with Rule
204A–1 under the Advisers Act. In addition, Rule
206(4)–7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment
advice to clients unless such investment adviser has
(i) adopted and implemented written policies and
procedures reasonably designed to prevent
violation, by the investment adviser and its
supervised persons, of the Advisers Act and the
Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review
regarding the adequacy of the policies and
procedures established pursuant to subparagraph (i)
above and the effectiveness of their
implementation; and (iii) designated an individual
(who is a supervised person) responsible for
administering the policies and procedures adopted
under subparagraph (i) above.
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securities, thus rendering trading in the
Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. In support of this
proposal, the Exchange has made
representations, including:
(1) The Shares will be subject to
BATS Rule 14.11(i), which sets forth the
initial and continued listing criteria
applicable to Managed Fund Shares.
(2) The Exchange has appropriate
rules to facilitate transactions in the
Shares during all trading sessions.
(3) The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws.
Trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, including Managed
Fund Shares.
(4) The Exchange will communicate
as needed regarding trading in the
Shares and in the exchange-traded
Commodities and exchange-traded
investment companies not included
within the definition of Commodities
(together, ‘‘Exchange Traded
Instruments’’) held by the Fund and the
Subsidiary with other markets and other
entities that are members of ISG and
may obtain trading information
regarding trading in the Shares and in
the Exchange Traded Instruments held
by the Fund and the Subsidiary from
such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares and in the Exchange Traded
Instruments held by the Fund and the
Subsidiary from markets and other
entities that are members of ISG, which
includes securities and futures
exchanges, or with which the Exchange
has in place a comprehensive
surveillance sharing agreement. The
Exchange also will be able to access, as
needed, trade information for certain
fixed income securities held by the
Fund reported to FINRA’s TRACE.
(5) With respect to the futures
contracts and exchange-traded options
on futures contracts in which the
Subsidiary invests, not more than 10%
of the weight (to be calculated as the
value of the contract divided by the total
absolute notional value of the
Subsidiary’s futures and options
contracts) of the futures and options
contracts held by the Subsidiary, in the
aggregate, shall consist of instruments
whose principal trading market is a
market from which the Exchange may
not obtain information regarding trading
in the futures contracts and exchange-
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Federal Register / Vol. 81, No. 66 / Wednesday, April 6, 2016 / Notices
traded options on futures contracts by
virtue of: (a) Its membership in ISG; or
(b) a comprehensive surveillance
sharing agreement.
(6) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular
(‘‘Circular’’) of the special
characteristics and risks associated with
trading the Shares. Specifically, the
Circular will discuss the following: (a)
The procedures for purchases and
redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (b) BATS Rule 3.7, which
imposes suitability obligations on
Exchange members with respect to
recommending transactions in the
Shares to customers; (c) how
information regarding the IIV and the
Disclosed Portfolio is disseminated; (d)
the risks involved in trading the Shares
during the Pre-Opening 40 and After
Hours Trading Sessions 41 when an
updated IIV will not be calculated or
publicly disseminated; (e) the
requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (f) trading information.
(7) For initial and continued listing,
the Fund and the Subsidiary must be in
compliance with Rule 10A–3 under the
Act.42
(8) The Fund may hold up to an
aggregate amount of 15% of its net
assets in illiquid assets (calculated at
the time of investment), including
securities deemed illiquid by the
Adviser under the 1940 Act.
(9) The Fund will invest in
Commodities through investments in
the Subsidiary and will not invest
directly in physical commodities. The
Fund’s investment in the Subsidiary
may not exceed 25% of the Fund’s total
assets. The Fund and the Subsidiary
will not invest in any non-U.S. equity
securities (other than shares of the
Subsidiary).
(10) Investments in non-centrally
cleared swaps (through the Subsidiary)
will not represent more than 20% of the
Fund’s net assets.
(11) At least 75% of corporate debt
obligations will have a minimum
principal amount outstanding of $100
million or more. In addition, the
exchange-traded investment companies
and commodity-linked instruments in
which the Fund invests will be listed
and traded in the U.S. on registered
exchanges.
40 The
Pre-Opening Session is from 8:00 a.m. to
9:30 a.m. Eastern Time.
41 The After Hours Trading Session is from 4:00
p.m. to 5:00 p.m. Eastern Time.
42 See 17 CFR 240.10A–3.
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(12) While the Fund will be permitted
to borrow as permitted under the 1940
Act, the Fund’s investments will not be
used to seek performance that is the
multiple or inverse multiple (i.e., 2X
and ¥3X) of the Benchmark.
(13) A minimum of 100,000 Shares
will be outstanding at the
commencement of trading on the
Exchange.
The Exchange represents that all
statements and representations made in
the filing regarding (a) the description of
the portfolio, (b) limitations on portfolio
holdings or reference assets, or (c) the
applicability of Exchange rules and
surveillance procedures constitute
continued listing requirements for
listing the Shares on the Exchange. In
addition, the issuer has represented to
the Exchange that it will advise the
Exchange of any failure by the Fund to
comply with the continued listing
requirements, and, pursuant to its
obligations under Section 19(g)(1) of the
Act, the Exchange will surveil for
compliance with the continued listing
requirements. If the Fund is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
Exchange Rule 14.12. This approval
order is based on all of the Exchange’s
representations and description of the
Fund, including those set forth above
and in the Notice. The Commission
notes that the Fund and the Shares must
comply with the requirements of BATS
Rule 14.11(i), including those set forth
in this proposed rule change, to be
listed and traded on the Exchange on an
initial and continuing basis.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 1, 2, and 3 thereto, is consistent
with Section 6(b)(5) of the Act 43 and the
rules and regulations thereunder
applicable to a national securities
exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,44 that the
proposed rule change (SR–BATS–2015–
105), as modified by Amendment Nos.
1, 2, and 3 thereto, be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.45
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–07832 Filed 4–5–16; 8:45 am]
BILLING CODE 8011–01–P
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
45 17 CFR 200.30–3(a)(12).
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–77488; File No. SR–
ISEGemini–2016–03]
Self-Regulatory Organizations; ISE
Gemini, LLC; Notice of Filing of
Proposed Rule Change Related to
Market Wide Risk Protection
March 31, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that, on March
17, 2016, the ISE Gemini, LLC (the
‘‘Exchange’’ or ‘‘ISE Gemini’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change, as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to introduce
new activity based order protections as
described in more detail below. The text
of the proposed rule change is available
on the Exchange’s Web site (https://
www.ise.com), at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to introduce new risk
protections for orders designed to aid
members in their risk management by
supplementing current price
43 15
44 15
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1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
06APN1
]]>Agencies
[Federal Register Volume 81, Number 66 (Wednesday, April 6, 2016)]
[Notices]
[Pages 20016-20021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07832]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77487; File No. SR-BATS-2015-105]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Granting Approval of Proposed Rule Change, as Modified by Amendment
Nos. 1, 2, and 3 Thereto, To List and Trade Shares of the Elkhorn S&P
GSCI Dynamic Roll Commodity ETF of Elkhorn ETF Trust
March 31, 2016.
I. Introduction
On December 18, 2015, BATS Exchange, Inc. (``Exchange'' or
``BATS'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
Elkhorn S&P GSCI Dynamic Roll Commodity ETF (``Fund'') of Elkhorn ETF
Trust (``Trust'') under BATS Rule 14.11(i). The proposed rule change
was published for comment in the Federal Register on January 4,
2016.\3\ On February 17, 2016, pursuant to Section 19(b)(2) of the
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On February 18, 2016, the Exchange filed
Amendment No. 1 to the proposed rule change.\6\ On February 24, 2016,
the Exchange filed Amendment No. 2 to the proposed rule change.\7\ On
March 22, 2016, the Exchange filed Amendment No. 3 to the proposed rule
change.\8\ The Commission received no comments on the proposal. This
order grants approval of the proposed rule change, as modified by
Amendment Nos. 1, 2, and 3 thereto.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 76776 (Dec. 28,
2015), 81 FR 120 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 77159, 81 FR 9041
(Feb. 23, 2016). The Commission designated April 1, 2016 as the date
by which the Commission shall either approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change. See id.
\6\ In Amendment No. 1, which amended and replaced the proposed
rule change in its entirety, the Exchange clarified the scope of the
non-exchange-traded investment companies, futures, and exchange-
traded options on futures to be held by the Fund and the Subsidiary.
Because Amendment No. 1 to the proposed rule change does not
materially alter the substance of the proposed rule change or raise
unique or novel regulatory issues, Amendment No. 1 is not subject to
notice and comment (Amendment No. 1 to the proposed rule change is
available at: https://www.sec.gov/comments/sr-bats-2015-105/bats2015105-2.pdf).
\7\ In Amendment No. 2, which amended and replaced the proposed
rule change, as modified by Amendment No. 1 thereto, in its
entirety, the Exchange clarified: (a) That the Fund and the
Subsidiary would not invest in leveraged or inverse leveraged
securities of investment companies; (b) that the commodity-linked
instruments in which the Fund invests will be listed and traded in
the U.S. on registered exchanges; (c) that, for surveillance, the
Exchange would be able to obtain information regarding trading in
the underlying commodity-linked instruments; and (d) the scope of
exchange-traded options on futures contracts to be held by the Fund
and Subsidiary. Because Amendment No. 2 to the proposed rule change
does not materially alter the substance of the proposed rule change
or raise unique or novel regulatory issues, Amendment No. 2 is not
subject to notice and comment (Amendment No. 2 to the proposed rule
change is available at: https://www.sec.gov/comments/sr-bats-2015-105/bats2015105-1.pdf).
\8\ In Amendment No. 3 to the proposed rule change, the Exchange
clarified that: (a) All statements and representations made in the
proposal shall constitute continued listing requirements for listing
the Shares on the Exchange; (b) the issuer will advise the Exchange
of any failure by the Fund to comply with the continued listing
requirements; (c) pursuant to its obligations under Section 19(g)(1)
of the Act, the Exchange will surveil for compliance with the
continued listing requirements; and (d) if the Fund is not in
compliance with the applicable listing requirements, the Exchange
will commence delisting procedures under Exchange Rule 14.12.
Because Amendment No. 3 does not materially alter the substance of
the proposed rule change or raise unique or novel regulatory issues,
Amendment No. 3 is not subject to notice and comment (Amendment No.
3 to the proposed rule change is available at: https://www.sec.gov/comments/sr-bats-2015-105/bats2015105-3.pdf).
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[[Page 20017]]
II. Exchange's Description of the Proposed Rule Change
The Exchange proposes to list and trade the Shares of the Fund
pursuant to BATS Rule 14.11(i), which governs the listing and trading
of Managed Fund Shares on the Exchange. The Shares will be offered by
the Trust, which was established as a Massachusetts business trust on
December 12, 2013.\9\ Elkhorn Investments, LLC will be the investment
adviser (``Adviser'') to the Fund. It is currently anticipated that
day-to-day portfolio management for the Fund will be provided by the
Adviser. However, the Fund and the Adviser may contract with an
investment sub-adviser (``Sub-Adviser'') to provide day-to-day
portfolio management for the Fund. ALPS Distributors, Inc. will be the
principal underwriter and distributor of the Fund's Shares. The Fund
will contract with unaffiliated third parties to provide
administrative, custodial and transfer agency services to the Fund. The
Exchange represents the Adviser is not a broker-dealer, but is
affiliated with a broker-dealer, and it has implemented a fire wall
with respect to its broker-dealer affiliate regarding access to
information concerning the composition of, or changes to, the Fund's
portfolio.\10\
---------------------------------------------------------------------------
\9\ The Exchange represents that the Trust is registered under
the Investment Company Act of 1940 (``1940 Act''). See Registration
Statement on Form N-1A for the Trust, dated November 10, 2015 (File
Nos. 333-201473 and 811-22926) (``Registration Statement''). The
Exchange further states that the Trust has obtained certain
exemptive relief under the 1940 Act.
\10\ See BATS Rule 14.11(i)(7). The Exchange further represents
that, in the event that (a) the Adviser or a Sub-Adviser becomes, or
becomes newly affiliated with, a broker-dealer or registers as a
broker-dealer, or (b) any new adviser or sub-adviser is a registered
broker-dealer or becomes affiliated with a broker-dealer, it will
implement a fire wall with respect to its relevant personnel or such
broker-dealer affiliate, as applicable, regarding access to
information concerning the composition of, or changes to, the
portfolio, and will be subject to procedures designed to prevent the
use and dissemination of material, non-public information regarding
such portfolio.
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A. Exchange's Description of the Fund's Investments \11\
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\11\ The Commission notes that additional information regarding
the Fund, the Trust, the Subsidiary (as defined herein), and the
Shares, including investment strategies, risks, creation and
redemption procedures, fees, portfolio holdings disclosure policies,
calculation of net asset value (``NAV''), distributions, and taxes,
among other things, can be found in the Notice and the Registration
Statement, as applicable. See Notice and Registration Statement,
supra notes 3 and 9, respectively.
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According to the Exchange, the Fund's investment objective will be
to provide total return which exceeds that of the S&P GSCI Dynamic Roll
Index (``Benchmark'') \12\ consistent with prudent investment
management.\13\ The Fund will seek excess return above the Benchmark
through the active management of a short duration portfolio of highly
liquid, high quality bonds.
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\12\ The Benchmark is developed, maintained, and sponsored by
S&P Dow Jones Indices LLC (``S&P Indices'').
\13\ According to the Exchange, the Benchmark currently contains
24 commodity futures on physical commodities across five sectors:
energy, agriculture; livestock; industrial metals; and precious
metals. See Notice, supra note 3 (providing additional information
regarding the Benchmark and its components, including a table
describing each of the commodities underlying the futures contracts
included in the Benchmark as of October 31, 2015, and each
instrument's trading hours, exchange, and ticker symbol).
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The Fund will be an actively managed fund that seeks to achieve its
investment objective by investing, under normal market conditions,\14\
in exchange-traded commodity futures contracts, centrally cleared and
non-centrally cleared swaps,\15\ exchange-traded options on futures
contracts, and exchange-traded commodity-linked instruments \16\
(collectively, ``Commodities'') through a wholly-owned subsidiary
controlled by the Fund and organized under the laws of the Cayman
Islands (``Subsidiary''), thereby obtaining exposure to the commodities
markets.
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\14\ The term ``under normal market conditions'' includes, but
is not limited to, the absence of extreme volatility or trading
halts in the fixed income markets, futures markets or the financial
markets generally; operational issues causing dissemination of
inaccurate market information; or force majeure type events such as
systems failure, natural or man-made disaster, act of God, armed
conflict, act of terrorism, riot or labor disruption, or any similar
intervening circumstance.
\15\ Investments in non-centrally cleared swaps (through the
Subsidiary) will not represent more than 20% of the Fund's net
assets. When investing in non-centrally cleared swaps, the
Subsidiary will seek, where possible, to use counterparties, as
applicable, whose financial status is such that the risk of default
is reduced; however, the risk of losses resulting from default is
still possible. The Adviser and/or a Sub-Adviser will evaluate the
creditworthiness of counterparties on an ongoing basis. In addition
to information provided by credit agencies, the Adviser's and/or a
Sub-Adviser's analysis will evaluate each approved counterparty
using various methods of analysis and may consider such factors as
the counterparty's liquidity, its reputation, the Adviser's and/or a
Sub-Adviser's past experience with the counterparty, its known
disciplinary history and its share of market participation.
\16\ Exchange-traded commodity-linked instruments include only
the following: (1) Funds that provide exposure to commodities as
would be listed under Exchange Rules 14.11(b), (c), and (i); and (2)
pooled investment vehicles that invest primarily in commodities and
commodity-linked instruments as would be listed under Exchange Rules
14.11(d) and 14.11(e)(2), (4), (6), (7), (8), (9), and (10).
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The Fund's Commodities investments, in part, will be comprised of
exchange-traded futures contracts on commodities that comprise the
Benchmark. Although the Fund, through the Subsidiary, will generally
hold many of the futures contracts included in the Benchmark, the Fund
and the Subsidiary will be actively managed and will not be obligated
to invest in all of (or to limit investments solely to) such futures
contracts. In addition, with respect to investments in exchange-traded
futures contracts, the Fund and the Subsidiary will not be obligated to
invest in the same amount or proportion as the Benchmark, or be
obligated to track the performance of the Benchmark. In addition to
exchange-traded futures contracts, the Fund's Commodities investments
will also be comprised of the following: centrally cleared and non-
centrally cleared swaps on commodities; exchange-traded options on
futures contracts that provide exposure to the investment returns of
the commodities markets; and exchange-traded commodity-linked
instruments, without investing directly in physical commodities.
The Fund will invest in Commodities through investments in the
Subsidiary and will not invest directly in physical commodities. The
Fund's investment in the Subsidiary may not exceed 25% of the Fund's
total assets. In addition to Commodities, the Fund's assets will be
invested in: (1) short-term, investment grade fixed income securities,
including only the following instruments: U.S. government and agency
securities,\17\ corporate debt obligations,\18\ and repurchase
agreements;\19\ (2) money market instruments; \20\ (3) investment
[[Page 20018]]
companies (other than those that are commodity-linked instruments),\21\
including both exchange traded and non-exchange-traded investment
companies, that provide exposure to commodities, equity securities, and
fixed income securities to the extent permitted under the 1940 Act and
any applicable exemptive relief; \22\ (4) certain bank instruments;
\23\ and (5) cash and other cash equivalents (collectively, ``Other
Investments''). The Fund will use the Other Investments as investments,
to provide liquidity, and to collateralize the Subsidiary's commodity
exposure on a day-to-day basis.
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\17\ Such securities are securities that are issued or
guaranteed by the U.S. Treasury, by various agencies of the U.S.
government, or by various instrumentalities, which have been
established or sponsored by the U.S. government. U.S. Treasury
obligations are backed by the ``full faith and credit'' of the U.S.
government. Securities issued or guaranteed by federal agencies and
U.S. government-sponsored instrumentalities may or may not be backed
by the full faith and credit of the U.S. government.
\18\ At least 75% of corporate debt obligations will have a
minimum principal amount outstanding of $100 million or more.
\19\ The Fund intends to enter into repurchase agreements only
with financial institutions and dealers believed by the Adviser and/
or a Sub-Adviser to present minimal credit risks in accordance with
criteria approved by the Trust's Board of Trustees (``Board''). The
Adviser and/or a Sub-Adviser will review and monitor the
creditworthiness of such institutions. The Adviser and/or a Sub-
Adviser will monitor the value of the collateral at the time the
transaction is entered into and at all times during the term of the
repurchase agreement.
\20\ For the Fund's purposes, money market instruments will
include only the following instruments: short-term, high-quality
securities issued or guaranteed by non-U.S. governments, agencies
and instrumentalities; non-convertible corporate debt securities
with remaining maturities of not more than 397 days that satisfy
ratings requirements under Rule 2a-7 under the 1940 Act; money
market mutual funds; and deposits and other obligations of U.S. and
non-U.S. banks and financial institutions. In addition, the Fund may
invest in commercial paper (short-term unsecured promissory notes),
but only if the commercial paper has received the highest rating
from at least one nationally recognized statistical rating
organization or, if unrated, has been judged by the Adviser and/or a
Sub-Adviser to be of comparable quality.
\21\ According to the Exchange, the Fund may invest in the
securities of certain other investment companies in excess of the
limits imposed under the 1940 Act pursuant to an exemptive order
obtained by the Trust and the Adviser from the Commission. The
exchange-traded investment companies in which the Fund may invest
include Index Fund Shares (as described in Rule 14.11(c)), Portfolio
Depository Receipts (as described in Rule 14.11(b)), and Managed
Fund Shares (as described in Rule 14.11(i)). The non-exchange-traded
investment companies in which the Fund may invest include all non-
exchange-traded investment companies that are not money market
mutual funds, as described above. While the Fund and the Subsidiary
may invest in inverse commodity-linked instruments and securities of
investment companies, the Fund and the Subsidiary will not invest in
leveraged or inverse leveraged (e.g., 2X or -3X) commodity-linked
instruments or securities of investment companies.
\22\ The exchange-traded investment companies and commodity-
linked instruments in which the Fund invests will be listed and
traded in the U.S. on registered exchanges.
\23\ The term ``certain bank instruments'' includes only the
following instruments: certificates of deposit issued against funds
deposited in a bank or savings and loan association; bankers'
acceptances, which are short-term credit instruments used to finance
commercial transactions; and bank time deposits, which are monies
kept on deposit with banks or savings and loan associations for a
stated period of time at a fixed rate of interest.
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The Fund's investment in the Subsidiary will be designed to help
the Fund achieve exposure to commodity returns in a manner consistent
with the federal tax requirements applicable to the Fund and other
regulated investment companies. The Fund intends to qualify for, and to
elect to be treated as, a separate regulated investment company under
Subchapter M of the Internal Revenue Code.
B. Exchange's Description of the Subsidiary's Investments
The Subsidiary will generally seek to make investments in
Commodities, and its portfolio will be managed by the Adviser or a Sub-
Adviser.\24\ The Adviser or a Sub-Adviser will use its discretion to
determine the percentage of the Fund's assets allocated to the
Commodities held by the Subsidiary that will be invested in exchange-
traded commodity futures contracts, centrally cleared and non-centrally
cleared swaps, exchange-traded options on futures contracts, and
exchange-traded commodity-linked instruments. In this regard, under
normal market conditions, the Subsidiary is expected, as a general
matter, to invest in futures contracts in proportional weights and
allocations that are similar to the Benchmark, as well as in the other
Commodities. Additionally, the Subsidiary, like the Fund, may invest in
Other Investments (e.g., as investments, to serve as margin or
collateral, or to otherwise support the Subsidiary's positions in
Commodities).
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\24\ The Exchange states that the Subsidiary will not be
registered under the 1940 Act and will not be directly subject to
its investor protections, except as noted in the Registration
Statement. However, the Subsidiary will be wholly-owned and
controlled by the Fund. Therefore, the Fund's ownership and control
of the Subsidiary will prevent the Subsidiary from taking action
contrary to the interests of the Fund or its shareholders. The Board
will have oversight responsibility for the investment activities of
the Fund, including its expected investment in the Subsidiary, and
the Fund's role as the sole shareholder of the Subsidiary. The
Subsidiary will also enter into separate contracts for the provision
of custody, transfer agency, and accounting agent services with the
same or with affiliates of the same service providers that provide
those services to the Fund.
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The Fund's investment in the Subsidiary is intended to provide the
Fund with exposure to commodity markets within the limits of current
federal income tax laws applicable to investment companies such as the
Fund, which limit the ability of investment companies to invest
directly in the derivative instruments. The Subsidiary will have the
same investment objective as the Fund, but unlike the Fund, it may
invest without limitation in Commodities. The Subsidiary's investments
will provide the Fund with exposure to domestic and international
markets.
C. Exchange's Description of Commodities Regulation
The Commodity Futures Trading Commission (``CFTC'') has adopted
substantial amendments to CFTC Rule 4.5 relating to the permissible
exemptions and conditions for reliance on exemptions from registration
as a commodity pool operator. As a result of the instruments that will
be indirectly held by the Fund, the Adviser will register as a
commodity pool operator and will also become a member of the National
Futures Association (``NFA''). Any Sub-Adviser will register as a
commodity pool operator or commodity trading adviser, as required by
CFTC regulations. The Fund and the Subsidiary will be subject to
regulation by the CFTC and NFA and additional disclosure, reporting,
and recordkeeping rules imposed upon commodity pools.
D. Exchange's Description of the Fund's Investment Restrictions
While the Fund will be permitted to borrow as permitted under the
1940 Act, the Fund's investments will not be used to seek performance
that is the multiple or inverse multiple (i.e., 2X and -3X) of the
Benchmark. In addition, the Fund may not invest more than 25% of the
value of its total assets in securities of issuers in any one industry
or group of industries. This restriction will not apply to obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or securities of other investment companies.
The Subsidiary's shares will be offered only to the Fund, and the
Fund will not sell shares of the Subsidiary to other investors. The
Fund and the Subsidiary will not invest in any non-U.S. equity
securities (other than shares of the Subsidiary). The Fund will not
purchase securities of open-end or closed-end investment companies,
except in compliance with the 1940 Act or any applicable exemptive
relief. In addition, the Exchange represents that, with respect to the
futures contracts and exchange-traded options on futures contracts in
which the Subsidiary invests, not more than 10% of the weight (to be
calculated as the value of the contract divided by the total absolute
notional value of the Subsidiary's futures and options contracts) of
the futures and options contracts held by the Subsidiary, in the
aggregate, shall consist of instruments whose principal trading market
is a market from which the Exchange may not obtain information
regarding trading in the futures contracts and exchange-traded options
on futures contracts by virtue of: (a) Its membership in the
Intermarket Surveillance Group (``ISG''); or (b) a comprehensive
surveillance sharing agreement.
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including securities deemed illiquid by the Adviser.\25\ The
[[Page 20019]]
Fund will monitor its portfolio liquidity on an ongoing basis to
determine whether, in light of current circumstances, an adequate level
of liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets, as determined in
accordance with Commission staff guidance.
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\25\ In reaching liquidity decisions, the Adviser may consider
the following factors: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer).
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III. Discussion and Commission's Findings
The Commission has carefully reviewed the proposed rule change and
finds that it is consistent with the requirements of Section 6 of the
Act \26\ and the rules and regulations thereunder applicable to a
national securities exchange.\27\ In particular, the Commission finds
that the proposal is consistent with Section 6(b)(5) of the Act,\28\
which requires, among other things, that the Exchange's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\26\ 15 U.S.C. 78f.
\27\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\28\ 15 U.S.C. 78f(b)(5).
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The Commission also finds that the proposal is consistent with
Section 11A(a)(1)(C)(iii) of the Act,\29\ which sets forth the finding
of Congress that it is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly markets
to assure the availability to brokers, dealers, and investors of
information with respect to quotations for, and transactions in,
securities. Quotation and last-sale information for the Shares will be
available on the facilities of the Consolidated Tape Association
(``CTA''). An estimated value, defined in BATS Rule 14.11(i)(3)(C) as
the Intraday Indicative Value (``IIV''), that reflects an estimated
intraday value of the Fund's portfolio (including the Subsidiary's
portfolio), will be disseminated. The IIV will be based upon the
current value for the components of the Disclosed Portfolio (as defined
below) and will be updated and widely disseminated by one or more major
market data vendors and broadly displayed at least every 15 seconds
during the Exchange's Regular Trading Hours.\30\ On each business day,
before commencement of trading in Shares during Regular Trading
Hours,\31\ the Fund will disclose on its Web site the identities and
quantities of the portfolio of securities, Commodities, and other
assets (``Disclosed Portfolio'' as defined in Rule 14.11(i)(3)(B)) held
by the Fund and the Subsidiary that will form the basis for the Fund's
calculation of NAV at the end of the business day.\32\ The NAV of the
Fund's Shares generally will be calculated once daily Monday through
Friday as of the close of regular trading on the New York Stock
Exchange, generally 4:00 p.m. Eastern Time.\33\ Additionally,
information regarding market price and volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. The previous
day's closing price and trading volume information for the Shares will
also be published daily in the financial section of newspapers. Intra-
day executable price quotations on the securities and other assets held
by the Fund and the Subsidiary will be available from major broker-
dealer firms or on the exchange on which they are traded, as
applicable. Intra-day price information on the securities and other
assets held by the Fund and the Subsidiary will also be available
through subscription services,
[[Page 20020]]
such as Bloomberg and Thomson Reuters, which can be accessed by
authorized participants and other investors.\34\ Daily trading volume
information for the Fund will also be available in the financial
section of newspapers, through subscription services such as Bloomberg,
Thomson Reuters, and International Data Corporation, which can be
accessed by authorized participants and other investors, as well as
through other electronic services, including major public Web sites.
The Fund's Web site will include a form of the prospectus for the Fund
and additional data relating to NAV and other applicable quantitative
information. Information relating to the Benchmark, including its
constituents, weightings, and changes to its constituents, will be
available on the Web site of S&P Indices.
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\29\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\30\ According to the Exchange, several major market data
vendors display and/or make widely available Intraday Indicative
Values published via the CTA or other data feeds.
\31\ Regular Trading Hours are 9:30 a.m. to 4:00 p.m. Eastern
Time.
\32\ According to the Exchange, the Fund's disclosure of
derivative positions in the Disclosed Portfolio will include
information that market participants can use to value these
positions intraday. On a daily basis, the Disclosed Portfolio
displayed on the Fund's Web site will include the following
information regarding each portfolio holding, as applicable to the
type of holding: Ticker symbol, CUSIP number or other identifier, if
any; a description of the holding (including the type of holding,
such as the type of swap), the identity of the security, commodity,
or other asset or instrument underlying the holding, if any; for
options, the option strike price; quantity held (as measured by, for
example, par value, notional value, or number of shares, contracts,
or units); maturity date, if any; coupon rate, if any; effective
date, if any; market value of the holding; and percentage weighting
of the holding in the Fund's portfolio. The Web site and information
will be publicly available at no charge.
\33\ In determining the value of the assets held by the Fund and
the Subsidiary, the Fund's and the Subsidiary's investments will be
generally valued using market valuations. A market valuation
generally means a valuation (i) obtained from an exchange, a pricing
service, or a major market maker (or dealer), (ii) based on a price
quotation or other equivalent indication of value supplied by an
exchange, a pricing service, or a major market maker (or dealer), or
(iii) based on amortized cost. The Fund and the Subsidiary may use
various pricing services or discontinue the use of any pricing
service. A price obtained from a pricing service based on such
pricing service's valuation matrix may be considered a market
valuation. If available, debt securities and money market
instruments with maturities of more than 60 days will typically be
priced based on valuations provided by independent, third party
pricing agents. Such values will generally reflect the last reported
sales price if the security is actively traded. The third party
pricing agents may also value debt securities at an evaluated bid
price by employing methodologies that utilize actual market
transactions, broker supplied valuations, or other methodologies
designed to identify the market value for such securities. Debt
obligations with remaining maturities of 60 days or less may be
valued on the basis of amortized cost, which approximates market
value. If such prices are not available, the security will be valued
based on values supplied by independent brokers or by fair value
pricing, as described below. Futures contracts will be valued at the
settlement price established each day by the board or exchange on
which they are traded. Exchange-traded options will be valued at the
closing price in the market where such contracts are principally
traded. Swaps will be valued based on valuations provided by
independent, third-party pricing agents. Securities of non-exchange-
traded investment companies will be valued at NAV. Equity securities
listed on a securities exchange (including exchange-traded commodity
linked instruments and exchange-traded investment companies), market
or automated quotation system for which quotations are readily
available (except for securities traded on The NASDAQ Stock Market
LLC (``NASDAQ'') and the London Stock Exchange Alternative
Investment Market (``LSE AIM'')) will be valued at the last reported
sale price on the primary exchange or market on which they are
traded on the valuation date (or at approximately 4:00 p.m. Eastern
Time if a security's primary exchange is normally open at that
time). For a security that trades on multiple exchanges, the primary
exchange will generally be considered to be the exchange on which
the security generally has the highest volume of trading activity.
If it is not possible to determine the last reported sale price on
the relevant exchange or market on the valuation date, the value of
the security will be taken to be the most recent mean between the
bid and asked prices on such exchange or market on the valuation
date. Absent both bid and asked prices on such exchange, the bid
price may be used. For securities traded on NASDAQ or LSE AIM, the
official closing price will be used. If such prices are not
available, the security will be valued based on values supplied by
independent brokers or by fair value pricing, as described below.
The prices for foreign instruments will be reported in local
currency and converted to U.S. dollars using currency exchange
rates. Exchange rates will be provided daily by recognized
independent pricing agents. In the event that current market
valuations are not readily available or such valuations do not
reflect current market values, the affected investments will be
valued using fair value pricing pursuant to the pricing policy and
procedures approved by the Board in accordance with the 1940 Act.
Fair value pricing may require subjective determinations about the
value of an asset and may result in prices that differ from the
value that would be realized if the asset was sold.
\34\ More specifically, the Exchange represents that pricing
information for exchange-traded commodity futures contracts,
exchange-traded options on futures contracts, exchange-traded
commodity-linked instruments, exchange-traded investment companies
other than exchange-traded commodity-linked instruments will be
available on the exchanges on which they are traded and through
subscription services. Pricing information for securities of non-
exchange-traded investment companies will be available through the
applicable fund's Web site or major market data vendors. Pricing
information for swaps, fixed income securities, and money market
instruments will be available through subscription services, broker-
dealer firms, and/or pricing services. Additionally, the Trade
Reporting and Compliance Engine (``TRACE'') of the Financial
Industry Regulatory Authority (``FINRA'') will be a source of price
information for certain fixed income securities held by the Fund.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share
will be calculated daily, and that the NAV and the Disclosed Portfolio
will be made available to all market participants at the same time.\35\
Trading in the Shares also will be subject to BATS Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which Shares
of the Fund may be halted.\36\ The Exchange may halt trading in the
Shares if trading is not occurring in the securities, Commodities, or
other assets constituting the Disclosed Portfolio of the Fund and the
Subsidiary, or if other unusual conditions or circumstances detrimental
to the maintenance of a fair and orderly market are present.\37\
Further, the Commission notes that the Reporting Authority that
provides the Disclosed Portfolio must implement and maintain, or be
subject to, procedures designed to prevent the use and dissemination of
material, non-public information regarding the actual components of the
portfolio.\38\ The Exchange states that it prohibits the distribution
of material, non-public information by its employees. The Exchange also
represents that the Adviser is affiliated with a broker-dealer, and the
Adviser has implemented a fire wall with respect to that broker-dealer
affiliate regarding access to information concerning the composition
of, or changes to, the Fund's portfolio.\39\ Moreover, the Exchange
represents that it may obtain information regarding trading in the
Shares and the underlying shares in exchange-traded investment
companies, commodity-linked instruments, futures, and options on
futures via ISG, from other exchanges who are members or affiliates of
ISG, or with which the Exchange has entered into a comprehensive
surveillance sharing agreement.
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\35\ See BATS Rule 14.11(i)(4)(A)(ii).
\36\ See BATS Rule 14.11(i)(4)(B)(iv).
\37\ See BATS Rule 14.11(i)(4)(B)(iii) (providing additional
considerations for the suspension of trading in or removal from
listing of Managed Fund Shares on the Exchange). With respect to
trading halts, the Exchange may consider all relevant factors in
exercising its discretion to halt or suspend trading in the Shares
of the Fund. The Exchange will halt trading in the Shares under the
conditions specified in BATS Rule 11.18. Trading also may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable.
\38\ See BATS Rule 14.11(i)(4)(B)(ii)(B).
\39\ See supra note 10 and accompanying text. An investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and any Sub-Adviser and their related personnel are subject
to the provisions of Rule 204A-1 under the Advisers Act relating to
codes of ethics. This Rule requires investment advisers to adopt a
code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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The Exchange further represents that the Shares are deemed to be
equity securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will be subject to BATS Rule 14.11(i), which sets
forth the initial and continued listing criteria applicable to Managed
Fund Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange believes that its surveillance procedures are
adequate to properly monitor the trading of the Shares on the Exchange
during all trading sessions and to deter and detect violations of
Exchange rules and the applicable federal securities laws. Trading of
the Shares through the Exchange will be subject to the Exchange's
surveillance procedures for derivative products, including Managed Fund
Shares.
(4) The Exchange will communicate as needed regarding trading in
the Shares and in the exchange-traded Commodities and exchange-traded
investment companies not included within the definition of Commodities
(together, ``Exchange Traded Instruments'') held by the Fund and the
Subsidiary with other markets and other entities that are members of
ISG and may obtain trading information regarding trading in the Shares
and in the Exchange Traded Instruments held by the Fund and the
Subsidiary from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares and in
the Exchange Traded Instruments held by the Fund and the Subsidiary
from markets and other entities that are members of ISG, which includes
securities and futures exchanges, or with which the Exchange has in
place a comprehensive surveillance sharing agreement. The Exchange also
will be able to access, as needed, trade information for certain fixed
income securities held by the Fund reported to FINRA's TRACE.
(5) With respect to the futures contracts and exchange-traded
options on futures contracts in which the Subsidiary invests, not more
than 10% of the weight (to be calculated as the value of the contract
divided by the total absolute notional value of the Subsidiary's
futures and options contracts) of the futures and options contracts
held by the Subsidiary, in the aggregate, shall consist of instruments
whose principal trading market is a market from which the Exchange may
not obtain information regarding trading in the futures contracts and
exchange-
[[Page 20021]]
traded options on futures contracts by virtue of: (a) Its membership in
ISG; or (b) a comprehensive surveillance sharing agreement.
(6) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular (``Circular'') of the special
characteristics and risks associated with trading the Shares.
Specifically, the Circular will discuss the following: (a) The
procedures for purchases and redemptions of Shares in Creation Units
(and that Shares are not individually redeemable); (b) BATS Rule 3.7,
which imposes suitability obligations on Exchange members with respect
to recommending transactions in the Shares to customers; (c) how
information regarding the IIV and the Disclosed Portfolio is
disseminated; (d) the risks involved in trading the Shares during the
Pre-Opening \40\ and After Hours Trading Sessions \41\ when an updated
IIV will not be calculated or publicly disseminated; (e) the
requirement that members deliver a prospectus to investors purchasing
newly issued Shares prior to or concurrently with the confirmation of a
transaction; and (f) trading information.
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\40\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
\41\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
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(7) For initial and continued listing, the Fund and the Subsidiary
must be in compliance with Rule 10A-3 under the Act.\42\
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\42\ See 17 CFR 240.10A-3.
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(8) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),
including securities deemed illiquid by the Adviser under the 1940 Act.
(9) The Fund will invest in Commodities through investments in the
Subsidiary and will not invest directly in physical commodities. The
Fund's investment in the Subsidiary may not exceed 25% of the Fund's
total assets. The Fund and the Subsidiary will not invest in any non-
U.S. equity securities (other than shares of the Subsidiary).
(10) Investments in non-centrally cleared swaps (through the
Subsidiary) will not represent more than 20% of the Fund's net assets.
(11) At least 75% of corporate debt obligations will have a minimum
principal amount outstanding of $100 million or more. In addition, the
exchange-traded investment companies and commodity-linked instruments
in which the Fund invests will be listed and traded in the U.S. on
registered exchanges.
(12) While the Fund will be permitted to borrow as permitted under
the 1940 Act, the Fund's investments will not be used to seek
performance that is the multiple or inverse multiple (i.e., 2X and -3X)
of the Benchmark.
(13) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.
The Exchange represents that all statements and representations
made in the filing regarding (a) the description of the portfolio, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange rules and surveillance procedures constitute
continued listing requirements for listing the Shares on the Exchange.
In addition, the issuer has represented to the Exchange that it will
advise the Exchange of any failure by the Fund to comply with the
continued listing requirements, and, pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange will surveil for compliance
with the continued listing requirements. If the Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. This approval
order is based on all of the Exchange's representations and description
of the Fund, including those set forth above and in the Notice. The
Commission notes that the Fund and the Shares must comply with the
requirements of BATS Rule 14.11(i), including those set forth in this
proposed rule change, to be listed and traded on the Exchange on an
initial and continuing basis.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1, 2, and 3 thereto, is
consistent with Section 6(b)(5) of the Act \43\ and the rules and
regulations thereunder applicable to a national securities exchange.
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\43\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\44\ that the proposed rule change (SR-BATS-2015-105), as modified
by Amendment Nos. 1, 2, and 3 thereto, be, and it hereby is, approved.
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\44\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-07832 Filed 4-5-16; 8:45 am]
BILLING CODE 8011-01-P
