Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 2, To List and Trade Shares of the LHA Market State® Tactical U.S. Equity ETF, a Series of the ETF Series Solutions, Under Rule 14.11(i), Managed Fund Shares, 12992-12995 [2018-06013]

Download as PDF 12992 Federal Register / Vol. 83, No. 58 / Monday, March 26, 2018 / Notices assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible, and to protect investors and the public interest; • Rule 17Ad–22(e)(13) under the Act,39 which requires, in general, a covered clearing agency, such as FICC, to establish, implement, maintain and enforce written policies and procedures reasonably designed to ensure the covered clearing agency has the authority and operational capacity to take timely action to contain losses and liquidity demands and continue to meet its obligations. • Rule 17Ad–22(e)(23)(i) under the Act,40 which requires a covered clearing agency, such as FICC, to establish, implement, maintain and enforce written policies and procedures reasonably designed to publicly disclose all relevant rules and material procedures, including key aspects of its default rules and procedures. IV. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the Proposed Rule Change. In particular, the Commission invites the written views of interested persons concerning whether the Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act,41 Rule 17Ad–22(e)(13) under the Act,42 Rule 17Ad–22(e)(23)(i) under the Act,43 or any other provision of the Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4(g) under the Act,44 any request for an opportunity to make an oral presentation.45 Interested persons are invited to submit written data, views, and arguments regarding whether the 39 17 CFR 240.17Ad–22(e)(13). CFR 240.17Ad–22(e)(23)(i). 41 15 U.S.C. 78q–1(b)(3)(F). 42 17 CFR 240.17Ad–22(e)(13). 43 17 CFR 240.17Ad–22(e)(23)(i). 44 17 CFR 240.19b–4(g). 45 Section 19(b)(2) of the Act grants to the Commission flexibility to determine what type of proceeding—either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a selfregulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). sradovich on DSK3GMQ082PROD with NOTICES 40 17 VerDate Sep<11>2014 16:38 Mar 23, 2018 Jkt 244001 Proposed Rule Change should be approved or disapproved by April 16, 2018. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by April 30, 2018. The Commission asks that commenters address the sufficiency of FICC’s statements in support of the Proposed Rule Change, which are set forth in the Notice,46 in addition to any other comments they may wish to submit about the Proposed Rule Change. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2017–022 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–FICC–2017–022. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the Proposed Rule Change that are filed with the Commission, and all written communications relating to the Proposed Rule Change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of FICC and on The Depository Trust & Clearing Corporation’s website (https://dtcc.com/legal/sec-rulefilings.aspx). All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only 46 See PO 00000 Notice, supra note 4. Frm 00055 Fmt 4703 Sfmt 4703 information that you wish to make available publicly. All submissions should refer to File Number SR–FICC– 2017–022 and should be submitted on or before April 16, 2018. Rebuttal comments should be submitted by April 30, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.47 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–06015 Filed 3–23–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82906; File No. SR– CboeBZX–2017–012] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 2, To List and Trade Shares of the LHA Market State® Tactical U.S. Equity ETF, a Series of the ETF Series Solutions, Under Rule 14.11(i), Managed Fund Shares March 20, 2018. I. Introduction On December 7, 2017, Cboe BZX Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade the shares (‘‘Shares’’) of the LHA Market State® Tactical U.S. Equity ETF (‘‘Fund’’), a Series of the ETF Series Solutions (‘‘Trust’’). The proposed rule change was published for comment in the Federal Register on December 28, 2017.3 On January 31, 2018, the Exchange filed Amendment No. 1 to the proposed rule change.4 On February 6, 2018, pursuant to Section 19(b)(2) of the Exchange Act,5 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 47 17 CFR 200.30–3(a)(57). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 82379 (Dec. 21, 2017), 82 FR 61608. 4 Amendment No. 1, which amended and replaced the proposed rule change in its entirety, is available on the Commission’s website at: https:// www.sec.gov/comments/sr-cboebzx-2017-012/ cboebzx2017012-3002921-161895.pdf. 5 15 U.S.C. 78s(b)(2). 1 15 E:\FR\FM\26MRN1.SGM 26MRN1 Federal Register / Vol. 83, No. 58 / Monday, March 26, 2018 / Notices rule change.6 On February 13, 2018, the Exchange filed Amendment No. 2 to the proposed rule change.7 The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change, as modified by Amendment No. 2. II. Exchange’s Description of the Proposal, as Modified by Amendment No. 2 sradovich on DSK3GMQ082PROD with NOTICES The Exchange proposes to list and trade the Shares under BZX Rule 14.11(i), which governs the listing and trading of Managed Fund Shares on the Exchange. The Exchange represents that the Fund will be an actively managed exchange-traded fund that seeks to provide investment results that exceed the total return performance of the broader U.S. equity market on a riskadjusted basis. The Exchange has submitted this proposal in order to allow the Fund to hold listed derivatives, in particular S&P 500 futures, in a manner that would exceed the limitations of BZX Rule 14.11(i)(4)(C)(iv)(b), which prevents, among other things, a series of Managed Fund Shares from holding listed derivatives based on any single underlying reference asset in excess of 30 percent of the weight of its portfolio (including gross notional exposures) (‘‘30% Limitation’’).8 Otherwise, the 6 See Securities Exchange Act Release No. 82643, 83 FR 6071 (Feb. 12, 2018). The Commission designated March 28, 2018, as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change. 7 In Amendment No. 2, which amended and replaced the proposed rule change, as modified by Amendment No. 1, in its entirety, the Exchange: (a) Supplemented the description of the Fund’s relative exposures to the U.S. equity and S&P 500 futures markets; (b) made conforming informational and rule reference corrections to maintain internal consistency; (c) updated the status of the registration statement for the Fund; (d) clarified the use of certain defined terms; and (e) made other technical and non-substantive changes. Because Amendment No. 2 does not materially alter the substance of the proposed rule change or raise unique or novel regulatory issues, it is not subject to notice and comment. Amendment No. 2 is available on the Commission’s website at: https:// www.sec.gov/comments/sr-cboebzx-2017-012/ cboebzx2017012-3033817-161904.pdf. 8 BZX Rule 14.11(i)(4)(C)(iv)(b) requires that the aggregate gross notional value of listed derivatives based on any five or fewer underlying reference assets to not exceed 65% of the weight of the portfolio (including gross notional exposures), and the aggregate gross notional value of listed derivatives based on any single underlying reference asset to not exceed 30% of the weight of the portfolio (including gross notional exposures). The Exchange states that the proposal is to allow the Fund to exceed the specific requirement of BZX Rule 14.11(i)(4)(C)(iv)(b) that prevents the aggregate gross notional value of listed derivatives based on any single underlying reference asset from exceeding 30% of the weight of the portfolio (including gross notional exposures). According to VerDate Sep<11>2014 16:38 Mar 23, 2018 Jkt 244001 Fund will comply with all other listing requirements of BZX Rule 14.11(i), including BZX Rule 14.11(i)(4)(C), on an initial and continued listing basis. The Shares will be offered by the Trust, which is registered with the Commission as an open-end investment company.9 The Fund’s adviser, Little Harbor Advisors, LLC (‘‘Adviser’’), is not registered as a broker-dealer and is not affiliated with a broker-dealer. Adviser personnel who make decisions regarding the Fund’s portfolio are subject to procedures designed to prevent the use and dissemination of material, nonpublic information regarding the Fund’s portfolio. In the event that (a) the Adviser becomes registered as a broker-dealer or newly affiliated with 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, nonpublic information regarding such portfolio. In order to achieve its investment objective, under Normal Market Conditions,10 the Fund will invest approximately 80% of its net assets at the time of investment in U.S. exchangelisted exchange-traded funds that principally invest in U.S. equity securities (‘‘U.S. ETFs’’) 11 or the constituent stock holdings of a U.S. ETF the Exchange, the Fund will meet the other requirement of BZX Rule 14.11(i)(4)(C)(iv)(b). 9 The Exchange represents that the Trust has filed a post-effective amendment to its registration statement (‘‘Registration Statement’’) on December 18, 2017. See Registration Statement on Form N– 1A for the Trust (File Nos. 333–179562 and 811– 22668). The Commission has not yet issued an order granting exemptive relief to the Trust under the Investment Company Act of 1940 applicable to the activities of the Fund, but the Exchange further represents that the Fund Shares will not be listed on the Exchange until such an order is issued and any conditions contained therein are satisfied. 10 As defined in BZX Rule 14.11(i)(3)(E), the term ‘‘Normal Market Conditions’’ includes, but is not limited to, the absence of trading halts in the applicable financial markets generally; operational issues causing dissemination of inaccurate market information or system failures; or force majeure type events, such as natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance. 11 The Exchange states that, for purposes of the proposal, the term ‘‘U.S. ETFs’’ means Portfolio Depositary Receipts, Index Fund Shares, and Managed Fund Shares as defined in BZX Rules 14.11(b), 14.11(c), and 14.11(i), respectively, and their equivalents on other national securities exchanges. PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 12993 (together with U.S. ETFs, collectively, ‘‘U.S. Equities’’). The Fund generally will invest in U.S. Equities in order to gain exposure to large cap U.S. equity securities. As noted above, BZX Rule 14.11(i)(4)(C)(iv)(b) imposes a 30% Limitation. The Exchange is proposing to allow the Fund to hold up to 60% of the weight of its portfolio at the time of investment (including gross notional exposures) in S&P 500 futures contracts traded on the Chicago Mercantile Exchange (‘‘S&P 500 Futures’’). The Fund will utilize short or long S&P 500 Futures to the extent needed to reduce or augment, respectively, the Fund’s exposure relative to the exposure resulting from investments in the U.S. Equities in order to achieve the desired net exposure. The Exchange represents that S&P 500 Futures are an efficient means of reducing or augmenting exposure to U.S. Equities, as described above. According to the Exchange, allowing the Fund to hold a greater portion of its portfolio in S&P 500 Futures would mitigate the Fund’s dependency on holding over-thecounter (‘‘OTC’’) instruments, which would reduce the Fund’s operational burden by allowing the Fund to primarily use listed futures contracts to achieve its investment objective and would further reduce counter-party risk associated with holding OTC instruments. The Exchange notes that the Fund may also hold certain fixed income securities and cash and cash equivalents in compliance with BZX Rules 14.11(i)(4)(C)(ii) and (iii) in order to collateralize its S&P 500 Futures positions. As noted above, the Fund’s investment in U.S. ETFs or the constituent stocks of a U.S. ETF will constitute approximately 80% of the Fund’s net assets at the time of investment and under Normal Market Conditions, and such holdings will meet the requirements for U.S. Component Stocks in BZX Rule 14.11(i)(4)(C)(i)(a). The Fund may hold approximately 20% of its net assets at the time of investment in fixed income securities, cash, cash equivalents, and the cash value of futures positions 12 under Normal Market Conditions. The combination of U.S. ETFs, constituent stocks of U.S. ETFs, fixed income securities, cash, cash equivalents, and the cash value of futures positions will constitute the entirety of the Fund’s holdings and the cash value of these holdings will be 12 The Exchange states that cash value of futures positions is based on the value of the Fund’s daily margin account with the applicable futures exchange(s). E:\FR\FM\26MRN1.SGM 26MRN1 12994 Federal Register / Vol. 83, No. 58 / Monday, March 26, 2018 / Notices used to form the basis for these calculations. The Exchange notes that this is different than the calculation used to measure the Fund’s holdings in S&P 500 Futures (as it relates to the Fund holding up to 60% of the weight of its portfolio), which, as noted above, is calculated using gross notional exposures gained through the S&P 500 Futures in both the numerator and denominator, and which is consistent with the derivatives exposure calculation under BZX Rule 14.11(i)(4)(C)(iv). The Exchange represents that, except for the 30% Limitation, the Fund’s proposed investments will satisfy, on an initial and continued listing basis, all of the generic listing standards under BZX Rule 14.11(i)(4)(C) and all other applicable requirements for Managed Fund Shares under BZX Rule 14.11(i). sradovich on DSK3GMQ082PROD with NOTICES III. Discussion and Commission Findings After careful review, the Commission finds that the Exchange’s proposal to list and trade the Shares, as modified by Amendment No. 2, is consistent with the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange.13 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Exchange Act,14 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 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 notes that, according to the Exchange, the Shares will meet each of the initial and continued listing criteria in BZX Rule 14.11(i), including BZX Rule 14.11(i)(4)(C), with the exception of the 30% Limitation. According to the Exchange, the liquidity in the S&P 500 Futures markets mitigates the concerns that BZX Rule 14.11(i)(4)(C)(iv)(b) is intended to address and that such liquidity would prevent the Shares from being susceptible to manipulation.15 13 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). 14 15 U.S.C. 78f(b)(5). 15 According to the Exchange, as of December 7, 2017, the average daily notional volume for S&P 500 Futures was more than $180 billion over the previous thirty trading days. The Exchange represents that allowing the Fund to hold a greater portion of its portfolio in S&P 500 Futures would mitigate the Fund’s dependency on holding OTC VerDate Sep<11>2014 16:38 Mar 23, 2018 Jkt 244001 In addition, the Exchange represents 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. The Exchange further represents that all of the futures contracts and U.S. ETFs held by the Fund will trade on markets that are members of the Intermarket Surveillance Group (‘‘ISG’’) or affiliated with a member of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. Moreover, the Exchange represents that it may obtain information regarding trading in the Shares and the underlying futures contracts and U.S. ETFs held by the Fund via the ISG from other exchanges who are members of the ISG or with which the Exchange has entered into a comprehensive surveillance sharing agreement.16 The Commission also notes that, according to the Exchange, the Fund’s investment in U.S. ETFs or the constituent stocks of a U.S. ETF will meet the requirements for U.S. Component Stocks in BZX Rule 14.11(i)(4)(C)(i)(a). BZX Rule 14.11(i)(4)(C)(i)(a) provides that equity securities in the portfolio shall be listed on a national securities exchange, except that no more than 10% of the equity weight of the portfolio may be non-exchange traded ADRs. As all national securities exchanges are ISG members, the Commission notes that no less than 90% of constituent stocks of a U.S. ETF that the Fund will hold will be traded on markets that are members of ISG. In addition, the Exchange also represents that the Shares of the Fund will comply with all requirements applicable to Managed Fund Shares, including, but not limited to, requirements relating to the dissemination of key information such instruments, which would reduce the Fund’s operational burden by allowing the Fund to primarily use listed futures contracts to achieve its investment objective and would further reduce counter-party risk associated with holding OTC instruments. Moreover, the Exchange represents that the diversity, liquidity, and market capitalization of the securities underlying the S&P 500 Index are sufficient to protect against market manipulation of both the Fund’s holdings and the Shares as it relates to the S&P 500 Futures holdings. 16 As stated above, S&P 500 Futures are traded on the Chicago Mercantile Exchange. The Commission notes that the Chicago Mercantile Exchange represents a significant market in S&P 500 Futures, is a regulated futures and options market, and is a member of ISG. See supra note 16. For a list of the current members and affiliate members of ISG, see www.isgportal.com. The Exchange notes that not all components of the Disclosed Portfolio for the Fund may trade on markets that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement. PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 as the Disclosed Portfolio,17 net asset value,18 and the Intraday Indicative Value,19 suspension of trading or removal,20 trading halts,21 surveillance,22 minimum price variation for quoting and order entry,23 the information circular,24 and firewalls 25 as set forth in Exchange rules applicable to Managed Fund Shares. Likewise, the Exchange represents that all statements and representations made in this filing regarding (a) the description of the portfolio or reference assets, (b) limitations on portfolio holdings or reference assets, (c) dissemination and availability of reference asset and intraday indicative values, (d) or the applicability of Exchange listing rules specified in this filing shall constitute continued listing requirements for listing the Shares on the Exchange. Moreover, according to the Exchange, the issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund or Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements.26 If the Fund or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under BZX 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 Amendment No. 2 to the proposed rule change. For the foregoing reasons, the Commission finds that the proposed rule change, as modified by Amendment No. 2, is consistent with Section 6(b)(5) of the Exchange Act 27 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 Exchange Act,28 17 See BZX Rules 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii). 18 See BZX Rule 14.11(i)(4)(A)(ii). 19 See BZX Rule 14.11(i)(4)(B)(i). 20 See BZX Rule 14.11(i)(4)(B)(iii). 21 See BZX Rule 14.11(i)(4)(B)(iv). 22 See BZX Rule 14.11(i)(2)(C). 23 See BZX Rule 14.11(i)(2)(B). 24 See BZX Rule 14.11(i)(6). 25 See BZX Rule 14.11(i)(7). 26 The Exchange represents that FINRA conducts certain cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange further represents that it is responsible for FINRA’s performance under this regulatory services agreement. 27 15 U.S.C. 78f(b)(5). 28 15 U.S.C. 78s(b)(2). E:\FR\FM\26MRN1.SGM 26MRN1 Federal Register / Vol. 83, No. 58 / Monday, March 26, 2018 / Notices office of the Exchange, and at the Commission’s Public Reference Room. that the proposed rule change (SR– CboeBZX–2017–012), as modified by Amendment No. 2, be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–06013 Filed 3–23–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82904; File No. SR– CboeEDGA–2018–004] Self-Regulatory Organizations; Cboe EDGA Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Expand an Offering Known as Cboe Connect To Provide Connectivity to Single-Dealer Platforms Connected to the Exchange’s Network and To Propose a Per Share Executed Fee for Such Service March 20, 2018. sradovich on DSK3GMQ082PROD with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 14, 2018, Cboe EDGA Exchange, Inc. (the ‘‘Exchange’’ or ‘‘EDGA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange has designated this proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A) of the Act 3 and Rule 19b–4(f)(6)(iii) thereunder,4 which renders it effective upon filing with the Commission. 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 filed a proposal to expand an offering known as Cboe Connect to provide connectivity to single-dealer platforms connected to the Exchange’s network and to propose a per share executed fee for such service. The text of the proposed rule change is available at the Exchange’s website at www.markets.cboe.com, at the principal 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b–4(f)(6)(iii). 1 15 VerDate Sep<11>2014 16:38 Mar 23, 2018 Jkt 244001 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 Exchange 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 Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant parts of such statements. (A) Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Cboe Connect is an optional communication service that provides Members 5 an additional means to receive market data from and route orders to any destination connected to the Exchange’s network.6 Cboe Connect is offered by the Exchange on a voluntary basis in a capacity similar to a vendor. The servers of the participant need not be located in the same facilities as the Exchange in order to subscribe to Cboe Connect. Participants may also seek to utilize Cboe Connect in the event of a market disruption where other alternative connection methods become unavailable. Today, market participants are able to send orders directly to broker-dealers that operate single-dealer platforms, where broker-dealers would execute orders received on a principal basis or return the unexecuted order (or portion thereof) back to their customers. To connect to a single-dealer platform, the broker-dealer’s customer must purchase connectivity and perform the necessary infrastructure work to be able to send orders to that single-dealer platform. Cboe Connect allows participants to send orders to other exchanges and market centers that are connected to the 5 The term ‘‘Member’’ is defined as ‘‘any registered broker or dealer, or any person associated with a registered broker or dealer, that has been admitted to membership in the Exchange. A Member will have the status of a ‘‘member’’ of the Exchange as that term is defined in Section 3(a)(3) of the Act.’’ See Exchange Rule 1.5(n). 6 See Exchange Rule 13.9. See also Securities Exchange Act Release Nos. 75112 (June 5, 2015), 80 FR 33316 (June 11, 2015) (SR–EDGA–2015–20) (proposal adopting Cboe Connect (f/k/a Bats Connect); and 34753 (June 11, 2015), 80 FR 34753 (June 17, 2015) (SR–EDGA–2015–24) (proposal adopting fees for Cboe Connect). PO 00000 Frm 00058 Fmt 4703 Sfmt 4703 12995 Exchange’s network. Market centers on the Exchange’s network include Alternative Trading Systems operated by broker-dealers, but do not currently include single-dealer platforms. The Exchange proposes to expand Cboe Connect to now provide optional connectivity by which market participant may send orders to these single-dealer trading platforms connected to the Exchange’s network. The exchange proposes to refer to this connectivity option under Cboe Connect as C–LNK. Orders routed via Cboe Connect to a single-dealer platform would be treated the same as orders routed today via Cboe Connect to an exchange or market center connected to the Exchange’s network. Cboe Connect does not effect trade executions and would not report trades to the relevant Securities Information Processor and the Exchange does not propose to do so for orders sent to single-dealer platforms. An order sent via the service to a single-dealer platform would be handled by the Exchange’s affiliated broker-dealer, Cboe Trading, Inc., and bypass the EDGA Book before going to a market center outside of the Exchange (i.e., a participant could choose to route an order directly to any single-dealer platform on the Exchange’s network). A participant would be responsible for identifying the single-dealer platform for any orders sent through the service and for ensuring that it had authority to access the selected destination; the Exchange would merely provide the connectivity by which orders (and associated messages) could be sent by a participant to the single-dealer platform and from the destination back to the participant. The Exchange notes that Users sending orders to single-dealer platforms via the C–LNK connectivity service would be subject to any transaction related rates applied by the single-dealer platform executing their order.7 This is not unique to C–LNK or Cboe Connect as market participants who chose another method to connect to a single-dealer platform would also be required to pay any transaction related fees directly to that single-dealer platform. In addition, market participants who send orders through Cboe Connect are subject to separate per transaction rates (fees/rebates) provided directly by the other exchanges and 7 Like alternative trading systems, single-dealer platforms are operated by broker-dealers and any transaction related rates are presumed to be similarly pre-negotiated between the broker-dealer and their customer. E:\FR\FM\26MRN1.SGM 26MRN1

Agencies

[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12992-12995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06013]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82906; File No. SR-CboeBZX-2017-012]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To 
List and Trade Shares of the LHA Market State[supreg] Tactical U.S. 
Equity ETF, a Series of the ETF Series Solutions, Under Rule 14.11(i), 
Managed Fund Shares

March 20, 2018.

I. Introduction

    On December 7, 2017, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade the shares 
(``Shares'') of the LHA Market State[supreg] Tactical U.S. Equity ETF 
(``Fund''), a Series of the ETF Series Solutions (``Trust''). The 
proposed rule change was published for comment in the Federal Register 
on December 28, 2017.\3\ On January 31, 2018, the Exchange filed 
Amendment No. 1 to the proposed rule change.\4\ On February 6, 2018, 
pursuant to Section 19(b)(2) of the Exchange Act,\5\ 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

[[Page 12993]]

rule change.\6\ On February 13, 2018, the Exchange filed Amendment No. 
2 to the proposed rule change.\7\ The Commission received no comment 
letters on the proposed rule change. This order approves the proposed 
rule change, as modified by Amendment No. 2.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82379 (Dec. 21, 
2017), 82 FR 61608.
    \4\ Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, is available on the Commission's 
website at: https://www.sec.gov/comments/sr-cboebzx-2017-012/cboebzx2017012-3002921-161895.pdf.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 82643, 83 FR 6071 
(Feb. 12, 2018). The Commission designated March 28, 2018, as the 
date by which the Commission shall either approve, disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ In Amendment No. 2, which amended and replaced the proposed 
rule change, as modified by Amendment No. 1, in its entirety, the 
Exchange: (a) Supplemented the description of the Fund's relative 
exposures to the U.S. equity and S&P 500 futures markets; (b) made 
conforming informational and rule reference corrections to maintain 
internal consistency; (c) updated the status of the registration 
statement for the Fund; (d) clarified the use of certain defined 
terms; and (e) made other technical and non-substantive changes. 
Because Amendment No. 2 does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
it is not subject to notice and comment. Amendment No. 2 is 
available on the Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2017-012/cboebzx2017012-3033817-161904.pdf.
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II. Exchange's Description of the Proposal, as Modified by Amendment 
No. 2

    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange. The Exchange represents that the Fund will be an 
actively managed exchange-traded fund that seeks to provide investment 
results that exceed the total return performance of the broader U.S. 
equity market on a risk-adjusted basis. The Exchange has submitted this 
proposal in order to allow the Fund to hold listed derivatives, in 
particular S&P 500 futures, in a manner that would exceed the 
limitations of BZX Rule 14.11(i)(4)(C)(iv)(b), which prevents, among 
other things, a series of Managed Fund Shares from holding listed 
derivatives based on any single underlying reference asset in excess of 
30 percent of the weight of its portfolio (including gross notional 
exposures) (``30% Limitation'').\8\ Otherwise, the Fund will comply 
with all other listing requirements of BZX Rule 14.11(i), including BZX 
Rule 14.11(i)(4)(C), on an initial and continued listing basis.
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    \8\ BZX Rule 14.11(i)(4)(C)(iv)(b) requires that the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets to not exceed 65% of the weight of 
the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset to not exceed 30% of the weight of 
the portfolio (including gross notional exposures). The Exchange 
states that the proposal is to allow the Fund to exceed the specific 
requirement of BZX Rule 14.11(i)(4)(C)(iv)(b) that prevents the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset from exceeding 30% of the weight 
of the portfolio (including gross notional exposures). According to 
the Exchange, the Fund will meet the other requirement of BZX Rule 
14.11(i)(4)(C)(iv)(b).
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    The Shares will be offered by the Trust, which is registered with 
the Commission as an open-end investment company.\9\ The Fund's 
adviser, Little Harbor Advisors, LLC (``Adviser''), is not registered 
as a broker-dealer and is not affiliated with a broker-dealer. Adviser 
personnel who make decisions regarding the Fund's portfolio are subject 
to procedures designed to prevent the use and dissemination of 
material, nonpublic information regarding the Fund's portfolio. In the 
event that (a) the Adviser becomes registered as a broker-dealer or 
newly affiliated with 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, nonpublic information 
regarding such portfolio.
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    \9\ The Exchange represents that the Trust has filed a post-
effective amendment to its registration statement (``Registration 
Statement'') on December 18, 2017. See Registration Statement on 
Form N-1A for the Trust (File Nos. 333-179562 and 811-22668). The 
Commission has not yet issued an order granting exemptive relief to 
the Trust under the Investment Company Act of 1940 applicable to the 
activities of the Fund, but the Exchange further represents that the 
Fund Shares will not be listed on the Exchange until such an order 
is issued and any conditions contained therein are satisfied.
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    In order to achieve its investment objective, under Normal Market 
Conditions,\10\ the Fund will invest approximately 80% of its net 
assets at the time of investment in U.S. exchange-listed exchange-
traded funds that principally invest in U.S. equity securities (``U.S. 
ETFs'') \11\ or the constituent stock holdings of a U.S. ETF (together 
with U.S. ETFs, collectively, ``U.S. Equities''). The Fund generally 
will invest in U.S. Equities in order to gain exposure to large cap 
U.S. equity securities.
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    \10\ As defined in BZX Rule 14.11(i)(3)(E), the term ``Normal 
Market Conditions'' includes, but is not limited to, the absence of 
trading halts in the applicable financial markets generally; 
operational issues causing dissemination of inaccurate market 
information or system failures; or force majeure type events, such 
as natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption, or any similar intervening 
circumstance.
    \11\ The Exchange states that, for purposes of the proposal, the 
term ``U.S. ETFs'' means Portfolio Depositary Receipts, Index Fund 
Shares, and Managed Fund Shares as defined in BZX Rules 14.11(b), 
14.11(c), and 14.11(i), respectively, and their equivalents on other 
national securities exchanges.
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    As noted above, BZX Rule 14.11(i)(4)(C)(iv)(b) imposes a 30% 
Limitation. The Exchange is proposing to allow the Fund to hold up to 
60% of the weight of its portfolio at the time of investment (including 
gross notional exposures) in S&P 500 futures contracts traded on the 
Chicago Mercantile Exchange (``S&P 500 Futures''). The Fund will 
utilize short or long S&P 500 Futures to the extent needed to reduce or 
augment, respectively, the Fund's exposure relative to the exposure 
resulting from investments in the U.S. Equities in order to achieve the 
desired net exposure. The Exchange represents that S&P 500 Futures are 
an efficient means of reducing or augmenting exposure to U.S. Equities, 
as described above. According to the Exchange, allowing the Fund to 
hold a greater portion of its portfolio in S&P 500 Futures would 
mitigate the Fund's dependency on holding over-the-counter (``OTC'') 
instruments, which would reduce the Fund's operational burden by 
allowing the Fund to primarily use listed futures contracts to achieve 
its investment objective and would further reduce counter-party risk 
associated with holding OTC instruments. The Exchange notes that the 
Fund may also hold certain fixed income securities and cash and cash 
equivalents in compliance with BZX Rules 14.11(i)(4)(C)(ii) and (iii) 
in order to collateralize its S&P 500 Futures positions.
    As noted above, the Fund's investment in U.S. ETFs or the 
constituent stocks of a U.S. ETF will constitute approximately 80% of 
the Fund's net assets at the time of investment and under Normal Market 
Conditions, and such holdings will meet the requirements for U.S. 
Component Stocks in BZX Rule 14.11(i)(4)(C)(i)(a). The Fund may hold 
approximately 20% of its net assets at the time of investment in fixed 
income securities, cash, cash equivalents, and the cash value of 
futures positions \12\ under Normal Market Conditions. The combination 
of U.S. ETFs, constituent stocks of U.S. ETFs, fixed income securities, 
cash, cash equivalents, and the cash value of futures positions will 
constitute the entirety of the Fund's holdings and the cash value of 
these holdings will be

[[Page 12994]]

used to form the basis for these calculations. The Exchange notes that 
this is different than the calculation used to measure the Fund's 
holdings in S&P 500 Futures (as it relates to the Fund holding up to 
60% of the weight of its portfolio), which, as noted above, is 
calculated using gross notional exposures gained through the S&P 500 
Futures in both the numerator and denominator, and which is consistent 
with the derivatives exposure calculation under BZX Rule 
14.11(i)(4)(C)(iv). The Exchange represents that, except for the 30% 
Limitation, the Fund's proposed investments will satisfy, on an initial 
and continued listing basis, all of the generic listing standards under 
BZX Rule 14.11(i)(4)(C) and all other applicable requirements for 
Managed Fund Shares under BZX Rule 14.11(i).
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    \12\ The Exchange states that cash value of futures positions is 
based on the value of the Fund's daily margin account with the 
applicable futures exchange(s).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares, as modified by Amendment No. 2, 
is consistent with the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange.\13\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Exchange Act,\14\ 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 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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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, according to the Exchange, the Shares 
will meet each of the initial and continued listing criteria in BZX 
Rule 14.11(i), including BZX Rule 14.11(i)(4)(C), with the exception of 
the 30% Limitation. According to the Exchange, the liquidity in the S&P 
500 Futures markets mitigates the concerns that BZX Rule 
14.11(i)(4)(C)(iv)(b) is intended to address and that such liquidity 
would prevent the Shares from being susceptible to manipulation.\15\
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    \15\ According to the Exchange, as of December 7, 2017, the 
average daily notional volume for S&P 500 Futures was more than $180 
billion over the previous thirty trading days. The Exchange 
represents that allowing the Fund to hold a greater portion of its 
portfolio in S&P 500 Futures would mitigate the Fund's dependency on 
holding OTC instruments, which would reduce the Fund's operational 
burden by allowing the Fund to primarily use listed futures 
contracts to achieve its investment objective and would further 
reduce counter-party risk associated with holding OTC instruments. 
Moreover, the Exchange represents that the diversity, liquidity, and 
market capitalization of the securities underlying the S&P 500 Index 
are sufficient to protect against market manipulation of both the 
Fund's holdings and the Shares as it relates to the S&P 500 Futures 
holdings.
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    In addition, the Exchange represents 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. The Exchange further represents that all of the futures contracts 
and U.S. ETFs held by the Fund will trade on markets that are members 
of the Intermarket Surveillance Group (``ISG'') or affiliated with a 
member of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. Moreover, the Exchange represents that 
it may obtain information regarding trading in the Shares and the 
underlying futures contracts and U.S. ETFs held by the Fund via the ISG 
from other exchanges who are members of the ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement.\16\ The Commission also notes that, according to the 
Exchange, the Fund's investment in U.S. ETFs or the constituent stocks 
of a U.S. ETF will meet the requirements for U.S. Component Stocks in 
BZX Rule 14.11(i)(4)(C)(i)(a). BZX Rule 14.11(i)(4)(C)(i)(a) provides 
that equity securities in the portfolio shall be listed on a national 
securities exchange, except that no more than 10% of the equity weight 
of the portfolio may be non-exchange traded ADRs. As all national 
securities exchanges are ISG members, the Commission notes that no less 
than 90% of constituent stocks of a U.S. ETF that the Fund will hold 
will be traded on markets that are members of ISG. In addition, the 
Exchange also represents that the Shares of the Fund will comply with 
all requirements applicable to Managed Fund Shares, including, but not 
limited to, requirements relating to the dissemination of key 
information such as the Disclosed Portfolio,\17\ net asset value,\18\ 
and the Intraday Indicative Value,\19\ suspension of trading or 
removal,\20\ trading halts,\21\ surveillance,\22\ minimum price 
variation for quoting and order entry,\23\ the information 
circular,\24\ and firewalls \25\ as set forth in Exchange rules 
applicable to Managed Fund Shares. Likewise, the Exchange represents 
that all statements and representations made in this filing regarding 
(a) the description of the portfolio or reference assets, (b) 
limitations on portfolio holdings or reference assets, (c) 
dissemination and availability of reference asset and intraday 
indicative values, (d) or the applicability of Exchange listing rules 
specified in this filing shall constitute continued listing 
requirements for listing the Shares on the Exchange. Moreover, 
according to the Exchange, the issuer has represented to the Exchange 
that it will advise the Exchange of any failure by the Fund or Shares 
to comply with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Exchange Act, the Exchange 
will surveil for compliance with the continued listing 
requirements.\26\ If the Fund or the Shares are not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under BZX Rule 14.12.
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    \16\ As stated above, S&P 500 Futures are traded on the Chicago 
Mercantile Exchange. The Commission notes that the Chicago 
Mercantile Exchange represents a significant market in S&P 500 
Futures, is a regulated futures and options market, and is a member 
of ISG. See supra note 16. For a list of the current members and 
affiliate members of ISG, see www.isgportal.com. The Exchange notes 
that not all components of the Disclosed Portfolio for the Fund may 
trade on markets that are members of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement.
    \17\ See BZX Rules 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
    \18\ See BZX Rule 14.11(i)(4)(A)(ii).
    \19\ See BZX Rule 14.11(i)(4)(B)(i).
    \20\ See BZX Rule 14.11(i)(4)(B)(iii).
    \21\ See BZX Rule 14.11(i)(4)(B)(iv).
    \22\ See BZX Rule 14.11(i)(2)(C).
    \23\ See BZX Rule 14.11(i)(2)(B).
    \24\ See BZX Rule 14.11(i)(6).
    \25\ See BZX Rule 14.11(i)(7).
    \26\ The Exchange represents that FINRA conducts certain cross-
market surveillances on behalf of the Exchange pursuant to a 
regulatory services agreement. The Exchange further represents that 
it is responsible for FINRA's performance under this regulatory 
services agreement.
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    This approval order is based on all of the Exchange's 
representations and description of the Fund, including those set forth 
above and in Amendment No. 2 to the proposed rule change.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 2, is consistent with Section 
6(b)(5) of the Exchange Act \27\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\28\

[[Page 12995]]

that the proposed rule change (SR-CboeBZX-2017-012), as modified by 
Amendment No. 2, be, and hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06013 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P
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