Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Principal Morley Short Duration Index ETF Under Rule 14.11(c)(4), 20892-20898 [2018-09692]
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sradovich on DSK3GMQ082PROD with NOTICES
20892
Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
the analyst’s personal views and
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Dated: May 1, 2018.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–09691 Filed 5–7–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–83152; File No. SR–
CboeBZX–2018–018]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To List and
Trade Shares of the Principal Morley
Short Duration Index ETF Under Rule
14.11(c)(4)
May 2, 2018.
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 April 23,
2018, Cboe BZX Exchange, Inc.
(‘‘Exchange’’ or ‘‘BZX’’) 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 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 list
and trade under BZX Rule 14.11(c)(4)
the shares of the Principal Morley Short
Duration Index ETF (the ‘‘Fund’’) of
Principal Exchange-Traded Funds (the
‘‘Trust’’).
The text of the proposed rule change
is available at the Exchange’s website at
www.markets.cboe.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
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.
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade shares of the Fund (‘‘Shares’’)
under BZX Rule 14.11(c)(4),3 which
governs the listing and trading of index
fund shares based on fixed income
securities indexes.4 The Shares will be
offered by the Trust, which was
established as a Delaware statutory trust
on March 05, 2013. The Trust is
registered with the Commission as an
open-end investment company and has
filed a registration statement on behalf
of the Fund on Form N–1A
(‘‘Registration Statement’’) with the
Commission.5 All statements and
3 The Commission approved BZX Rule 14.11(c) in
Securities Exchange Act Release No. 65225 (August
30, 2011), 76 FR 55148 (September 6, 2011) (SR–
BATS–2011–018).
4 The Commission previously has approved
proposed rule changes relating to listing and trading
of funds based on municipal bond indexes. See
Securities Exchange Act Release Nos. 78329 (July
14, 2016), 81 FR 47217 (July 20, 2016) (SR–
BatsBZX–2016–01) (order approving the listing and
trading of the following series of VanEck Vectors
ETF Trust: VanEck Vectors AMT-Free 6–8 Year
Municipal Index ETF; VanEck Vectors AMT-Free 8–
12 Year Municipal Index ETF; and VanEck Vectors
AMT-Free 12–17 Year Municipal Index ETF); 67985
(October 4, 2012), 77 FR 61804 (October 11, 2012)
(SR–NYSEArca–2012–92) (order approving
proposed rule change relating to the listing and
trading of iShares 2018 S&P AMT-Free Municipal
Series and iShares 2019 S&P AMT-Free Municipal
Series under NYSE Arca, Inc. (‘‘NYSE Arca’’) Rule
5.2(j)(3), Commentary .02); 72523 (July 2, 2014), 79
FR 39016 (July 9, 2014) (SR–NYSEArca–2014–37)
(order approving proposed rule change relating to
the listing and trading of iShares 2020 S&P AMTFree Municipal Series under NYSE Arca Rule
5.2(j)(3), Commentary .02); and 75468 (July 16,
2015), 80 FR 43500 (July 22, 2015) (SR–NYSEArca–
2015–25) (order approving proposed rule change
relating to the listing and trading of the iShares
iBonds Dec 2021 AMT-Free Muni Bond ETF and
iShares iBonds Dec 2022 AMT-Free Muni Bond
ETF under NYSE Arca Rule 5.2(j)(3), Commentary
.02). The Commission also has issued a notice of
filing and immediate effectiveness of a proposed
rule change relating to listing and trading on NYSE
Arca of the iShares Taxable Municipal Bond Fund.
See Securities Exchange Act Release No. 63176
(October 25, 2010), 75 FR 66815 (October 29, 2010)
(SR–NYSEArca–2010–94). The Commission has
approved two actively managed funds of the PIMCO
ETF Trust that hold municipal bonds. See
Securities Exchange Act Release No. 60981
(November 10, 2009), 74 FR 59594 (November 18,
2009) (SR–NYSEArca–2009–79) (order approving
listing and trading of PIMCO ShortTerm Municipal
Bond Strategy Fund and PIMCO Intermediate
Municipal Bond Strategy Fund, among others). The
Commission also has approved listing and trading
of the SPDR Nuveen S&P High Yield Municipal
Bond Fund. See Securities Exchange Act Release
No.63881 (February 9, 2011), 76 FR 9065 (February
16, 2011) (SR–NYSEArca–2010–120).
5 See Registration Statement on Form N–1A for
the Trust, dated September 1, 2017 (File Nos. 333–
201935 and 811–23029). The descriptions of the
Fund and the Shares contained herein are based, in
part, on information in the Registration Statement.
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Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
representations made in this filing
regarding the index composition, the
description of the portfolio or reference
assets, limitations on portfolio holdings
or reference assets, dissemination and
availability of index, reference asset,
and intraday indicative values, and the
applicability of Exchange rules specified
in this filing shall constitute continued
listing requirements for the Fund.
sradovich on DSK3GMQ082PROD with NOTICES
Description of the Shares and the Fund
Principal Global Investors, LLC will
be the investment adviser (the
‘‘Adviser’’) to the Fund and Morley
Capital Management will be the subadviser (the ‘‘Sub-Adviser’’) to the
Fund.6 The Adviser will serve as the
administrator for the Fund (the
‘‘Administrator’’). The State Street Bank
and Trust Company will serve as the
custodian (‘‘Custodian’’), transfer agent
(‘‘Transfer Agent’’) and subadministrator (‘‘Sub-Administrator) for
the Fund. ALPS Distributors, Inc. (the
‘‘Distributor’’) will be the distributor of
the Shares. Neither the Adviser nor the
Sub-Adviser is registered as a brokerdealer, but they are affiliated with
broker-dealers, [sic] Both the Advisor
and Sub-Advisor has [sic] implemented
and will maintain a fire wall with
respect to such broker-dealer affiliates
regarding access to information
concerning the composition and/or
changes to the portfolio, and will be
subject to procedures designed to
prevent the use and dissemination of
material non-public information
The Commission has issued an order granting
certain exemptive relief to the Trust under the
Investment Company Act of 1940 (15 U.S.C. 80a–
1) (‘‘1940 Act’’) (the ‘‘Exemptive Order’’). See
Investment Company Act Release No. 31872
(October 19, 2015) (File No. 812–14509).
6 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (the ‘‘Advisers Act’’). As a
result, the Adviser and its 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
all 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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18:41 May 07, 2018
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regarding such portfolio. Adviser and
Sub-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 or SubAdviser becomes registered as a brokerdealer or newly affiliated with a brokerdealer; or (b) any new adviser or subadviser is a registered broker-dealer or
becomes affiliated with a broker-dealer;
the Adviser and Sub-Adviser will
implement a fire wall with respect to
relevant personnel or such broker-dealer
affiliate, as applicable, regarding access
to information concerning the
composition and/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.
The ICE BofA Merrill Lynch Low
Duration U.S. ABS & CMBS Equal Par
Index
The Fund seeks to provide investment
results that seek to replicate, before
expenses, to [sic] the performance of
The ICE BofA Merrill Lynch Low
Duration U.S. ABS & CMBS Equal Par
Index (the ‘‘Index’’). The Index is
designed to provide exposure to
investment-grade securitized products
issued in the U.S., including ABS 7 and
CMBS.8 To qualify for inclusion in the
Index, eligible securities must be a
component of the The ICE BofA Merrill
Lynch US ABS & CMBS Index (the
‘‘Feeder Index’’). Such securities are
then selected and weighted based upon
the Index methodology discussed
below.
Feeder Index
In order to be included in the Feeder
Index, a security (whether ABS or
CMBS) must meet the following criteria
(the ‘‘Basic Criteria’’):
• be rated investment-grade (based on
an average of Moody’s, S&P Global, and
Fitch);
• have a term of at least one year
remaining until final stated maturity;
and have at least one month to the last
expected cash flow; and
• inverse floating rate, interest only,
and principal only securities are
excluded.
In addition to the Basic Criteria, an
ABS must meet the following criteria:
7 For
purposes of this filing, the term ‘‘ABS’’ shall
mean fixed and floating rate debt securities secured
by non-mortgage assets.
8 For purposes of this filing, the term ‘‘CMBS’’
shall mean fixed rate debt securities secured by first
mortgages on commercial real estate.
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20893
• must issue a fixed or floating rate
coupon;
• must have an original deal size for
the collateral group 9 of at least $250
million;
• must have a current outstanding
deal size for the collateral group greater
than or equal to 10% of the original deal
size; and
• a minimum current outstanding
tranche size of $50 million for senior
tranches and $10 million current
amount outstanding for mezzanine and
subordinated tranches.
In addition to the Basic Criteria, a
CMBS (which may include U.S. agency
CMBS) must also meet the following
criteria:
• must issue a fixed coupon schedule;
• must have an original deal size for
the collateral group of at least $250
million;
• must have a current outstanding
deal size for the collateral group that is
greater than or equal to 10% of the
original deal size; and
• must have a minimum outstanding
tranche size of $50 million for senior
tranches and $10 million for mezzanine
and subordinated tranches.
Index Methodology
All securities in the Feeder Index are
screened for inclusion/exclusion in the
Index based on the following criteria:
• ABS related to home equity and
manufactured housing are excluded;
• CMBS securities that are rated less
than AAA credit quality (based on an
average of Moody’s, S&P Global and
Fitch) are excluded;
• CMBS securities that are issued
prior to December 31, 2010 are
excluded;
• Securities must have a modified
duration to worst that is less than or
equal to 5 years for intial [sic] inclusion
in the Index, although once included,
the security remains in the Index
provided the remaining criteria are met.
The qualifying securities are assigned
equal par amounts with a 70%
allocation given to ABS securities and a
30% allocation given to CMBS
securities. The Index rebalances on a
monthly basis.
The Exchange is submitting this
proposed rule change because the Index
for the Fund does not meet all of the
‘‘generic’’ listing requirements of Rule
14.11(c)(4) applicable to the listing of
index fund shares based on fixed
9 A collateral group describes the assets
(receivables) that are held by the special purpose
vehicle (‘‘SPV’’) issuing the ABS securities. The
collateral group provides the source of payment for
the SPV’s liabilities (i.e. ABS securities). Typically,
an SPV will include assets greater than its liabilities
as a form of credit enhancement.
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Federal Register / Vol. 83, No. 89 / Tuesday, May 8, 2018 / Notices
income securities indexes. The Index
meets all such requirements except for
those set forth in Rule
14.11(c)(4)(B)(i)(b) 10 and
14.11(c)(4)(B)(i)(f).11 Specifically, as of
February 22, 2018, 57.9% of the weight
of the Index components have a
minimum original principal amount
outstanding of $100 million or more and
68.0% of the weight of the Index
components met the requirements of
Rule 14.11(c)(4)(B)(i)(f).
As of February 22, 2018, there were
2,693 constituents in the Index.
Principal Morley Short Duration Index
ETF
According to the Registration
Statement, the Fund will seek to
provide investment results that closely
correspond, before expenses, to the
performance of the Index. Under
Normal Market Conditions,12 the Fund
will invest at least 80% of its net assets,
plus any borrowings for investment
purposes, in ABS and CMBS that
compose the Index at the time of
purchase.
sradovich on DSK3GMQ082PROD with NOTICES
Other Portfolio Holdings
While the Fund normally will invest
at least 80% of its net assets, plus any
borrowings for investment purposes, in
ABS and CMBS that compose the Index,
as described above, the Fund may invest
its remaining assets in securities not
included in the Index including only
the following instruments: ABS and
CMBS not included in the Index; cash
and cash equivalents; 13 Treasury
10 Rule 14.11(c)(4)(B)(i)(b) provides that
components that in the aggregate account for at
least 75% of the weight of the index or portfolio
each shall have a minimum original principal
amount outstanding of $100 million or more.
11 Rule 14.11(c)(4)(B)(i)(f) provides that
component securities that in aggregate account for
at least 90% of the Fixed Income Securities portion
of the weight of the index or portfolio must be
either: (1) from issuers that are required to file
reports pursuant to Sections 13 and 15(d) of the
Act; (2) from issuers that have a worldwide market
value of its outstanding common equity held by
non-affiliates of $700 million or more; (3) from
issuers that have outstanding securities that are
notes, bonds, debentures, or evidence of
indebtedness having a total remaining principal
amount of at least $1 billion; (4) exempted
securities as defined in section 3(a)(12) of the Act;
or (5) from issuers that are a government of a foreign
country or a political subdivision of a foreign
country.
12 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 manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar
intervening circumstance.
13 For purposes of this filing, cash equivalents are
short-term instruments with maturities of less than
three months, including: (i) U.S. Government
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Securities with a maturity of three
months or greater; centrally cleared,
index-based credit default swaps; 14
and, to the extent permitted by the 1940
Act, other exchange-traded funds
(‘‘ETFs’’).15
Discussion
The Exchange is submitting this
proposed rule change because the Index
for the Fund does not meet all of the
‘‘generic’’ listing requirements of Rule
14.11(c)(4) applicable to the listing of
index fund shares based on fixed
income securities indexes. The Index
meets all such requirements except for
those set forth in Rule
14.11(c)(4)(B)(i)(b) 16 and
14.11(c)(4)(B)(i)(f).17 Specifically, as of
February 22, 2018, 57.9% of the weight
of the Index components have a
minimum original principal amount
outstanding of $100 million or more and
securities, including bills, notes, and bonds
differing as to maturity and rates of interest, which
are either issued or guaranteed by the U.S. Treasury
or by U.S. Government agencies or
instrumentalities; (ii) certificates of deposit issued
against funds deposited in a bank or savings and
loan association; (iii) bankers acceptances, which
are short-term credit instruments used to finance
commercial transactions; (iv) repurchase
agreements and reverse repurchase agreements; (v)
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;
(vi) commercial paper, which are short-term
unsecured promissory notes; and (vii) money
market funds.
14 Centrally cleared swaps are cleared through a
central clearinghouse and, as such, the counterparty
risk traditionally associated with over-the-counter
swaps is eliminated.
15 For purposes of this filing, ETFs include Index
Fund Shares (as described in Rule 14.11(c));
Portfolio Depositary Receipts (as described in Rule
14.11(b)); and Managed Fund Shares (as described
in Rule 14.11(i)). The ETFs all will be listed and
traded in the U.S. on registered exchanges. The
Fund may invest in the securities of ETFs registered
under the 1940 Act consistent with the
requirements of Section 12(d)(1) of the 1940 Act, or
any rule, regulation or order of the Commission or
interpretation thereof. The Fund will not invest in
leveraged or inverse leveraged (e.g., 2X, –2X, 3X or
–3X) ETFs.
16 Rule 14.11(c)(4)(B)(i)(b) provides that
components that in the aggregate account for at
least 75% of the weight of the index or portfolio
each shall have a minimum original principal
amount outstanding of $100 million or more.
17 Rule 14.11(c)(4)(B)(i)(f) provides that
component securities that in aggregate account for
at least 90% of the Fixed Income Securities portion
of the weight of the index or portfolio must be
either: (1) From issuers that are required to file
reports pursuant to Sections 13 and 15(d) of the
Act; (2) from issuers that have a worldwide market
value of its outstanding common equity held by
non-affiliates of $700 million or more; (3) from
issuers that have outstanding securities that are
notes, bonds, debentures, or evidence of
indebtedness having a total remaining principal
amount of at least $1 billion; (4) exempted
securities as defined in section 3(a)(12) of the Act;
or (5) from issuers that are a government of a foreign
country or a political subdivision of a foreign
country.
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Fmt 4703
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68.0% of the weight of the Index
components met the requirements of
Rule 14.11(c)(4)(B)(i)(f). The Exchange
notes that at least 90% of the weight of
the Index will be comprised of
securities that have a minimum par
amount of $10 million and were a
constituent of an offering where the
original deal size was at least $250
million.
While the Index will not meet certain
provisions of Rule 14.11(c)(4), as
described above, the Exchange believes
that the policy issues which such
provisions are intended to address are
otherwise mitigated. Specifically, the
concerns around the size and
manipulability of the underlying Fixed
Income Securities that Rule
14.11(c)(4)(B)(i)(b) is intended to
address are mitigated by the fact that at
least 90% of the weight of the Index will
be comprised of securities that have a
minimum par amount of $10 million
and were a constituent of an offering
where the original deal size was at least
$250 million. Similar standards have
been applied for other comparably
situated funds and the Exchange
believes that there is no reason that this
standard should not be applied for the
Fund.18
Further, the concerns around the
availability of information that Rule
14.11(c)(4)(B)(i)(f) is intended to address
are also mitigated as it relates to the
ABS and CMBS that populate the Index.
While only 68.0% of the weight of the
portfolio meets the requirements of Rule
14.11(c)(4)(B)(i)(f), the Index’s inability
to meet the 90% threshold is largely
based on a technicality in the rule text.
Part (1) of the Rule includes in the
calculation of percentage ‘‘issuers that
are required [emphasis added] to file
reports pursuant to Sections 13 and
15(d) of the Act.’’ The technicality is
that, while only certain registered
issuances of ABS and CMBS are
required to file reports pursuant to
Sections 13 or 15(d) of the Act, many
ABS and CMBS issuances include in the
bond indenture a requirement that the
issuer make a public disclosure of a
Statement to Noteholders. To this point,
the Fund will only hold ABS and CMBS
18 The Commission has previously approved a
proposed rule change relating to the listing and
trading of twelve series of Index Fund Shares based
on municipal bond indexes that did not satisfy the
requirement that component fixed income
securities that, in the aggregate, account for at least
75% of the weight of the index or portfolio have
a minimum principal amount outstanding of $100
million or more, provided that such municipal
bond index contained at least 500 component
securities on a continuous basis. See Securities
Exchange Act Release No. 82295 (December 12,
2017), 82 FR 60056 (December 18, 2017) (SR–
NYSEArca–2017–56).
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sradovich on DSK3GMQ082PROD with NOTICES
for which the bond indenture requires
the public disclosure of a Statement to
Noteholders on a no less frequent than
quarterly basis.19 As such, while the
Fund will not technically meet the
requirements of Rule
14.11(c)(4)(B)(i)(f)(1), the policy
concerns related to the transparency and
availability of information regarding the
Fixed Income Securities held by a fund
that the Rule is intended to address are
otherwise mitigated.
Further, the Index is broad-based and
currently includes 2,693 component
securities. Whereas the generic listing
rules permit a single component
security to represent up to 30% of the
weight of an index and the top five
component securities to, in aggregate,
represent up to 65% of the weight of an
index, the largest component security in
the Underyling Index only constitutes
0.044% of the weight of the Index and
the largest five component securities
represent 0.22% of the weight of the
Index. The Exchange believes that this
significant diversification and the lack
of concentration among constituent
securities provides a strong degree of
protection against index manipulation.
On a continuous basis, the Index will (i)
contain at least 500 component
securities and (ii) comply with the
19 A Statement to Noteholders generally includes
the same pieces of information about an issuer and
issuance of ABS or CMBS that would be included
in Form 10D. All ABS and CMBS held by the Fund
will issue Statements to Noteholders that will
include, at a minimum, a remittance report that will
show monthly or quarterly cash flows of the assets
and liabilities for the issuance. Statements to
Noteholders also typically include the following
types of information: (1) The amount of the
distribution(s) allocable to interest on the notes; (2)
the amount of the distribution(s) allocable to
principal of the notes; (3) the note balance, after
taking into account all payments to be made on
such distribution date; (4) the servicing fee paid
and/or due but unpaid as of such distribution date;
(5) the pool balance and required
overcollateralization amount as of the close of
business on the last day of the related collection
period; (6) the reserve fund amount, the reserve
fund required amount and the reserve fund draw
amount; (7) the amount of the aggregate realized
losses on the loans, if any, for the preceding
collection period and the cumulative default ratio;
(8) whether an amortization event will exist as of
such distribution date; (9) the aggregate repurchase
prices for loans, if any, that were repurchased by
the seller during the related collection period; (10)
the amount of fees payable to all parties pursuant
to the indenture; (11) any and all other fees,
expenses, indemnities or taxes payable by the issuer
or the grantor trust (including reserved amounts for
payments required to be made before the next
distribution date); (12) the payments to the
certificate holders; and (13) during a pre-funding
period, the amount on deposit in the pre-funding
account as of the close of business on the last day
of the related collection period, and the pool
balance of subsequent loans purchased during the
related collection period, and following the prefunding period, the amount of principal payments
made on each class of notes from amounts on
deposit in the pre-funding account.
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index methodology description
provided above.
Additional Information
The Index value, calculated and
disseminated at least once daily, as well
as the components of the Index and
their percentage weighting, will be
available from major market data
vendors. In addition, the portfolio of
securities held by the Fund will be
disclosed on the Fund’s website at
www.PrincipalETFs.com.
The Exchange represents that: (1)
Except as described above, the Index
currently satisfies and will continue to
satisfy all of the generic listing
standards under Rule 14.11(c)(4); (2) the
continued listing standards under BZX
Rule 14.11(c) applicable to index fund
shares shall apply to the Shares of the
Fund; and (3) the Trust is required to
comply with Rule 10A–3 20 under the
Act for the initial and continued listing
of the Shares of the Fund. In addition,
the Exchange represents that the Shares
of the Fund will comply with all other
requirements applicable to index fund
shares including, but not limited to,
requirements relating to the
dissemination of key information such
as the value of the Index and the
Intraday Indicative Value (‘‘IIV’’), rules
governing the trading of equity
securities, trading hours, trading halts,
surveillance, and the information
circular, as set forth in Exchange rules
applicable to index fund shares and the
orders approving such rules.
Availability of Information
The Fund’s website, which will be
publicly available prior to the public
offering of Shares, will include a form
of the prospectus for the Fund that may
be downloaded. The website will
include additional quantitative
information updated on a daily basis,
including, for the Fund: (1) The prior
business day’s reported NAV, daily
trading volume, and a calculation of the
premium and discount of the Bid/Ask
Price against the NAV; and (2) data in
chart format displaying the frequency
distribution of discounts and premiums
of the daily Bid/Ask Price against the
NAV, within appropriate ranges, for
each of the four previous calendar
quarters. 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
20 See
PO 00000
17 CFR 240.10A–3.
Frm 00109
Fmt 4703
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20895
electronic services, including major
public websites. On each business day,
before commencement of trading in
Shares during Regular Trading Hours 21
on the Exchange, the Fund will disclose
on its website the identities and
quantities of the portfolio of securities
and other assets in the portfolio held by
the Fund that will form the basis for the
Fund’s calculation of NAV at the end of
the business day. The portfolio
description will include, as applicable:
The 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, index 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 the percentage
weighting of the holding in the Fund’s
portfolio. The website and information
will be publicly available at no charge.
The value, components, and percentage
weightings of the Index will be
calculated and disseminated at least
once daily and will be available from
major market data vendors. Rules
governing the Index are available on the
Index Provider’s website and in the
Fund’s prospectus.
In addition, an estimated value,
defined in BZX Rule 14.11(c)(6)(A) as
the ‘‘Intraday Indicative Value,’’ that
reflects an estimated intraday value of
the Fund’s portfolio, will be
disseminated. Moreover, the Intraday
Indicative Value will be based upon the
current value for the components of the
daily disclosed portfolio and will be
updated and widely disseminated by
one or more major market data vendors
at least every 15 seconds during the
Exchange’s Regular Trading Hours.22 In
addition, the quotations of certain of the
Fund’s holdings may not be updated
during U.S. trading hours if updated
prices cannot be ascertained.
The dissemination of the Intraday
Indicative Value, together with the daily
disclosed portfolio, will allow investors
to determine the value of the underlying
portfolio of the Fund on a daily basis
and provide a close estimate of that
value throughout the trading day.
Quotation and last sale information
for the Shares of the Fund will be
21 Regular Trading Hours are 9:30 a.m. to 4:00
p.m. Eastern Time.
22 Currently, it is the Exchange’s understanding
that several major market data vendors display and/
or make widely available Intraday Indicative Values
published via the Consolidated Tape Association
(‘‘CTA’’) or other data feeds.
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available via the CTA high speed line.
Price information regarding ABS,
CMBS, and other non-exchange traded
assets, including the types of swaps
held by the Fund, cash and cash
equivalents, and other Treasury
Securities, is available from third party
pricing services and major market data
vendors. For exchange-traded assets,
including ETFs, such intraday
information is available directly from
the applicable listing exchange.
Initial and Continued Listing
The Shares of the Fund will conform
to the initial and continued listing
criteria under BZX Rule 14.11(c)(4),
except as described above. The
Exchange represents that, for initial
and/or continued listing, the Fund and
the Trust must be in compliance with
Rule 10A–3 under the Act.23 A
minimum of 100,000 Shares of the Fund
will be outstanding at the
commencement of trading on the
Exchange. The Exchange will obtain a
representation from the issuer of the
Shares that the NAV per Share for the
Fund will be calculated daily and will
be made available to all market
participants at the same time.
sradovich on DSK3GMQ082PROD with NOTICES
Trading Halts
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 BZX Rule 11.18.
Trading may be halted because of
market conditions or for reasons that, in
the view of the Exchange, make trading
in the Shares inadvisable. These may
include: (1) The extent to which trading
is not occurring in the securities and/or
the financial instruments composing the
daily disclosed portfolio of the Fund; or
(2) whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present. Trading in the
Shares also will be subject to Rule
14.11(c)(1)(B)(iv), which sets forth
circumstances under which Shares of
the Fund may be halted.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. The Exchange will
allow trading in the Shares from 8:00
a.m. until 5:00 p.m. Eastern Time and
has the appropriate rules to facilitate
transactions in the Shares during all
23 See
17 CFR 240.10A–3.
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trading sessions. As provided in BZX
Rule 11.11(a), the minimum price
variation for quoting and entry of orders
in securities traded on the Exchange is
$0.01, with the exception of securities
that are priced less than $1.00, for
which the minimum price variation for
order entry is $0.0001.
Surveillance
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 Index
Fund Shares. 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
Exchange Act, the Exchange will surveil
for compliance with the continued
listing requirements. FINRA conducts
certain cross-market surveillances on
behalf of the Exchange pursuant to a
regulatory services agreement. The
Exchange is responsible for FINRA’s
performance under this regulatory
services agreement. If the Fund is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
Exchange Rule 14.12. The Exchange, or
FINRA on behalf of the Exchange, may
obtain information regarding trading in
the Shares and the underlying shares in
exchange traded equity securities,
including ETFs, via the ISG, from other
exchanges that are members or affiliates
of the ISG, and the Exchange may obtain
such information from markets with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement.24 In addition, the Exchange,
or FINRA on behalf of the Exchange, is
able to access, as needed, trade
information for certain fixed income
instruments reported to FINRA’s Trade
Reporting and Compliance Engine
(‘‘TRACE’’). The Exchange prohibits the
distribution of material non-public
information by its employees.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
24 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the 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 00110
Fmt 4703
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of the Act 25 in general and Section
6(b)(5) of the Act 26 in particular in that
it is 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 Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the shares of
the Fund will be listed and traded on
the Exchange pursuant to the initial and
continued listing criteria for Index Fund
Shares based on a fixed income index in
Rule 14.11(c)(4), except for the
requirements of Rule 14.11(c)(4)(B)(i)(b)
and Rule 14.11(c)(4)(B)(i)(f). The
Exchange represents that trading in the
shares of the Fund will be subject to the
existing trading surveillances
administered by the Exchange as well as
cross-market surveillances administered
by the FINRA on behalf of the Exchange,
which are designed to detect violations
of Exchange rules and federal securities
laws applicable to trading on the
Exchange. The Exchange represents that
these procedures are adequate to
properly monitor Exchange trading of
the shares of the Fund in all trading
sessions and to deter and detect
violations of Exchange rules and federal
securities laws applicable to trading on
the Exchange. The Exchange or FINRA,
on behalf of the Exchange, or both, will
communicate as needed regarding
trading in the shares of the Fund with
other markets that are members of the
ISG. In addition, the Exchange will
communicate as needed regarding
trading in the shares of the Fund with
other markets that are members of the
ISG or with which the Exchange has in
place a comprehensive surveillance
sharing agreement. FINRA, on behalf of
the Exchange, is able to access, as
needed, trade information for certain
fixed income securities held by the
Fund reported to TRACE.
Further, the Index is broad-based and
currently includes 2,693 component
securities. Whereas the generic listing
rules permit a single component
security to represent up to 30% of the
weight of an index and the top five
component securities to, in aggregate,
represent up to 65% of the weight of an
index, the largest component security in
the Underyling Index only constitutes
25 15
26 15
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U.S.C. 78f(b)(5).
08MYN1
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sradovich on DSK3GMQ082PROD with NOTICES
0.044% of the weight of the Index and
the largest five component securities
represent 0.22% of the weight of the
Index. The Exchange believes that this
significant diversification and the lack
of concentration among constituent
securities provides a strong degree of
protection against index manipulation.
On a continuous basis, the Index will (i)
contain at least 500 component
securities and (ii) comply with the
index methodology description
provided above.
As of February 22, 2018, 57.9% of the
weight of the Index components have a
minimum original principal amount
outstanding of $100 million or more and
68.0% of the weight of the Index
components met the requirements of
Rule 14.11(c)(4)(B)(i)(f). The Exchange
notes that at least 90% of the weight of
the Index will be comprised of
securities that have a minimum par
amount of $25 million and were a
constituent of an offering where the
original deal size was at least $250
million.
While the Index will not meet certain
provisions of Rule 14.11(c)(4), as
described above, the Exchange believes
that the policy issues which such
provisions are intended to address are
otherwise mitigated. Specifically, the
concerns around the size and
manipulability of the underlying Fixed
Income Securities that Rule
14.11(c)(4)(B)(i)(b) is intended to
address are mitigated by the fact that at
least 90% of the weight of the Index will
be comprised of securities that have a
minimum par amount of $25 million
and were a constituent of an offering
where the original deal size was at least
$250 million. Similar standards have
been applied for other comparably
situated funds and the Exchange
believes that there is no reason that this
standard should not be applied for the
Fund.27
Further, the concerns around the
availability of information that Rule
14.11(c)(4)(B)(i)(f) is intended to address
are also mitigated as it relates to the
ABS and CMBS that populate the Index.
While only 68.0% of the weight of the
portfolio meets the requirements of Rule
27 The Commission has previously approved a
proposed rule change relating to the listing and
trading of twelve series of Index Fund Shares based
on municipal bond indexes that did not satisfy the
requirement that component fixed income
securities that, in the aggregate, account for at least
75% of the weight of the index or portfolio have
a minimum principal amount outstanding of $100
million or more, provided that such municipal
bond index contained at least 500 component
securities on a continuous basis. See Securities
Exchange Act Release No. 82295 (December 12,
2017), 82 FR 60056 (December 18, 2017) (SR–
NYSEArca–2017–56).
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18:41 May 07, 2018
Jkt 244001
14.11(c)(4)(B)(i)(f), the Index’s inability
to meet the 90% threshold is largely
based on a technicality in the rule text.
Part (1) of the Rule includes in the
calculation of percentage ‘‘issuers that
are required [emphasis added] to file
reports pursuant to Sections 13 and
15(d) of the Act.’’ The technicality is
that, while only certain registered
issuances of ABS and CMBS are
required to file reports pursuant to
Sections 13 or 15(d) of the Act, many
ABS and CMBS issuances include in the
bond indenture a requirement that the
issuer make a public disclosure of a
Statement to Noteholders.28 To this
point, the Fund will only hold ABS and
CMBS for which the bond indenture
requires the public disclosure of a
Statement to Noteholders on a no less
frequent than quarterly basis. As such,
while the Fund will not technically
meet the requirements of Rule
14.11(c)(4)(B)(i)(f)(1), the policy
concerns related to the transparency and
availability of information regarding the
Fixed Income Securities held by a fund
that the Rule is intended to address are
otherwise mitigated.
The proposed rule change is designed
to promote just and equitable principles
of trade and to protect investors and the
public interest in that a large amount of
28 A Statement to Noteholders generally includes
the same pieces of information about an issuer and
issuance of ABS or CMBS that would be included
in Form 10D. All Statements to Noteholders issued
by ABS and CMBS held by the Fund will include,
at a minimum, a remittance report that will show
monthly or quarterly cash flows of the assets and
liabilities for the issuance. Statements to
Noteholders also typically include the following
types of information: (1) The amount of the
distribution(s) allocable to interest on the notes; (2)
the amount of the distribution(s) allocable to
principal of the notes; (3) the note balance, after
taking into account all payments to be made on
such distribution date; (4) the servicing fee paid
and/or due but unpaid as of such distribution date;
(5) the pool balance and required
overcollateralization amount as of the close of
business on the last day of the related collection
period; (6) the reserve fund amount, the reserve
fund required amount and the reserve fund draw
amount; (7) the amount of the aggregate realized
losses on the loans, if any, for the preceding
collection period and the cumulative default ratio;
(8) whether an amortization event will exist as of
such distribution date; (9) the aggregate repurchase
prices for loans, if any, that were repurchased by
the seller during the related collection period; (10)
the amount of fees payable to all parties pursuant
to the indenture; (11) any and all other fees,
expenses, indemnities or taxes payable by the issuer
or the grantor trust (including reserved amounts for
payments required to be made before the next
distribution date); (12) the payments to the
certificate holders; and (13) during a pre-funding
period, the amount on deposit in the pre-funding
account as of the close of business on the last day
of the related collection period, and the pool
balance of subsequent loans purchased during the
related collection period, and following the prefunding period, the amount of principal payments
made on each class of notes from amounts on
deposit in the pre-funding account.
PO 00000
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20897
information is publicly available
regarding the Funds, thereby promoting
market transparency. The Fund’s
portfolio holdings will be disclosed on
the Fund’s website daily after the close
of trading on the Exchange and prior to
the opening of trading on the Exchange
the following day. Moreover, the IIV for
shares of the Fund will be widely
disseminated by one or more major
market data vendors at least every 15
seconds during the Exchange’s Regular
Trading Hours. The current value of the
Index will be disseminated by one or
more major market data vendors at least
once per day. Information regarding
market price and trading volume of the
shares of the Fund will be continually
available on a real-time basis throughout
the day on brokers’ computer screens
and other electronic services, and
quotation and last sale information will
be available via the CTA high-speed
line. The website for the Fund will
include the prospectus for the Fund and
additional data relating to NAV and
other applicable quantitative
information.
If the Exchange becomes aware that
the Fund’s NAV is not being
disseminated to all market participants
at the same time, it will halt trading in
the shares of the Fund until such time
as the NAV is available to all market
participants. 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. Trading also
may be halted because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the shares the Fund inadvisable. If the
IIV and index value are not being
disseminated for the Fund as required,
the Exchange may halt trading during
the day in which the interruption to the
dissemination of the IIV or index value
occurs. If the interruption to the
dissemination of an IIV or index value
persists past the trading day in which it
occurred, the Exchange will halt
trading. 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 BZX Rule 11.18.
Trading may be halted because of
market conditions or for reasons that, in
the view of the Exchange, make trading
in the Shares inadvisable. These may
include: (1) The extent to which trading
is not occurring in the securities and/or
the financial instruments composing the
daily disclosed portfolio of the Funds;
or (2) whether other unusual conditions
or circumstances detrimental to the
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sradovich on DSK3GMQ082PROD with NOTICES
maintenance of a fair and orderly
market are present. Trading in the
Shares also will be subject to Rule
14.11(c)(1)(B)(iv), which sets forth
circumstances under which Shares of a
Fund may be halted. In addition,
investors will have ready access to
information regarding the applicable
IIV, and quotation and last sale
information for the shares of the Fund.
All statements and representations
made in this filing regarding the index
composition, the description of the
portfolio or reference assets, limitations
on portfolio holdings or reference assets,
dissemination and availability of index,
reference asset, and intraday indicative
values (as applicable), or the
applicability of Exchange listing rules
shall constitute continued listing
requirements for listing the Shares on
the Exchange. The issuer is required to
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 monitor 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
Rule 14.12.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an exchange-traded product that
principally holds ABS and CMBS and
that will enhance competition among
market participants, to the benefit of
investors and the marketplace. The
Exchange has in place surveillance
procedures relating to trading in the
shares of the Fund and may obtain
information via ISG from other
exchanges that are members of ISG or
with which the Exchange has entered
into a comprehensive surveillance
sharing agreement. In addition,
investors will have ready access to
information regarding the IIV and
quotation and last sale information for
the shares of the Fund.
For the above reasons, the Exchange
believes that the proposed rule change
is consistent with the requirements of
Section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of an
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18:41 May 07, 2018
Jkt 244001
additional exchange-traded product that
will enhance competition among market
participants, to the benefit of investors
and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or up to 90 days (i) as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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 the Exchange. 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 information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2018–018 and
should be submitted on or before May
29, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Eduardo A. Aleman,
Assistant Secretary.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
[FR Doc. 2018–09692 Filed 5–7–18; 8:45 am]
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–
CboeBZX–2018–018 on the subject line.
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
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–CboeBZX–2018–018. 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
PO 00000
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Extension:
Rule 17a–6; SEC File No. 270–433, OMB
Control No. 3235–0489.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
provided for in Rule 17a–6 (17 CFR
240.17a–6) under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et
seq.). The Commission plans to submit
this existing collection of information to
the Office of Management and Budget
(‘‘OMB’’) for extension and approval.
Rule 17a–6 permits national securities
exchanges, national securities
associations, registered clearing
agencies, and the Municipal Securities
Rulemaking Board (‘‘MSRB’’)
(collectively, ‘‘SROs’’) to destroy or
29 17
E:\FR\FM\08MYN1.SGM
CFR 200.30–3(a)(12).
08MYN1
]]>Agencies
[Federal Register Volume 83, Number 89 (Tuesday, May 8, 2018)]
[Notices]
[Pages 20892-20898]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09692]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83152; File No. SR-CboeBZX-2018-018]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To List and Trade Shares of the
Principal Morley Short Duration Index ETF Under Rule 14.11(c)(4)
May 2, 2018.
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 April 23, 2018, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') 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
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange filed a proposal to list and trade under BZX Rule
14.11(c)(4) the shares of the Principal Morley Short Duration Index ETF
(the ``Fund'') of Principal Exchange-Traded Funds (the ``Trust'').
The text of the proposed rule change is available at the Exchange's
website at www.markets.cboe.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 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
The Exchange proposes to list and trade shares of the Fund
(``Shares'') under BZX Rule 14.11(c)(4),\3\ which governs the listing
and trading of index fund shares based on fixed income securities
indexes.\4\ The Shares will be offered by the Trust, which was
established as a Delaware statutory trust on March 05, 2013. The Trust
is registered with the Commission as an open-end investment company and
has filed a registration statement on behalf of the Fund on Form N-1A
(``Registration Statement'') with the Commission.\5\ All statements and
[[Page 20893]]
representations made in this filing regarding the index composition,
the description of the portfolio or reference assets, limitations on
portfolio holdings or reference assets, dissemination and availability
of index, reference asset, and intraday indicative values, and the
applicability of Exchange rules specified in this filing shall
constitute continued listing requirements for the Fund.
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\3\ The Commission approved BZX Rule 14.11(c) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\4\ The Commission previously has approved proposed rule changes
relating to listing and trading of funds based on municipal bond
indexes. See Securities Exchange Act Release Nos. 78329 (July 14,
2016), 81 FR 47217 (July 20, 2016) (SR-BatsBZX-2016-01) (order
approving the listing and trading of the following series of VanEck
Vectors ETF Trust: VanEck Vectors AMT-Free 6-8 Year Municipal Index
ETF; VanEck Vectors AMT-Free 8-12 Year Municipal Index ETF; and
VanEck Vectors AMT-Free 12-17 Year Municipal Index ETF); 67985
(October 4, 2012), 77 FR 61804 (October 11, 2012) (SR-NYSEArca-2012-
92) (order approving proposed rule change relating to the listing
and trading of iShares 2018 S&P AMT-Free Municipal Series and
iShares 2019 S&P AMT-Free Municipal Series under NYSE Arca, Inc.
(``NYSE Arca'') Rule 5.2(j)(3), Commentary .02); 72523 (July 2,
2014), 79 FR 39016 (July 9, 2014) (SR-NYSEArca-2014-37) (order
approving proposed rule change relating to the listing and trading
of iShares 2020 S&P AMT-Free Municipal Series under NYSE Arca Rule
5.2(j)(3), Commentary .02); and 75468 (July 16, 2015), 80 FR 43500
(July 22, 2015) (SR-NYSEArca-2015-25) (order approving proposed rule
change relating to the listing and trading of the iShares iBonds Dec
2021 AMT-Free Muni Bond ETF and iShares iBonds Dec 2022 AMT-Free
Muni Bond ETF under NYSE Arca Rule 5.2(j)(3), Commentary .02). The
Commission also has issued a notice of filing and immediate
effectiveness of a proposed rule change relating to listing and
trading on NYSE Arca of the iShares Taxable Municipal Bond Fund. See
Securities Exchange Act Release No. 63176 (October 25, 2010), 75 FR
66815 (October 29, 2010) (SR-NYSEArca-2010-94). The Commission has
approved two actively managed funds of the PIMCO ETF Trust that hold
municipal bonds. See Securities Exchange Act Release No. 60981
(November 10, 2009), 74 FR 59594 (November 18, 2009) (SR-NYSEArca-
2009-79) (order approving listing and trading of PIMCO ShortTerm
Municipal Bond Strategy Fund and PIMCO Intermediate Municipal Bond
Strategy Fund, among others). The Commission also has approved
listing and trading of the SPDR Nuveen S&P High Yield Municipal Bond
Fund. See Securities Exchange Act Release No.63881 (February 9,
2011), 76 FR 9065 (February 16, 2011) (SR-NYSEArca-2010-120).
\5\ See Registration Statement on Form N-1A for the Trust, dated
September 1, 2017 (File Nos. 333-201935 and 811-23029). The
descriptions of the Fund and the Shares contained herein are based,
in part, on information in the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Trust under the Investment Company Act of 1940 (15 U.S.C. 80a-1)
(``1940 Act'') (the ``Exemptive Order''). See Investment Company Act
Release No. 31872 (October 19, 2015) (File No. 812-14509).
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Description of the Shares and the Fund
Principal Global Investors, LLC will be the investment adviser (the
``Adviser'') to the Fund and Morley Capital Management will be the sub-
adviser (the ``Sub-Adviser'') to the Fund.\6\ The Adviser will serve as
the administrator for the Fund (the ``Administrator''). The State
Street Bank and Trust Company will serve as the custodian
(``Custodian''), transfer agent (``Transfer Agent'') and sub-
administrator (``Sub-Administrator) for the Fund. ALPS Distributors,
Inc. (the ``Distributor'') will be the distributor of the Shares.
Neither the Adviser nor the Sub-Adviser is registered as a broker-
dealer, but they are affiliated with broker-dealers, [sic] Both the
Advisor and Sub-Advisor has [sic] implemented and will maintain a fire
wall with respect to such broker-dealer affiliates regarding access to
information concerning the composition and/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. Adviser and Sub-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 or
Sub-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;
the Adviser and Sub-Adviser will implement a fire wall with respect to
relevant personnel or such broker-dealer affiliate, as applicable,
regarding access to information concerning the composition and/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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\6\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its 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 all 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 ICE BofA Merrill Lynch Low Duration U.S. ABS & CMBS Equal Par Index
The Fund seeks to provide investment results that seek to
replicate, before expenses, to [sic] the performance of The ICE BofA
Merrill Lynch Low Duration U.S. ABS & CMBS Equal Par Index (the
``Index''). The Index is designed to provide exposure to investment-
grade securitized products issued in the U.S., including ABS \7\ and
CMBS.\8\ To qualify for inclusion in the Index, eligible securities
must be a component of the The ICE BofA Merrill Lynch US ABS & CMBS
Index (the ``Feeder Index''). Such securities are then selected and
weighted based upon the Index methodology discussed below.
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\7\ For purposes of this filing, the term ``ABS'' shall mean
fixed and floating rate debt securities secured by non-mortgage
assets.
\8\ For purposes of this filing, the term ``CMBS'' shall mean
fixed rate debt securities secured by first mortgages on commercial
real estate.
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Feeder Index
In order to be included in the Feeder Index, a security (whether
ABS or CMBS) must meet the following criteria (the ``Basic Criteria''):
be rated investment-grade (based on an average of Moody's,
S&P Global, and Fitch);
have a term of at least one year remaining until final
stated maturity; and have at least one month to the last expected cash
flow; and
inverse floating rate, interest only, and principal only
securities are excluded.
In addition to the Basic Criteria, an ABS must meet the following
criteria:
must issue a fixed or floating rate coupon;
must have an original deal size for the collateral group
\9\ of at least $250 million;
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\9\ A collateral group describes the assets (receivables) that
are held by the special purpose vehicle (``SPV'') issuing the ABS
securities. The collateral group provides the source of payment for
the SPV's liabilities (i.e. ABS securities). Typically, an SPV will
include assets greater than its liabilities as a form of credit
enhancement.
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must have a current outstanding deal size for the
collateral group greater than or equal to 10% of the original deal
size; and
a minimum current outstanding tranche size of $50 million
for senior tranches and $10 million current amount outstanding for
mezzanine and subordinated tranches.
In addition to the Basic Criteria, a CMBS (which may include U.S.
agency CMBS) must also meet the following criteria:
must issue a fixed coupon schedule;
must have an original deal size for the collateral group
of at least $250 million;
must have a current outstanding deal size for the
collateral group that is greater than or equal to 10% of the original
deal size; and
must have a minimum outstanding tranche size of $50
million for senior tranches and $10 million for mezzanine and
subordinated tranches.
Index Methodology
All securities in the Feeder Index are screened for inclusion/
exclusion in the Index based on the following criteria:
ABS related to home equity and manufactured housing are
excluded;
CMBS securities that are rated less than AAA credit
quality (based on an average of Moody's, S&P Global and Fitch) are
excluded;
CMBS securities that are issued prior to December 31, 2010
are excluded;
Securities must have a modified duration to worst that is
less than or equal to 5 years for intial [sic] inclusion in the Index,
although once included, the security remains in the Index provided the
remaining criteria are met.
The qualifying securities are assigned equal par amounts with a 70%
allocation given to ABS securities and a 30% allocation given to CMBS
securities. The Index rebalances on a monthly basis.
The Exchange is submitting this proposed rule change because the
Index for the Fund does not meet all of the ``generic'' listing
requirements of Rule 14.11(c)(4) applicable to the listing of index
fund shares based on fixed
[[Page 20894]]
income securities indexes. The Index meets all such requirements except
for those set forth in Rule 14.11(c)(4)(B)(i)(b) \10\ and
14.11(c)(4)(B)(i)(f).\11\ Specifically, as of February 22, 2018, 57.9%
of the weight of the Index components have a minimum original principal
amount outstanding of $100 million or more and 68.0% of the weight of
the Index components met the requirements of Rule 14.11(c)(4)(B)(i)(f).
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\10\ Rule 14.11(c)(4)(B)(i)(b) provides that components that in
the aggregate account for at least 75% of the weight of the index or
portfolio each shall have a minimum original principal amount
outstanding of $100 million or more.
\11\ Rule 14.11(c)(4)(B)(i)(f) provides that component
securities that in aggregate account for at least 90% of the Fixed
Income Securities portion of the weight of the index or portfolio
must be either: (1) from issuers that are required to file reports
pursuant to Sections 13 and 15(d) of the Act; (2) from issuers that
have a worldwide market value of its outstanding common equity held
by non-affiliates of $700 million or more; (3) from issuers that
have outstanding securities that are notes, bonds, debentures, or
evidence of indebtedness having a total remaining principal amount
of at least $1 billion; (4) exempted securities as defined in
section 3(a)(12) of the Act; or (5) from issuers that are a
government of a foreign country or a political subdivision of a
foreign country.
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As of February 22, 2018, there were 2,693 constituents in the
Index.
Principal Morley Short Duration Index ETF
According to the Registration Statement, the Fund will seek to
provide investment results that closely correspond, before expenses, to
the performance of the Index. Under Normal Market Conditions,\12\ the
Fund will invest at least 80% of its net assets, plus any borrowings
for investment purposes, in ABS and CMBS that compose the Index at the
time of purchase.
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\12\ 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.
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Other Portfolio Holdings
While the Fund normally will invest at least 80% of its net assets,
plus any borrowings for investment purposes, in ABS and CMBS that
compose the Index, as described above, the Fund may invest its
remaining assets in securities not included in the Index including only
the following instruments: ABS and CMBS not included in the Index; cash
and cash equivalents; \13\ Treasury Securities with a maturity of three
months or greater; centrally cleared, index-based credit default swaps;
\14\ and, to the extent permitted by the 1940 Act, other exchange-
traded funds (``ETFs'').\15\
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\13\ For purposes of this filing, cash equivalents are short-
term instruments with maturities of less than three months,
including: (i) U.S. Government securities, including bills, notes,
and bonds differing as to maturity and rates of interest, which are
either issued or guaranteed by the U.S. Treasury or by U.S.
Government agencies or instrumentalities; (ii) certificates of
deposit issued against funds deposited in a bank or savings and loan
association; (iii) bankers acceptances, which are short-term credit
instruments used to finance commercial transactions; (iv) repurchase
agreements and reverse repurchase agreements; (v) 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; (vi) commercial paper, which are short-term unsecured
promissory notes; and (vii) money market funds.
\14\ Centrally cleared swaps are cleared through a central
clearinghouse and, as such, the counterparty risk traditionally
associated with over-the-counter swaps is eliminated.
\15\ For purposes of this filing, ETFs include Index Fund Shares
(as described in Rule 14.11(c)); Portfolio Depositary Receipts (as
described in Rule 14.11(b)); and Managed Fund Shares (as described
in Rule 14.11(i)). The ETFs all will be listed and traded in the
U.S. on registered exchanges. The Fund may invest in the securities
of ETFs registered under the 1940 Act consistent with the
requirements of Section 12(d)(1) of the 1940 Act, or any rule,
regulation or order of the Commission or interpretation thereof. The
Fund will not invest in leveraged or inverse leveraged (e.g., 2X, -
2X, 3X or -3X) ETFs.
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Discussion
The Exchange is submitting this proposed rule change because the
Index for the Fund does not meet all of the ``generic'' listing
requirements of Rule 14.11(c)(4) applicable to the listing of index
fund shares based on fixed income securities indexes. The Index meets
all such requirements except for those set forth in Rule
14.11(c)(4)(B)(i)(b) \16\ and 14.11(c)(4)(B)(i)(f).\17\ Specifically,
as of February 22, 2018, 57.9% of the weight of the Index components
have a minimum original principal amount outstanding of $100 million or
more and 68.0% of the weight of the Index components met the
requirements of Rule 14.11(c)(4)(B)(i)(f). The Exchange notes that at
least 90% of the weight of the Index will be comprised of securities
that have a minimum par amount of $10 million and were a constituent of
an offering where the original deal size was at least $250 million.
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\16\ Rule 14.11(c)(4)(B)(i)(b) provides that components that in
the aggregate account for at least 75% of the weight of the index or
portfolio each shall have a minimum original principal amount
outstanding of $100 million or more.
\17\ Rule 14.11(c)(4)(B)(i)(f) provides that component
securities that in aggregate account for at least 90% of the Fixed
Income Securities portion of the weight of the index or portfolio
must be either: (1) From issuers that are required to file reports
pursuant to Sections 13 and 15(d) of the Act; (2) from issuers that
have a worldwide market value of its outstanding common equity held
by non-affiliates of $700 million or more; (3) from issuers that
have outstanding securities that are notes, bonds, debentures, or
evidence of indebtedness having a total remaining principal amount
of at least $1 billion; (4) exempted securities as defined in
section 3(a)(12) of the Act; or (5) from issuers that are a
government of a foreign country or a political subdivision of a
foreign country.
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While the Index will not meet certain provisions of Rule
14.11(c)(4), as described above, the Exchange believes that the policy
issues which such provisions are intended to address are otherwise
mitigated. Specifically, the concerns around the size and
manipulability of the underlying Fixed Income Securities that Rule
14.11(c)(4)(B)(i)(b) is intended to address are mitigated by the fact
that at least 90% of the weight of the Index will be comprised of
securities that have a minimum par amount of $10 million and were a
constituent of an offering where the original deal size was at least
$250 million. Similar standards have been applied for other comparably
situated funds and the Exchange believes that there is no reason that
this standard should not be applied for the Fund.\18\
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\18\ The Commission has previously approved a proposed rule
change relating to the listing and trading of twelve series of Index
Fund Shares based on municipal bond indexes that did not satisfy the
requirement that component fixed income securities that, in the
aggregate, account for at least 75% of the weight of the index or
portfolio have a minimum principal amount outstanding of $100
million or more, provided that such municipal bond index contained
at least 500 component securities on a continuous basis. See
Securities Exchange Act Release No. 82295 (December 12, 2017), 82 FR
60056 (December 18, 2017) (SR-NYSEArca-2017-56).
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Further, the concerns around the availability of information that
Rule 14.11(c)(4)(B)(i)(f) is intended to address are also mitigated as
it relates to the ABS and CMBS that populate the Index. While only
68.0% of the weight of the portfolio meets the requirements of Rule
14.11(c)(4)(B)(i)(f), the Index's inability to meet the 90% threshold
is largely based on a technicality in the rule text. Part (1) of the
Rule includes in the calculation of percentage ``issuers that are
required [emphasis added] to file reports pursuant to Sections 13 and
15(d) of the Act.'' The technicality is that, while only certain
registered issuances of ABS and CMBS are required to file reports
pursuant to Sections 13 or 15(d) of the Act, many ABS and CMBS
issuances include in the bond indenture a requirement that the issuer
make a public disclosure of a Statement to Noteholders. To this point,
the Fund will only hold ABS and CMBS
[[Page 20895]]
for which the bond indenture requires the public disclosure of a
Statement to Noteholders on a no less frequent than quarterly
basis.\19\ As such, while the Fund will not technically meet the
requirements of Rule 14.11(c)(4)(B)(i)(f)(1), the policy concerns
related to the transparency and availability of information regarding
the Fixed Income Securities held by a fund that the Rule is intended to
address are otherwise mitigated.
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\19\ A Statement to Noteholders generally includes the same
pieces of information about an issuer and issuance of ABS or CMBS
that would be included in Form 10D. All ABS and CMBS held by the
Fund will issue Statements to Noteholders that will include, at a
minimum, a remittance report that will show monthly or quarterly
cash flows of the assets and liabilities for the issuance.
Statements to Noteholders also typically include the following types
of information: (1) The amount of the distribution(s) allocable to
interest on the notes; (2) the amount of the distribution(s)
allocable to principal of the notes; (3) the note balance, after
taking into account all payments to be made on such distribution
date; (4) the servicing fee paid and/or due but unpaid as of such
distribution date; (5) the pool balance and required
overcollateralization amount as of the close of business on the last
day of the related collection period; (6) the reserve fund amount,
the reserve fund required amount and the reserve fund draw amount;
(7) the amount of the aggregate realized losses on the loans, if
any, for the preceding collection period and the cumulative default
ratio; (8) whether an amortization event will exist as of such
distribution date; (9) the aggregate repurchase prices for loans, if
any, that were repurchased by the seller during the related
collection period; (10) the amount of fees payable to all parties
pursuant to the indenture; (11) any and all other fees, expenses,
indemnities or taxes payable by the issuer or the grantor trust
(including reserved amounts for payments required to be made before
the next distribution date); (12) the payments to the certificate
holders; and (13) during a pre-funding period, the amount on deposit
in the pre-funding account as of the close of business on the last
day of the related collection period, and the pool balance of
subsequent loans purchased during the related collection period, and
following the pre-funding period, the amount of principal payments
made on each class of notes from amounts on deposit in the pre-
funding account.
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Further, the Index is broad-based and currently includes 2,693
component securities. Whereas the generic listing rules permit a single
component security to represent up to 30% of the weight of an index and
the top five component securities to, in aggregate, represent up to 65%
of the weight of an index, the largest component security in the
Underyling Index only constitutes 0.044% of the weight of the Index and
the largest five component securities represent 0.22% of the weight of
the Index. The Exchange believes that this significant diversification
and the lack of concentration among constituent securities provides a
strong degree of protection against index manipulation. On a continuous
basis, the Index will (i) contain at least 500 component securities and
(ii) comply with the index methodology description provided above.
Additional Information
The Index value, calculated and disseminated at least once daily,
as well as the components of the Index and their percentage weighting,
will be available from major market data vendors. In addition, the
portfolio of securities held by the Fund will be disclosed on the
Fund's website at www.PrincipalETFs.com.
The Exchange represents that: (1) Except as described above, the
Index currently satisfies and will continue to satisfy all of the
generic listing standards under Rule 14.11(c)(4); (2) the continued
listing standards under BZX Rule 14.11(c) applicable to index fund
shares shall apply to the Shares of the Fund; and (3) the Trust is
required to comply with Rule 10A-3 \20\ under the Act for the initial
and continued listing of the Shares of the Fund. In addition, the
Exchange represents that the Shares of the Fund will comply with all
other requirements applicable to index fund shares including, but not
limited to, requirements relating to the dissemination of key
information such as the value of the Index and the Intraday Indicative
Value (``IIV''), rules governing the trading of equity securities,
trading hours, trading halts, surveillance, and the information
circular, as set forth in Exchange rules applicable to index fund
shares and the orders approving such rules.
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\20\ See 17 CFR 240.10A-3.
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Availability of Information
The Fund's website, which will be publicly available prior to the
public offering of Shares, will include a form of the prospectus for
the Fund that may be downloaded. The website will include additional
quantitative information updated on a daily basis, including, for the
Fund: (1) The prior business day's reported NAV, daily trading volume,
and a calculation of the premium and discount of the Bid/Ask Price
against the NAV; and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily Bid/Ask Price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. 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 websites. On each business day, before
commencement of trading in Shares during Regular Trading Hours \21\ on
the Exchange, the Fund will disclose on its website the identities and
quantities of the portfolio of securities and other assets in the
portfolio held by the Fund that will form the basis for the Fund's
calculation of NAV at the end of the business day. The portfolio
description will include, as applicable: The 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, index 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 the
percentage weighting of the holding in the Fund's portfolio. The
website and information will be publicly available at no charge. The
value, components, and percentage weightings of the Index will be
calculated and disseminated at least once daily and will be available
from major market data vendors. Rules governing the Index are available
on the Index Provider's website and in the Fund's prospectus.
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\21\ Regular Trading Hours are 9:30 a.m. to 4:00 p.m. Eastern
Time.
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In addition, an estimated value, defined in BZX Rule 14.11(c)(6)(A)
as the ``Intraday Indicative Value,'' that reflects an estimated
intraday value of the Fund's portfolio, will be disseminated. Moreover,
the Intraday Indicative Value will be based upon the current value for
the components of the daily disclosed portfolio and will be updated and
widely disseminated by one or more major market data vendors at least
every 15 seconds during the Exchange's Regular Trading Hours.\22\ In
addition, the quotations of certain of the Fund's holdings may not be
updated during U.S. trading hours if updated prices cannot be
ascertained.
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\22\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Intraday Indicative Values published via the Consolidated Tape
Association (``CTA'') or other data feeds.
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The dissemination of the Intraday Indicative Value, together with
the daily disclosed portfolio, will allow investors to determine the
value of the underlying portfolio of the Fund on a daily basis and
provide a close estimate of that value throughout the trading day.
Quotation and last sale information for the Shares of the Fund will
be
[[Page 20896]]
available via the CTA high speed line. Price information regarding ABS,
CMBS, and other non-exchange traded assets, including the types of
swaps held by the Fund, cash and cash equivalents, and other Treasury
Securities, is available from third party pricing services and major
market data vendors. For exchange-traded assets, including ETFs, such
intraday information is available directly from the applicable listing
exchange.
Initial and Continued Listing
The Shares of the Fund will conform to the initial and continued
listing criteria under BZX Rule 14.11(c)(4), except as described above.
The Exchange represents that, for initial and/or continued listing, the
Fund and the Trust must be in compliance with Rule 10A-3 under the
Act.\23\ A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange. The Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share for
the Fund will be calculated daily and will be made available to all
market participants at the same time.
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\23\ See 17 CFR 240.10A-3.
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Trading Halts
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 BZX Rule 11.18. Trading
may be halted because of market conditions or for reasons that, in the
view of the Exchange, make trading in the Shares inadvisable. These may
include: (1) The extent to which trading is not occurring in the
securities and/or the financial instruments composing the daily
disclosed portfolio of the Fund; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present. Trading in the Shares also will be
subject to Rule 14.11(c)(1)(B)(iv), which sets forth circumstances
under which Shares of the Fund may be halted.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. The Exchange will
allow trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time
and has the appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a), the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01, with the exception of securities that
are priced less than $1.00, for which the minimum price variation for
order entry is $0.0001.
Surveillance
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 Index Fund Shares. 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 Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. FINRA conducts certain cross-market
surveillances on behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for FINRA's performance
under this regulatory services agreement. If the Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. The Exchange,
or FINRA on behalf of the Exchange, may obtain information regarding
trading in the Shares and the underlying shares in exchange traded
equity securities, including ETFs, via the ISG, from other exchanges
that are members or affiliates of the ISG, and the Exchange may obtain
such information from markets with which the Exchange has entered into
a comprehensive surveillance sharing agreement.\24\ In addition, the
Exchange, or FINRA on behalf of the Exchange, is able to access, as
needed, trade information for certain fixed income instruments reported
to FINRA's Trade Reporting and Compliance Engine (``TRACE''). The
Exchange prohibits the distribution of material non-public information
by its employees.
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\24\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
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.
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2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \25\ in general and Section 6(b)(5) of the Act \26\ in
particular in that it is 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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\25\ 15 U.S.C. 78f.
\26\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
shares of the Fund will be listed and traded on the Exchange pursuant
to the initial and continued listing criteria for Index Fund Shares
based on a fixed income index in Rule 14.11(c)(4), except for the
requirements of Rule 14.11(c)(4)(B)(i)(b) and Rule
14.11(c)(4)(B)(i)(f). The Exchange represents that trading in the
shares of the Fund will be subject to the existing trading
surveillances administered by the Exchange as well as cross-market
surveillances administered by the FINRA on behalf of the Exchange,
which are designed to detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange. The Exchange
represents that these procedures are adequate to properly monitor
Exchange trading of the shares of the Fund in all trading sessions and
to deter and detect violations of Exchange rules and federal securities
laws applicable to trading on the Exchange. The Exchange or FINRA, on
behalf of the Exchange, or both, will communicate as needed regarding
trading in the shares of the Fund with other markets that are members
of the ISG. In addition, the Exchange will communicate as needed
regarding trading in the shares of the Fund with other markets that are
members of the ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. FINRA, on behalf of the
Exchange, is able to access, as needed, trade information for certain
fixed income securities held by the Fund reported to TRACE.
Further, the Index is broad-based and currently includes 2,693
component securities. Whereas the generic listing rules permit a single
component security to represent up to 30% of the weight of an index and
the top five component securities to, in aggregate, represent up to 65%
of the weight of an index, the largest component security in the
Underyling Index only constitutes
[[Page 20897]]
0.044% of the weight of the Index and the largest five component
securities represent 0.22% of the weight of the Index. The Exchange
believes that this significant diversification and the lack of
concentration among constituent securities provides a strong degree of
protection against index manipulation. On a continuous basis, the Index
will (i) contain at least 500 component securities and (ii) comply with
the index methodology description provided above.
As of February 22, 2018, 57.9% of the weight of the Index
components have a minimum original principal amount outstanding of $100
million or more and 68.0% of the weight of the Index components met the
requirements of Rule 14.11(c)(4)(B)(i)(f). The Exchange notes that at
least 90% of the weight of the Index will be comprised of securities
that have a minimum par amount of $25 million and were a constituent of
an offering where the original deal size was at least $250 million.
While the Index will not meet certain provisions of Rule
14.11(c)(4), as described above, the Exchange believes that the policy
issues which such provisions are intended to address are otherwise
mitigated. Specifically, the concerns around the size and
manipulability of the underlying Fixed Income Securities that Rule
14.11(c)(4)(B)(i)(b) is intended to address are mitigated by the fact
that at least 90% of the weight of the Index will be comprised of
securities that have a minimum par amount of $25 million and were a
constituent of an offering where the original deal size was at least
$250 million. Similar standards have been applied for other comparably
situated funds and the Exchange believes that there is no reason that
this standard should not be applied for the Fund.\27\
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\27\ The Commission has previously approved a proposed rule
change relating to the listing and trading of twelve series of Index
Fund Shares based on municipal bond indexes that did not satisfy the
requirement that component fixed income securities that, in the
aggregate, account for at least 75% of the weight of the index or
portfolio have a minimum principal amount outstanding of $100
million or more, provided that such municipal bond index contained
at least 500 component securities on a continuous basis. See
Securities Exchange Act Release No. 82295 (December 12, 2017), 82 FR
60056 (December 18, 2017) (SR-NYSEArca-2017-56).
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Further, the concerns around the availability of information that
Rule 14.11(c)(4)(B)(i)(f) is intended to address are also mitigated as
it relates to the ABS and CMBS that populate the Index. While only
68.0% of the weight of the portfolio meets the requirements of Rule
14.11(c)(4)(B)(i)(f), the Index's inability to meet the 90% threshold
is largely based on a technicality in the rule text. Part (1) of the
Rule includes in the calculation of percentage ``issuers that are
required [emphasis added] to file reports pursuant to Sections 13 and
15(d) of the Act.'' The technicality is that, while only certain
registered issuances of ABS and CMBS are required to file reports
pursuant to Sections 13 or 15(d) of the Act, many ABS and CMBS
issuances include in the bond indenture a requirement that the issuer
make a public disclosure of a Statement to Noteholders.\28\ To this
point, the Fund will only hold ABS and CMBS for which the bond
indenture requires the public disclosure of a Statement to Noteholders
on a no less frequent than quarterly basis. As such, while the Fund
will not technically meet the requirements of Rule
14.11(c)(4)(B)(i)(f)(1), the policy concerns related to the
transparency and availability of information regarding the Fixed Income
Securities held by a fund that the Rule is intended to address are
otherwise mitigated.
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\28\ A Statement to Noteholders generally includes the same
pieces of information about an issuer and issuance of ABS or CMBS
that would be included in Form 10D. All Statements to Noteholders
issued by ABS and CMBS held by the Fund will include, at a minimum,
a remittance report that will show monthly or quarterly cash flows
of the assets and liabilities for the issuance. Statements to
Noteholders also typically include the following types of
information: (1) The amount of the distribution(s) allocable to
interest on the notes; (2) the amount of the distribution(s)
allocable to principal of the notes; (3) the note balance, after
taking into account all payments to be made on such distribution
date; (4) the servicing fee paid and/or due but unpaid as of such
distribution date; (5) the pool balance and required
overcollateralization amount as of the close of business on the last
day of the related collection period; (6) the reserve fund amount,
the reserve fund required amount and the reserve fund draw amount;
(7) the amount of the aggregate realized losses on the loans, if
any, for the preceding collection period and the cumulative default
ratio; (8) whether an amortization event will exist as of such
distribution date; (9) the aggregate repurchase prices for loans, if
any, that were repurchased by the seller during the related
collection period; (10) the amount of fees payable to all parties
pursuant to the indenture; (11) any and all other fees, expenses,
indemnities or taxes payable by the issuer or the grantor trust
(including reserved amounts for payments required to be made before
the next distribution date); (12) the payments to the certificate
holders; and (13) during a pre-funding period, the amount on deposit
in the pre-funding account as of the close of business on the last
day of the related collection period, and the pool balance of
subsequent loans purchased during the related collection period, and
following the pre- funding period, the amount of principal payments
made on each class of notes from amounts on deposit in the pre-
funding account.
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The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that a large amount of information is publicly available regarding the
Funds, thereby promoting market transparency. The Fund's portfolio
holdings will be disclosed on the Fund's website daily after the close
of trading on the Exchange and prior to the opening of trading on the
Exchange the following day. Moreover, the IIV for shares of the Fund
will be widely disseminated by one or more major market data vendors at
least every 15 seconds during the Exchange's Regular Trading Hours. The
current value of the Index will be disseminated by one or more major
market data vendors at least once per day. Information regarding market
price and trading volume of the shares of the Fund will be continually
available on a real-time basis throughout the day on brokers' computer
screens and other electronic services, and quotation and last sale
information will be available via the CTA high-speed line. The website
for the Fund will include the prospectus for the Fund and additional
data relating to NAV and other applicable quantitative information.
If the Exchange becomes aware that the Fund's NAV is not being
disseminated to all market participants at the same time, it will halt
trading in the shares of the Fund until such time as the NAV is
available to all market participants. 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.
Trading also may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the shares the Fund
inadvisable. If the IIV and index value are not being disseminated for
the Fund as required, the Exchange may halt trading during the day in
which the interruption to the dissemination of the IIV or index value
occurs. If the interruption to the dissemination of an IIV or index
value persists past the trading day in which it occurred, the Exchange
will halt trading. 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 BZX Rule 11.18. Trading may be halted because
of market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) The
extent to which trading is not occurring in the securities and/or the
financial instruments composing the daily disclosed portfolio of the
Funds; or (2) whether other unusual conditions or circumstances
detrimental to the
[[Page 20898]]
maintenance of a fair and orderly market are present. Trading in the
Shares also will be subject to Rule 14.11(c)(1)(B)(iv), which sets
forth circumstances under which Shares of a Fund may be halted. In
addition, investors will have ready access to information regarding the
applicable IIV, and quotation and last sale information for the shares
of the Fund.
All statements and representations made in this filing regarding
the index composition, the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and intraday
indicative values (as applicable), or the applicability of Exchange
listing rules shall constitute continued listing requirements for
listing the Shares on the Exchange. The issuer is required to 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 monitor 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 Rule 14.12.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an exchange-traded product that principally holds ABS and CMBS and that
will enhance competition among market participants, to the benefit of
investors and the marketplace. The Exchange has in place surveillance
procedures relating to trading in the shares of the Fund and may obtain
information via ISG from other exchanges that are members of ISG or
with which the Exchange has entered into a comprehensive surveillance
sharing agreement. In addition, investors will have ready access to
information regarding the IIV and quotation and last sale information
for the shares of the Fund.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional exchange-traded product that will enhance competition among
market participants, to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 [email protected]. Please include
File Number SR-CboeBZX-2018-018 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-CboeBZX-2018-018. 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 the Exchange. 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
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2018-018 and should be submitted
on or before May 29, 2018.
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. 2018-09692 Filed 5-7-18; 8:45 am]
BILLING CODE 8011-01-P
