Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Granting Approval of a Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List and Trade Shares of the FormulaFolios Sector Rotation ETF, a Series of the Northern Lights Fund Trust IV, Under Rule 14.11(i), Managed Fund Shares, 63689-63692 [2018-26735]
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Federal Register / Vol. 83, No. 237 / Tuesday, December 11, 2018 / Notices
first paragraph should be replaced with
the following: ‘‘The NRC has terminated
License No. DPR–54, held by
Sacramento Municipal Utility District
(SMUD), for Rancho Seco in Herald,
California, and has approved the site for
unrestricted release. Accordingly, the
existing indemnity agreement between
SMUD and the NRC has been
amended.’’
Specifically, the last word
(terminated) in the first paragraph,
should be replaced with ‘‘amended’’ to
accurately reflect the action.
Dated at Rockville, Maryland, this 4th day
of December 2018.
For the Nuclear Regulatory Commission.
Amy Snyder,
Acting Chief, Reactor Decommissioning
Branch, Division of Decommissioning,
Uranium Recovery, and Waste Programs,
Office of Nuclear Material Safety and
Safeguards.
[FR Doc. 2018–26744 Filed 12–10–18; 8:45 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84719; File No. SRCboeBZX–2018–076]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Order Granting
Approval of a Proposed Rule Change,
as Modified by Amendment Nos. 1 and
2, To List and Trade Shares of the
FormulaFolios Sector Rotation ETF, a
Series of the Northern Lights Fund
Trust IV, Under Rule 14.11(i), Managed
Fund Shares
December 4, 2018.
amozie on DSK3GDR082PROD with NOTICES1
I. Introduction
On October 2, 2018, Cboe BZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b-4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of the FormulaFolios Sector
Rotation ETF (‘‘Fund’’) of the Northern
Lights Fund Trust IV (‘‘Trust’’) under
BZX Rule 14.11(i). The proposed rule
change was published for comment in
the Federal Register on October 22,
2018.3 On November 8, 2018, the
Exchange filed Amendment No. 1 to the
proposed rule change.4 On November
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 84438
(October 16, 2018), 83 FR 53343.
4 In Amendment No. 1, which amended and
replaced the proposed rule change in its entirety,
2 17
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30, 2018, the Exchange filed
Amendment No. 2 to the proposed rule
change.5 The Commission has received
no comments on the proposal. This
order grants approval of the proposed
rule change, as modified by Amendment
Nos. 1 and 2.
II. Exchange’s Description of the
Proposal, as Modified by Amendment
Nos. 1 and 2
The Exchange proposes to list and
trade the Shares of the Fund under BZX
Rule 14.11(i), which governs the listing
and trading of Managed Fund Shares on
the Exchange. The Shares will be
offered by the Trust, which was
established as a Delaware statutory trust
on June 2, 2015. The Exchange
represents that 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.6
FormulaFolio Investments, LLC is the
investment adviser to the Fund
(‘‘Adviser’’).7
the Exchange: (a) clarified references to certain OTC
derivatives that the Fund intends to invest; (b)
clarified that, in the event that Sector Swaps (as
defined herein) are unavailable or the pricing for
such contracts are unfavorable, the Fund may
attempt to replicate the desired equity exposure by
purchasing some or all of the equity securities that
are listed on a U.S. national securities exchange,
including ETFs, comprising the top four sectors at
the time; and (c) made other non-substantive,
technical, and clarifying corrections to the proposal.
Because Amendment No. 1 does not materially alter
the substance of the proposed rule change or raise
unique or novel regulatory issues under the Act,
Amendment No. 1 is not subject to notice and
comment. Amendment No. 1 to the proposed rule
change is available at: https://www.sec.gov/
comments/sr-cboebzx-2018-076/srcboebzx20180764716147-176694.pdf.
5 In Amendment No. 2, the Exchange: (a) Clarified
that the Fund will meet the requirements of Rule
14.11(i)(4)(C)(vi), which requires that, to the extent
that listed or OTC derivatives are used to gain
exposure to individual equities and/or fixed income
securities, or to indexes of equities and/or indexes
of fixed income securities, the aggregate gross
notional value of such exposure shall meet the
criteria set forth in BZX Rule 14.11(i)(4)(C)(i) and
(ii) (including gross notional exposures),
respectively; and (b) made other non-substantive,
technical, and clarifying corrections to the proposal.
Because Amendment No. 2 does not materially alter
the substance of the proposed rule change or raise
unique or novel regulatory issues under the Act,
Amendment No. 2 is not subject to notice and
comment. Amendment No. 2 to the proposed rule
change is available at: https://www.sec.gov/
comments/sr-cboebzx-2018-076/srcboebzx20180764716146-176693.pdf.
6 See Registration Statement on Form N–1A for
the Trust, dated July 27, 2018 (File Nos. 333–
204808 and 811–23066). According to the
Exchange, the Trust has obtained an order granting
certain exemptive relief under the Investment
Company Act of 1940 (‘‘1940 Act’’). See Investment
Company Act Release No. 29571 (May 16, 2017)
(File No. 812–32367).
7 The Exchange represents that the Adviser is not
a registered broker-dealer and is not currently
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63689
The Fund will be an actively managed
exchange-traded fund that seeks to
provide a long-term total return which
exceeds the total return of its Primary
Benchmark Index.8 The Fund will seek
to achieve its investment objective,
under Normal Market Conditions,9 by
utilizing derivatives, or a combination
of derivatives and direct investments, to
gain 100% equity exposure. The
Exchange submits this proposal in order
to allow the Fund to hold over-thecounter (‘‘OTC’’) derivatives, in a
manner that may not comply with BZX
Rule 14.11(i)(4)(C)(v), which requires,
among other things, that the aggregate
gross notional value of OTC derivatives
not exceed 20% of the weight of the
portfolio (including gross notional
exposures).10 Specifically, the Exchange
is proposing that the Fund may hold up
to 75% of the weight of its portfolio in
OTC derivatives, including gross
notional exposures. Otherwise, the
Exchange represents that the Fund will
comply with all other listing
requirements on an initial and
continued listing basis under BZX Rule
14.11(i).11
affiliated with any broker-dealers. In addition, the
Exchange represents that Adviser personnel who
make decisions regarding the Fund’s portfolio are
subject to procedures designed to prevent the use
and dissemination of material nonpublic
information regarding the Fund’s portfolio. In the
event that (a) the Adviser becomes registered as a
broker-dealer or newly affiliated with a brokerdealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with
a broker-dealer, it will implement and maintain a
fire wall with respect to its relevant personnel or
such broker-dealer affiliate, as applicable, regarding
access to information concerning the composition
of, 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.
8 The Fund’s Primary Benchmark Index is the
S&P 500 Index.
9 As defined in BZX Rule 14.11(i)(3)(E), the term
‘‘Normal Market Conditions’’ includes, but is not
limited to, the absence of trading halts in the
applicable financial markets generally; operational
issues causing dissemination of inaccurate market
information or system failures; or force majeure
type events such as natural or man-made disaster,
act of God, armed conflict, act of terrorism, riot or
labor disruption, or any similar intervening
circumstance.
10 BZX Rule 14.11(i)(4)(C)(v) provides that ‘‘the
portfolio may, on both an initial and continuing
basis, hold OTC derivatives, including forwards,
options, and swaps on commodities, currencies and
financial instruments (e.g., stocks, fixed income,
interest rates, and volatility) or a basket or index of
any of the foregoing, however the aggregate gross
notional value of OTC derivatives [sic] shall not
exceed 20% of the weight of the portfolio
(including gross notional exposures).’’
11 In particular, the Exchange notes that the Fund
will meet the requirements of BZX Rule
14.11(i)(4)(C)(vi), which requires that, to the extent
that listed or OTC derivatives are used to gain
exposure to individual equities and/or fixed income
securities, or to indexes of equities and/or indexes
of fixed income securities, the aggregate gross
E:\FR\FM\11DEN1.SGM
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The Adviser will allocate the Fund’s
assets based on two proprietary
investment models. The Adviser’s first
investment model will identify trends
for the individual sectors within its
Primary Benchmark Index. Each month,
the model will analyze the strength of
the US economy and rank the sectors of
its Primary Benchmark Index based on
a blend of various technical momentum
indicators, volatility gauges, and
valuation multiples. When the economy
appears healthy, sectors with the
highest risk-adjusted returns (lower
volatility and higher price momentum)
and the lowest valuations (lower price
ratios) are ranked higher. When the
economy appears unhealthy, sectors
with more stable price movements and
lower volatility are ranked higher. The
Fund will invest in the top four sectors
in an equal weight. In order to achieve
such exposure, the Fund will use OTC
swap contracts that reference each
applicable sector index (‘‘Sector
Swaps’’).12 In the event that such Sector
Swaps are unavailable or the pricing for
such contracts are unfavorable, the
Fund may attempt to replicate the
desired equity exposure by purchasing
some or all of the equity securities that
are listed on a U.S. national securities
exchange, including ETFs,13 comprising
the top four sectors at the time.14 If the
model indicates the market is doing
notional value of such exposure shall meet the
criteria set forth in BZX Rule 14.11(i)(4)(C)(i) and
(ii) (including gross notional exposures),
respectively.
12 The Fund will attempt to limit counterparty
risk in non-cleared swap contracts by entering into
such contracts only with counterparties the Adviser
believes are creditworthy and by limiting the
Fund’s exposure to each counterparty. The Adviser
will monitor the creditworthiness of each
counterparty and the Fund’s exposure to each
counterparty on an ongoing basis. The Sector Swaps
will reference the individual sector indices that
underlie the Primary Benchmark Index, which
include S&P 500 Consumer Discretionary, S&P 500
Consumer Staples, S&P 500 Health Care, S&P 500
Industrials, S&P 500 Information Technology, S&P
500 Materials, S&P 500 Real Estate, S&P 500
Telecommunication Services, S&P 500 Utilities,
S&P 500 Financials, and S&P 500 Energy
(individually, ‘‘Primary Benchmark Sector Index,’’
and, collectively, ‘‘Primary Benchmark Sector
Indexes’’). The Exchange notes that the Primary
Benchmark Index and each Primary Benchmark
Sector Index separately meet the generic listing
standards applicable to Index Fund Shares under
BZX Rule 14.11(c)(3)(A)(i).
13 For purposes of this proposal, the term ETF
includes Portfolio Depositary Receipts, Index Fund
Shares, and Managed Fund Shares as defined in
BZX Rules 14.11(b), (c), and (i), respectively, and
their equivalents on other national securities
exchanges.
14 Such equity securities may include either
component securities of the Primary Benchmark
Index, ETFs based on the Primary Benchmark
Index, or ETFs based on the sectors underlying the
Primary Benchmark Index. Any such holdings will
meet the listing requirements for U.S. Component
Stocks as provided in BZX Rule 14.11(i)(4)(C)(i)(a).
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poorly, and if not enough sectors pass
the screening criteria, the Fund can
invest a portion or all of its assets in
cash or Cash Equivalents.15 The
Exchange is proposing to allow the
Fund to hold up to 75% of the weight
of its portfolio (including gross notional
exposure) in Sector Swaps, collectively,
in a manner that may not comply with
14.11(i)(4)(C)(v).16
The Adviser’s second investment
model is used to manage an active bond
allocation exclusively through holding
fixed income ETFs. This model analyzes
various major fixed income asset classes
(U.S. treasuries, investment grade U.S.
bonds, high-yield U.S. bonds, high-yield
municipal bonds, and floating rate
bonds) based on a blend of yield
spreads, interest rates, and price
momentum. Following the ranking
process, the Fund will invest in ETFs
based on the highest-ranked asset
classes, with the lowest ranked asset
classes left out of the Fund.17 When not
enough of the asset classes meet the
model’s criteria, the Fund may invest
heavily in cash or Cash Equivalents
until more asset classes become
favorable for investing.
III. Discussion and Commission
Findings
After careful review, the Commission
finds that the Exchange’s proposal to list
and trade the Shares, as modified by
Amendment Nos. 1 and 2, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange.18 In
particular, the Commission finds that
the proposed rule change is consistent
with Section 6(b)(5) of the Act,19 which
15 As defined in BZX Rule 14.11(i)(4)(C)(iii)(b),
Cash Equivalents are short-term instruments with
maturities of less than three months, which
includes only the following: (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.
16 See supra note 10.
17 All of the Fund’s investments made pursuant
to this second investment model will meet the
listing requirements for U.S. equity securities as
provided in BZX Rule 14.11(i)(4)(C)(i)(a).
18 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
19 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00079
Fmt 4703
Sfmt 4703
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest. The Commission also
finds that the proposal to list and trade
the Shares on the Exchange is consistent
with Section 11A(a)(1)(C)(iii) of the
Act 20 which sets forth Congress’ finding
that it is in the public interest and
appropriate for the protection of
investors and the maintenance of fair
and orderly markets to assure the
availability to brokers, dealers and
investors of information with respect to
quotations for and transactions in
securities.
According to the Exchange, apart from
the exception to BZX Rule
14.11(i)(4)(C)(v) described above, the
Fund’s proposed investments will
satisfy, on an initial and continued
listing basis, all of the generic listing
standards under BZX Rule 14.11(i)(4)(C)
and all other applicable requirements
for Managed Fund Shares under Rule
14.11(i). In addition, the Exchange
represents that the Shares of the Fund
will comply with all other requirements
applicable to Managed Fund Shares
including, but not limited to,
requirements relating to the
dissemination of key information such
as the Disclosed Portfolio, Net Asset
Value (‘‘NAV’’), and the Intraday
Indicative Value, rules governing the
trading of equity securities, trading
hours, trading halts, surveillance,
firewalls, and the information circular,
as set forth in Exchange rules applicable
to Managed Fund Shares and the orders
approving such rules.
The Exchange also represents that the
intra-day, closing, and settlement prices
of exchange-traded portfolio assets,
including equity securities, will be
readily available from the securities
exchanges trading such securities,
automated quotation systems, published
or other public sources, or online
information services such as Bloomberg
or Reuters. Intraday price quotations on
OTC swaps and fixed income
instruments are available from major
broker-dealer firms and from thirdparties, which may provide prices free
with a time delay or in real-time for a
paid fee. Price information for Cash
Equivalents will be available from major
market data vendors. In addition, the
Disclosed Portfolio will be available on
the issuer’s website free of charge. The
20 15
E:\FR\FM\11DEN1.SGM
U.S.C. 78k–1(a)(1)(C)(iii)
11DEN1
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Federal Register / Vol. 83, No. 237 / Tuesday, December 11, 2018 / Notices
Fund’s website includes a form of the
prospectus for the Fund and additional
information related to NAV and other
applicable quantitative information.
Information regarding market price and
trading volume of the Shares will be
continuously available throughout the
day on brokers’ computer screens and
other electronic services. Quotation and
last-sale information on the Shares will
be available through the Consolidated
Tape Association. Trading in the Shares
may be halted for market conditions or
for reasons that, in the view of the
Exchange, make trading inadvisable.
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
represents that it has appropriate rules
to facilitate trading in the Shares during
all trading sessions.
The Commission notes that, in
support of its proposal, the Exchange
has made the following additional
representations:
(1) As noted above, the Exchange
represents that, apart from the exception
to BZX Rule 14.11(i)(4)(C)(v) relating to
holdings in OTC derivatives, the Fund
will meet and be subject to all other
requirements of the generic listing
standards and other applicable
continued listing requirements for
Managed Fund Shares under BZX Rule
14.11(i), including those requirements
regarding the Disclosed Portfolio and
the requirement that the Disclosed
Portfolio and the NAV will be made
available to all market participants at
the same time,21 Intraday Indicative
Value,22 suspension of trading or
removal,23 trading halts,24 disclosure,25
and firewalls.26
(2) Trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, including Managed
Fund Shares. All of the equity securities
held by the Fund will trade on markets
that are a member of Intermarket
Surveillance Group (‘‘ISG’’) or affiliated
with a member of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement. The
Exchange, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’),
on behalf of the Exchange, or both will
communicate regarding trading in the
Shares and the underlying equity
21 See Rules 14.11(i)(4)(A)(ii) and
14.11(i)(4)(B)(ii).
22 See Rule 14.11(i)(4)(B)(i).
23 See Rule 14.11(i)(4)(B)(iii).
24 See Rule 14.11(i)(4)(B)(iv).
25 See Rule 14.11(i)(6).
26 See Rule 14.11(i)(7).
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17:51 Dec 10, 2018
securities held by the Fund with the
ISG, other markets or entities who are
members or affiliates of the ISG, or with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement. The Exchange, FINRA, on
behalf of the Exchange, or both may
obtain information regarding trading in
the Shares and the underlying equity
securities held by the Fund via the ISG
from other markets or entities who are
members or affiliates of the ISG or with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement. Additionally, the Exchange
or FINRA, on behalf of the Exchange,
may access, as needed, trade
information for certain fixed income
instruments reported to FINRA’s Trade
Reporting and Compliance Engine. The
Exchange has a policy prohibiting the
distribution of material non-public
information by its employees.
(3) Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (a) The
procedures for purchases and
redemptions of Shares in Creation Units
(and that Shares are not individually
redeemable); (b) BZX Rule 3.7, which
imposes suitability obligations on
Exchange members with respect to
recommending transactions in the
Shares to customers; (c) how
information regarding the Intraday
Indicative Value and the Disclosed
Portfolio is disseminated; (d) the risks
involved in trading the Shares during
the Pre-Opening 27 and After Hours
Trading Sessions 28 when an updated
Intraday Indicative Value and
Underlying Index value will not be
calculated or publicly disseminated; (e)
the requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (f) trading information.
In addition, the Information Circular
will advise members, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Fund. Members
purchasing Shares from the Fund for
resale to investors will deliver a
prospectus to such investors. The
Information Circular will also discuss
any exemptive, no-action, and
interpretive relief granted by the
27 The Pre-Opening Session is from 8:00 a.m. to
9:30 a.m. Eastern Time.
28 The After Hours Trading Session is from 4:00
p.m. to 5:00 p.m. Eastern Time.
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Fmt 4703
Sfmt 4703
63691
Commission from any rules under the
Act.
(4) The Fund’s investments, including
derivatives, will be consistent with the
1940 Act, and the Fund’s investment
objective and policies and will not be
used to enhance leverage (although
certain derivatives and other
investments may result in leverage).29
(5) The Fund’s investments will not
be used to seek performance that is the
multiple or inverse multiple (i.e., 2Xs
and 3Xs) of the Fund’s primary broadbased securities benchmark index (as
defined in Form N–1A).
(6) The Fund will only use those
derivatives included in the defined term
‘‘Sector Swaps.’’ The Fund’s use of
derivative instruments will be
collateralized.
(7) The Trust is required to comply
with Rule 10A–3 under the Act 30 for the
initial and continued listing of the
Shares of the Fund, and at least 100,000
Shares will be outstanding upon the
commencement of trading.
(8) The Fund will attempt to limit
counterparty risk in Sector Swaps by
entering into such contracts only with
counterparties the Adviser believes are
creditworthy and by limiting the Fund’s
exposure to each counterparty. The
Adviser will monitor the
creditworthiness of each counterparty
and the Fund’s exposure to each
counterparty on an ongoing basis.
(9) All statements and representations
made in this filing regarding 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. The
issuer has represented to the Exchange
that it will advise the Exchange of any
failure by the Fund or the Shares to
comply with the continued listing
requirements, and, pursuant to its
29 According to the Exchange, the Fund will
include appropriate risk disclosure in its offering
documents, including leveraging risk, which is the
risk that certain transactions of a fund, including a
fund’s use of derivatives, may give rise to leverage,
causing a fund to be more volatile than if it had not
been leveraged. The Fund’s investments in
derivative instruments will be made in accordance
with the 1940 Act and consistent with the Fund’s
investment objective and policies. To mitigate
leveraging risk, the Fund will segregate or earmark
liquid assets determined to be liquid by the Adviser
in accordance with procedures established by the
Trust’s Board and in accordance with the 1940 Act
(or, as permitted by applicable regulations, enter
into certain offsetting positions) to cover its
obligations under derivative instruments. These
procedures have been adopted consistent with
Section 18 of the 1940 Act and related Commission
guidance.
30 See 17 CFR 240.10A–3.
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Federal Register / Vol. 83, No. 237 / Tuesday, December 11, 2018 / Notices
obligations under Section 19(g)(1) of the
Act, the Exchange will surveil for
compliance with the continued listing
requirements. If the Fund or the Shares
are not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under Exchange Rule 14.12.
This approval order is based on all of
the Exchange’s representations and
description of the Shares and the Fund,
including those set forth above and in
Amendment Nos. 1 and 2 to the
proposed rule change. Except as
described herein, the Commission notes
that the Shares must comply with all
applicable requirements of BZX Rule
14.11(i) to be listed and traded on the
Exchange on an initial and continuing
basis.
For the foregoing reasons, the
Commission finds that the proposed
rule change, as modified by Amendment
Nos. 1 and 2, is consistent with Section
6(b)(5) of the Act 31 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,32 that the
proposed rule change (SR–CboeBZX–
2017–076), as modified by Amendment
Nos. 1 and 2, be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–26735 Filed 12–10–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Delay a New
Protocol ‘‘Ouch to Trade Options’’ or
‘‘OTTO’’ on The Nasdaq Options Market
LLC (‘‘NOM’’)
amozie on DSK3GDR082PROD with NOTICES1
December 4, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
26, 2018, The Nasdaq Stock Market LLC
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
33 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
32 15
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17:51 Dec 10, 2018
Jkt 247001
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to a proposal
to delay a new protocol ‘‘Ouch to Trade
Options’’ or ‘‘OTTO’’ on The Nasdaq
Options Market LLC (‘‘NOM’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaq.cchwallstreet.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 aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Nasdaq recently filed a rule change 3
which adopted a new protocol ‘‘Ouch to
Trade Options’’ or ‘‘OTTO’’ 4 and
[Release No. 34–84723; File No. SR–
NASDAQ–2018–097]
31 15
(‘‘Nasdaq’’ or ‘‘Exchange’’) 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.
3 See Securities Exchange Act Release No. 83888
(August 20, 2018), 83 FR 42954 (August 24, 2018)
(SR–NASDAQ–2018–069) (‘‘Prior Rule Change’’).
This rule change is immediately effective but will
not be operative until such time as the Exchange
issues an Options Trader Alert announcing the
implementation date. This notification will be
issued in Q4 2018. The Exchange notes that this
filing renamed and modified the current OTTO
protocol as ‘‘QUO’’ and also proposed the adoption
of a new OTTO protocol.
4 New OTTO is an interface that allows
Participants and their Sponsored Customers to
connect, send, and receive messages related to
orders to and from the Exchange. Features include
the following: (1) Options symbol directory
messages (e.g., underlying); (2) system event
messages (e.g., start of trading hours messages and
start of opening); (3) trading action messages (e.g.,
halts and resumes); (4) execution messages; (5)
order messages; and (6) risk protection triggers and
cancel notifications. See NOM Rules at Chapter VI,
Section 21(a)(i)(C).
PO 00000
Frm 00081
Fmt 4703
Sfmt 4703
renamed and modified the current
OTTO protocol as ‘‘Quote Using
Orders’’ or ‘‘QUO’’.5 The Prior Rule
Change, which is effective but not yet
operative, renamed and modified the
current OTTO protocol to ‘‘QUO.’’ The
Exchange subsequently filed a rule
change to amend Chapter VI, Section
6(e), titled ‘‘Detection of Loss of
Communication’’ which describes the
impact to NOM protocols in the event
of a loss of a communication. The
Exchange accounted for both the new
OTTO and renamed and modified QUO
within this rule. Similarly, the Exchange
amended Chapter VI, Section 8,
‘‘Nasdaq Opening and Halt Cross’’ to
account for the new OTTO and renamed
and modified QUO within this rule.
Finally, the Exchange amended Chapter
VI, Section 19, ‘‘Data Feeds and Trade
Information’’ to amend ‘‘OTTO DROP’’
to ‘‘QUO DROP’’ and noted within
Chapter VI, Section 18(a)(1) related to
Order Price Protection rule or ‘‘OPP’’
that OPP shall not apply to orders
entered through QUO.6
Both the Prior Rule Change and the
Subsequent Rule Change indicated the
aforementioned rule changes would be
implemented for QUO and OTTO in Q4
of 2018 with the date announced via an
Options Traders Alert. At this time, the
Exchange proposes to immediately
implement QUO and delay the
introduction of new OTTO functionality
until Q1 2019 by announcing the date
of implementation via an Options
Traders Alert. The Exchange proposes to
provide for the delay of the OTTO
functionality by inserting the following
rule text at the beginning of NOM Rules
at Chapter VI, Sections 6, 9 and 21 to
make clear that OTTO functionality is
not yet implemented: ‘‘OTTO
functionality implementation shall be
delayed until Q1 2019. The Exchange
will issue an Options Trader Alert
notifying Participants when this
functionality will be available.’’
The Exchange proposes this delay to
allow the Exchange additional time to
implement this functionality and for
5 QUO is an interface that allows NOM Market
Makers to connect, send, and receive messages
related to single-sided orders to and from the
Exchange. Order Features include the following: (1)
Options symbol directory messages (e.g.,
underlying); (2) system event messages (e.g., start of
trading hours messages and start of opening); (3)
trading action messages (e.g., halts and resumes); (4)
execution messages; (5) order messages; and (6) risk
protection triggers and cancel notifications. Orders
submitted by NOM Market Makers over this
interface are treated as quotes. See NOM Rules at
Chapter VI, Section 21(a)(i)(D).
6 See Securities Exchange Act Release No. 84559
(November 9, 2019), 83 FR 57774 (November 16,
2018) (SR–NASDAQ–2018–085) (‘‘Subsequent Rule
Change’’).
E:\FR\FM\11DEN1.SGM
11DEN1
]]>Agencies
[Federal Register Volume 83, Number 237 (Tuesday, December 11, 2018)]
[Notices]
[Pages 63689-63692]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26735]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84719; File No. SR-CboeBZX-2018-076]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Granting Approval of a Proposed Rule Change, as Modified by Amendment
Nos. 1 and 2, To List and Trade Shares of the FormulaFolios Sector
Rotation ETF, a Series of the Northern Lights Fund Trust IV, Under Rule
14.11(i), Managed Fund Shares
December 4, 2018.
I. Introduction
On October 2, 2018, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
FormulaFolios Sector Rotation ETF (``Fund'') of the Northern Lights
Fund Trust IV (``Trust'') under BZX Rule 14.11(i). The proposed rule
change was published for comment in the Federal Register on October 22,
2018.\3\ On November 8, 2018, the Exchange filed Amendment No. 1 to the
proposed rule change.\4\ On November 30, 2018, the Exchange filed
Amendment No. 2 to the proposed rule change.\5\ The Commission has
received no comments on the proposal. This order grants approval of the
proposed rule change, as modified by Amendment Nos. 1 and 2.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 84438 (October 16,
2018), 83 FR 53343.
\4\ In Amendment No. 1, which amended and replaced the proposed
rule change in its entirety, the Exchange: (a) clarified references
to certain OTC derivatives that the Fund intends to invest; (b)
clarified that, in the event that Sector Swaps (as defined herein)
are unavailable or the pricing for such contracts are unfavorable,
the Fund may attempt to replicate the desired equity exposure by
purchasing some or all of the equity securities that are listed on a
U.S. national securities exchange, including ETFs, comprising the
top four sectors at the time; and (c) made other non-substantive,
technical, and clarifying corrections to the proposal. Because
Amendment No. 1 does not materially alter the substance of the
proposed rule change or raise unique or novel regulatory issues
under the Act, Amendment No. 1 is not subject to notice and comment.
Amendment No. 1 to the proposed rule change is available at: https://www.sec.gov/comments/sr-cboebzx-2018-076/srcboebzx2018076-4716147-176694.pdf.
\5\ In Amendment No. 2, the Exchange: (a) Clarified that the
Fund will meet the requirements of Rule 14.11(i)(4)(C)(vi), which
requires that, to the extent that listed or OTC derivatives are used
to gain exposure to individual equities and/or fixed income
securities, or to indexes of equities and/or indexes of fixed income
securities, the aggregate gross notional value of such exposure
shall meet the criteria set forth in BZX Rule 14.11(i)(4)(C)(i) and
(ii) (including gross notional exposures), respectively; and (b)
made other non-substantive, technical, and clarifying corrections to
the proposal. Because Amendment No. 2 does not materially alter the
substance of the proposed rule change or raise unique or novel
regulatory issues under the Act, Amendment No. 2 is not subject to
notice and comment. Amendment No. 2 to the proposed rule change is
available at: https://www.sec.gov/comments/sr-cboebzx-2018-076/srcboebzx2018076-4716146-176693.pdf.
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II. Exchange's Description of the Proposal, as Modified by Amendment
Nos. 1 and 2
The Exchange proposes to list and trade the Shares of the Fund
under BZX Rule 14.11(i), which governs the listing and trading of
Managed Fund Shares on the Exchange. The Shares will be offered by the
Trust, which was established as a Delaware statutory trust on June 2,
2015. The Exchange represents that 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.\6\ FormulaFolio
Investments, LLC is the investment adviser to the Fund
(``Adviser'').\7\
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\6\ See Registration Statement on Form N-1A for the Trust, dated
July 27, 2018 (File Nos. 333-204808 and 811-23066). According to the
Exchange, the Trust has obtained an order granting certain exemptive
relief under the Investment Company Act of 1940 (``1940 Act''). See
Investment Company Act Release No. 29571 (May 16, 2017) (File No.
812-32367).
\7\ The Exchange represents that the Adviser is not a registered
broker-dealer and is not currently affiliated with any broker-
dealers. In addition, the Exchange represents that Adviser personnel
who make decisions regarding the Fund's portfolio are subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the Fund's portfolio. In the event
that (a) the Adviser becomes registered as a broker-dealer or newly
affiliated with a broker-dealer, or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a
broker-dealer, it will implement and maintain a fire wall with
respect to its relevant personnel or such broker-dealer affiliate,
as applicable, regarding access to information concerning the
composition of, 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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The Fund will be an actively managed exchange-traded fund that
seeks to provide a long-term total return which exceeds the total
return of its Primary Benchmark Index.\8\ The Fund will seek to achieve
its investment objective, under Normal Market Conditions,\9\ by
utilizing derivatives, or a combination of derivatives and direct
investments, to gain 100% equity exposure. The Exchange submits this
proposal in order to allow the Fund to hold over-the-counter (``OTC'')
derivatives, in a manner that may not comply with BZX Rule
14.11(i)(4)(C)(v), which requires, among other things, that the
aggregate gross notional value of OTC derivatives not exceed 20% of the
weight of the portfolio (including gross notional exposures).\10\
Specifically, the Exchange is proposing that the Fund may hold up to
75% of the weight of its portfolio in OTC derivatives, including gross
notional exposures. Otherwise, the Exchange represents that the Fund
will comply with all other listing requirements on an initial and
continued listing basis under BZX Rule 14.11(i).\11\
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\8\ The Fund's Primary Benchmark Index is the S&P 500 Index.
\9\ As defined in BZX Rule 14.11(i)(3)(E), the term ``Normal
Market Conditions'' includes, but is not limited to, the absence of
trading halts in the applicable financial markets generally;
operational issues causing dissemination of inaccurate market
information or system failures; or force majeure type events such as
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
\10\ BZX Rule 14.11(i)(4)(C)(v) provides that ``the portfolio
may, on both an initial and continuing basis, hold OTC derivatives,
including forwards, options, and swaps on commodities, currencies
and financial instruments (e.g., stocks, fixed income, interest
rates, and volatility) or a basket or index of any of the foregoing,
however the aggregate gross notional value of OTC derivatives [sic]
shall not exceed 20% of the weight of the portfolio (including gross
notional exposures).''
\11\ In particular, the Exchange notes that the Fund will meet
the requirements of BZX Rule 14.11(i)(4)(C)(vi), which requires
that, to the extent that listed or OTC derivatives are used to gain
exposure to individual equities and/or fixed income securities, or
to indexes of equities and/or indexes of fixed income securities,
the aggregate gross notional value of such exposure shall meet the
criteria set forth in BZX Rule 14.11(i)(4)(C)(i) and (ii) (including
gross notional exposures), respectively.
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[[Page 63690]]
The Adviser will allocate the Fund's assets based on two
proprietary investment models. The Adviser's first investment model
will identify trends for the individual sectors within its Primary
Benchmark Index. Each month, the model will analyze the strength of the
US economy and rank the sectors of its Primary Benchmark Index based on
a blend of various technical momentum indicators, volatility gauges,
and valuation multiples. When the economy appears healthy, sectors with
the highest risk-adjusted returns (lower volatility and higher price
momentum) and the lowest valuations (lower price ratios) are ranked
higher. When the economy appears unhealthy, sectors with more stable
price movements and lower volatility are ranked higher. The Fund will
invest in the top four sectors in an equal weight. In order to achieve
such exposure, the Fund will use OTC swap contracts that reference each
applicable sector index (``Sector Swaps'').\12\ In the event that such
Sector Swaps are unavailable or the pricing for such contracts are
unfavorable, the Fund may attempt to replicate the desired equity
exposure by purchasing some or all of the equity securities that are
listed on a U.S. national securities exchange, including ETFs,\13\
comprising the top four sectors at the time.\14\ If the model indicates
the market is doing poorly, and if not enough sectors pass the
screening criteria, the Fund can invest a portion or all of its assets
in cash or Cash Equivalents.\15\ The Exchange is proposing to allow the
Fund to hold up to 75% of the weight of its portfolio (including gross
notional exposure) in Sector Swaps, collectively, in a manner that may
not comply with 14.11(i)(4)(C)(v).\16\
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\12\ The Fund will attempt to limit counterparty risk in non-
cleared swap contracts by entering into such contracts only with
counterparties the Adviser believes are creditworthy and by limiting
the Fund's exposure to each counterparty. The Adviser will monitor
the creditworthiness of each counterparty and the Fund's exposure to
each counterparty on an ongoing basis. The Sector Swaps will
reference the individual sector indices that underlie the Primary
Benchmark Index, which include S&P 500 Consumer Discretionary, S&P
500 Consumer Staples, S&P 500 Health Care, S&P 500 Industrials, S&P
500 Information Technology, S&P 500 Materials, S&P 500 Real Estate,
S&P 500 Telecommunication Services, S&P 500 Utilities, S&P 500
Financials, and S&P 500 Energy (individually, ``Primary Benchmark
Sector Index,'' and, collectively, ``Primary Benchmark Sector
Indexes''). The Exchange notes that the Primary Benchmark Index and
each Primary Benchmark Sector Index separately meet the generic
listing standards applicable to Index Fund Shares under BZX Rule
14.11(c)(3)(A)(i).
\13\ For purposes of this proposal, the term ETF includes
Portfolio Depositary Receipts, Index Fund Shares, and Managed Fund
Shares as defined in BZX Rules 14.11(b), (c), and (i), respectively,
and their equivalents on other national securities exchanges.
\14\ Such equity securities may include either component
securities of the Primary Benchmark Index, ETFs based on the Primary
Benchmark Index, or ETFs based on the sectors underlying the Primary
Benchmark Index. Any such holdings will meet the listing
requirements for U.S. Component Stocks as provided in BZX Rule
14.11(i)(4)(C)(i)(a).
\15\ As defined in BZX Rule 14.11(i)(4)(C)(iii)(b), Cash
Equivalents are short-term instruments with maturities of less than
three months, which includes only the following: (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.
\16\ See supra note 10.
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The Adviser's second investment model is used to manage an active
bond allocation exclusively through holding fixed income ETFs. This
model analyzes various major fixed income asset classes (U.S.
treasuries, investment grade U.S. bonds, high-yield U.S. bonds, high-
yield municipal bonds, and floating rate bonds) based on a blend of
yield spreads, interest rates, and price momentum. Following the
ranking process, the Fund will invest in ETFs based on the highest-
ranked asset classes, with the lowest ranked asset classes left out of
the Fund.\17\ When not enough of the asset classes meet the model's
criteria, the Fund may invest heavily in cash or Cash Equivalents until
more asset classes become favorable for investing.
---------------------------------------------------------------------------
\17\ All of the Fund's investments made pursuant to this second
investment model will meet the listing requirements for U.S. equity
securities as provided in BZX Rule 14.11(i)(4)(C)(i)(a).
---------------------------------------------------------------------------
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares, as modified by Amendment Nos. 1
and 2, is consistent with the Act and the rules and regulations
thereunder applicable to a national securities exchange.\18\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Act,\19\ which requires, among
other things, that the Exchange's rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. The
Commission also finds that the proposal to list and trade the Shares on
the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the Act
\20\ which sets forth Congress' finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers and investors of information with respect to
quotations for and transactions in securities.
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\18\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\19\ 15 U.S.C. 78f(b)(5).
\20\ 15 U.S.C. 78k-1(a)(1)(C)(iii)
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According to the Exchange, apart from the exception to BZX Rule
14.11(i)(4)(C)(v) described above, the Fund's proposed investments will
satisfy, on an initial and continued listing basis, all of the generic
listing standards under BZX Rule 14.11(i)(4)(C) and all other
applicable requirements for Managed Fund Shares under Rule 14.11(i). In
addition, the Exchange represents that the Shares of the Fund will
comply with all other requirements applicable to Managed Fund Shares
including, but not limited to, requirements relating to the
dissemination of key information such as the Disclosed Portfolio, Net
Asset Value (``NAV''), and the Intraday Indicative Value, rules
governing the trading of equity securities, trading hours, trading
halts, surveillance, firewalls, and the information circular, as set
forth in Exchange rules applicable to Managed Fund Shares and the
orders approving such rules.
The Exchange also represents that the intra-day, closing, and
settlement prices of exchange-traded portfolio assets, including equity
securities, will be readily available from the securities exchanges
trading such securities, automated quotation systems, published or
other public sources, or online information services such as Bloomberg
or Reuters. Intraday price quotations on OTC swaps and fixed income
instruments are available from major broker-dealer firms and from
third-parties, which may provide prices free with a time delay or in
real-time for a paid fee. Price information for Cash Equivalents will
be available from major market data vendors. In addition, the Disclosed
Portfolio will be available on the issuer's website free of charge. The
[[Page 63691]]
Fund's website includes a form of the prospectus for the Fund and
additional information related to NAV and other applicable quantitative
information. Information regarding market price and trading volume of
the Shares will be continuously available throughout the day on
brokers' computer screens and other electronic services. Quotation and
last-sale information on the Shares will be available through the
Consolidated Tape Association. Trading in the Shares may be halted for
market conditions or for reasons that, in the view of the Exchange,
make trading inadvisable. 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 represents that it has appropriate rules to facilitate
trading in the Shares during all trading sessions.
The Commission notes that, in support of its proposal, the Exchange
has made the following additional representations:
(1) As noted above, the Exchange represents that, apart from the
exception to BZX Rule 14.11(i)(4)(C)(v) relating to holdings in OTC
derivatives, the Fund will meet and be subject to all other
requirements of the generic listing standards and other applicable
continued listing requirements for Managed Fund Shares under BZX Rule
14.11(i), including those requirements regarding the Disclosed
Portfolio and the requirement that the Disclosed Portfolio and the NAV
will be made available to all market participants at the same time,\21\
Intraday Indicative Value,\22\ suspension of trading or removal,\23\
trading halts,\24\ disclosure,\25\ and firewalls.\26\
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\21\ See Rules 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
\22\ See Rule 14.11(i)(4)(B)(i).
\23\ See Rule 14.11(i)(4)(B)(iii).
\24\ See Rule 14.11(i)(4)(B)(iv).
\25\ See Rule 14.11(i)(6).
\26\ See Rule 14.11(i)(7).
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(2) Trading of the Shares through the Exchange will be subject to
the Exchange's surveillance procedures for derivative products,
including Managed Fund Shares. All of the equity securities held by the
Fund will trade on markets that are a member of Intermarket
Surveillance Group (``ISG'') or affiliated with a member of ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement. The Exchange, the Financial Industry Regulatory Authority,
Inc. (``FINRA''), on behalf of the Exchange, or both will communicate
regarding trading in the Shares and the underlying equity securities
held by the Fund with the ISG, other markets or entities who are
members or affiliates of the ISG, or with which the Exchange has
entered into a comprehensive surveillance sharing agreement. The
Exchange, FINRA, on behalf of the Exchange, or both may obtain
information regarding trading in the Shares and the underlying equity
securities held by the Fund via the ISG from other markets or entities
who are members or affiliates of the ISG or with which the Exchange has
entered into a comprehensive surveillance sharing agreement.
Additionally, the Exchange or FINRA, on behalf of the Exchange, may
access, as needed, trade information for certain fixed income
instruments reported to FINRA's Trade Reporting and Compliance Engine.
The Exchange has a policy prohibiting the distribution of material non-
public information by its employees.
(3) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable); (b) BZX Rule 3.7, which imposes
suitability obligations on Exchange members with respect to
recommending transactions in the Shares to customers; (c) how
information regarding the Intraday Indicative Value and the Disclosed
Portfolio is disseminated; (d) the risks involved in trading the Shares
during the Pre-Opening \27\ and After Hours Trading Sessions \28\ when
an updated Intraday Indicative Value and Underlying Index value will
not be calculated or publicly disseminated; (e) the requirement that
members deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
and (f) trading information. In addition, the Information Circular will
advise members, prior to the commencement of trading, of the prospectus
delivery requirements applicable to the Fund. Members purchasing Shares
from the Fund for resale to investors will deliver a prospectus to such
investors. The Information Circular will also discuss any exemptive,
no-action, and interpretive relief granted by the Commission from any
rules under the Act.
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\27\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
\28\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
---------------------------------------------------------------------------
(4) The Fund's investments, including derivatives, will be
consistent with the 1940 Act, and the Fund's investment objective and
policies and will not be used to enhance leverage (although certain
derivatives and other investments may result in leverage).\29\
---------------------------------------------------------------------------
\29\ According to the Exchange, the Fund will include
appropriate risk disclosure in its offering documents, including
leveraging risk, which is the risk that certain transactions of a
fund, including a fund's use of derivatives, may give rise to
leverage, causing a fund to be more volatile than if it had not been
leveraged. The Fund's investments in derivative instruments will be
made in accordance with the 1940 Act and consistent with the Fund's
investment objective and policies. To mitigate leveraging risk, the
Fund will segregate or earmark liquid assets determined to be liquid
by the Adviser in accordance with procedures established by the
Trust's Board and in accordance with the 1940 Act (or, as permitted
by applicable regulations, enter into certain offsetting positions)
to cover its obligations under derivative instruments. These
procedures have been adopted consistent with Section 18 of the 1940
Act and related Commission guidance.
---------------------------------------------------------------------------
(5) The Fund's investments will not be used to seek performance
that is the multiple or inverse multiple (i.e., 2Xs and 3Xs) of the
Fund's primary broad-based securities benchmark index (as defined in
Form N-1A).
(6) The Fund will only use those derivatives included in the
defined term ``Sector Swaps.'' The Fund's use of derivative instruments
will be collateralized.
(7) The Trust is required to comply with Rule 10A-3 under the Act
\30\ for the initial and continued listing of the Shares of the Fund,
and at least 100,000 Shares will be outstanding upon the commencement
of trading.
---------------------------------------------------------------------------
\30\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------
(8) The Fund will attempt to limit counterparty risk in Sector
Swaps by entering into such contracts only with counterparties the
Adviser believes are creditworthy and by limiting the Fund's exposure
to each counterparty. The Adviser will monitor the creditworthiness of
each counterparty and the Fund's exposure to each counterparty on an
ongoing basis.
(9) All statements and representations made in this filing
regarding 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.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Fund or the Shares to comply with the
continued listing requirements, and, pursuant to its
[[Page 63692]]
obligations under Section 19(g)(1) of the Act, the Exchange will
surveil for compliance with the continued listing requirements. If the
Fund or the Shares are not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under
Exchange Rule 14.12.
This approval order is based on all of the Exchange's
representations and description of the Shares and the Fund, including
those set forth above and in Amendment Nos. 1 and 2 to the proposed
rule change. Except as described herein, the Commission notes that the
Shares must comply with all applicable requirements of BZX Rule
14.11(i) to be listed and traded on the Exchange on an initial and
continuing basis.
For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment Nos. 1 and 2, is consistent with
Section 6(b)(5) of the Act \31\ and the rules and regulations
thereunder applicable to a national securities exchange.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-CboeBZX-2017-076), as
modified by Amendment Nos. 1 and 2, be, and it hereby is, approved.
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\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-26735 Filed 12-10-18; 8:45 am]
BILLING CODE 8011-01-P
