Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Adopt Rule 14.11(m), Portfolio Fund Shares, and To List and Trade Shares of the Fidelity Value ETF, Fidelity Growth ETF, and Fidelity Opportunistic ETF, Each a Series of the Fidelity Beach Street Trust, Under Proposed Rule 14.11(m), 72414-72424 [2019-28217]
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counter party risks for investors that
they would not normally otherwise
choose to be subject to if series on the
EM Index were available for trading.
Next, the Exchange states that the
inability to add the EM options would
be a detriment to market participants
seeking to hedge positions in ETPs
based on the EM Index (e.g., EEM),
options on EEM and EM futures, and
European-traded derivatives on the EM
Index. Likewise, the Exchange notes
that there are ETPs that use options on
the EM Index as part of their investment
strategy. Without the ability to add the
EM options, these ETPs could be unable
to achieve their investment objective,
which the Exchange believes would be
to the detriment of investors.
Additionally, the Exchange states that
market participants that wish to roll a
position in EM options that expire in
January to a position in a series with a
later expiration month at a favorable or
comparable price, will be prevented
from doing so should the Commission
not approve this proposal prior to
January 1, 2020.
Based on the foregoing, the
Commission believes that good cause
exists to issue this order approving a
one-time exception to the 10%
component-securities threshold under
Rule 4.10(i) prior to the 30th day after
the date of publication of notice of in
the Federal Register. Approving the
proposed rule change on an accelerated
basis should protect investors and the
public interest from potential harm that
might arise from a disruption in the
listing of classes of options on the MSCI
Emerging Markets Index. Accordingly,
pursuant to Section 19(b)(2) of the
Exchange Act,22 the Commission finds
good cause to approve the proposed rule
change on an accelerated basis.
V. Conclusion
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It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,23
that the proposed rule change (SR–
CBOE–2019–122) be, and it hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–28215 Filed 12–30–19; 8:45 am]
BILLING CODE 8011–01–P
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(2).
24 17 CFR 200.30–3(a)(12).
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87856; File No. SR–
CboeBZX–2019–107]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To Adopt
Rule 14.11(m), Portfolio Fund Shares,
and To List and Trade Shares of the
Fidelity Value ETF, Fidelity Growth
ETF, and Fidelity Opportunistic ETF,
Each a Series of the Fidelity Beach
Street Trust, Under Proposed Rule
14.11(m)
December 23, 2019.
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 December
12, 2019, Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III 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 proposes a rule change
to adopt Rule 14.11(m), Portfolio Fund
Shares, and to list and trade shares of
the Fidelity Value ETF, Fidelity Growth
ETF, and Fidelity Opportunistic ETF
(each a ‘‘Fund’’ and, collectively, the
‘‘Funds’’), each a series of the Fidelity
Beach Street Trust (the ‘‘Trust’’), under
such proposed Rule 14.11(m). The
shares of each Fund are referred to
herein as the ‘‘Shares.’’ The text of the
proposed rule change is also available
on the Exchange’s website (https://
markets.cboe.com/us/equities/
regulation/rule_filings/bzx/), at the
Exchange’s Office of the Secretary, 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
22 15
23 15
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1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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
The Exchange proposes to add new
Rule 14.11(m) 3 for the purpose of
permitting the listing and trading, or
trading pursuant to unlisted trading
privileges, of Portfolio Fund Shares,
which are securities issued by an
actively managed open-end
management investment company.4
Proposed Rule 14.11(m)
Proposed Rule 14.11(m)(3)(A)
provides that the term ‘‘Portfolio Fund
Share’’ means a security that: (i)
Represents an interest in a registered
investment company (‘‘Investment
Company’’) organized as an open-end
management investment company or
3 The Exchange notes that it is proposing new
Rule 14.11(m) because it has also proposed a new
Rule 14.11(k) and new Rule 14.11(l) under two
separate proposals. See Securities Exchange Act
Release Nos. 87062 (September 23, 2019), 84 FR
51193 (September 27, 2019) (SR–CboeBZX–2019–
047) and 87560 (November 18, 2019), 84 FR 64607
(November 22, 2019) (CboeBZX–2019–097).
4 The basis of this proposal are several
applications for exemptive relief that were filed
with the Commission and for which public notice
was issued on November 14, 2019 (the ‘‘Notice’’)
and subsequent order granting certain exemptive
relief to, among others, Fidelity Management &
Research Company and FMR Co., Inc., Fidelity
Beach Street Trust, and Fidelity Distributors
Corporation (File No. 812–14364), issued on
December 10, 2019 (the ‘‘Order’’ and, collectively,
with the Application and the Notice, the
‘‘Exemptive Order’’). See Investment Company Act
Release Nos. 33683 and 33712. The Order
specifically notes that ‘‘granting the requested
exemptions is appropriate in and consistent with
the public interest and consistent with the
protection of investors and the purposes fairly
intended by the policy and provisions of the Act.
It is further found that the terms of the proposed
transactions, including the consideration to be paid
or received, are reasonable and fair and do not
involve overreaching on the part of any person
concerned, and that the proposed transactions are
consistent with the policy of each registered
investment company concerned and with the
general purposes of the Act.’’ The Exchange notes
that it also referred to the application for exemptive
relief orders for T. Rowe Price Associates, Inc. and
T. Rowe Price Equity Series, Inc. (File No. 812–
14214 and Investment Company Act Release Nos.
33685 and 33713), Natixis ETF Trust II, et al. (File
No. 812–14870 and Investment Company Act
Release Nos. 33684 and 33711), Blue Tractor ETF
Trust and Blue Tractor Group, LLC (File No. 812–
14625 and Investment Company Act Release Nos.
33682 and 33710), and Gabelli ETFs Trust, et al.
(File No. 812–15036 and Investment Company Act
Release Nos. 33681 and 33708). While there are
certain differences between the applications, the
Exchange believes that each would qualify as
Portfolio Fund Shares under proposed Rule
14.11(m).
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similar entity, that: (a) Invests in a
portfolio of securities selected by the
Investment Company’s investment
adviser consistent with the Investment
Company’s investment objectives and
policies; and (b) will at a minimum
disclose the Fund Portfolio within at
least 60 days following the end of every
fiscal quarter; (ii) is issued in a specified
aggregate minimum number in return
for a deposit of a specified portfolio of
securities and/or a cash amount with a
value equal to the next determined net
asset value; and (iii) when aggregated in
the same specified minimum number,
may be redeemed at a holder’s request,
which holder will be paid a specified
portfolio of securities and/or cash with
a value equal to the next determined net
asset value.
Proposed Rule 14.11(m)(1) provides
that the Exchange will consider for
trading, whether by listing or pursuant
to unlisted trading privileges, Portfolio
Fund Shares that meet the criteria of
this Rule.
Proposed Rule 14.11(m)(2) provides
that this proposed Rule is applicable
only to Portfolio Fund Shares. Except to
the extent inconsistent with this Rule,
or unless the context otherwise requires,
the rules and procedures of the Board of
Directors shall be applicable to the
trading on the Exchange of such
securities. Portfolio Fund Shares are
included within the definition of
‘‘security’’ or ‘‘securities’’ as such terms
are used in the Rules of the Exchange.
Proposed Rule 14.11(m)(2)(A)–(D)
provide that the Exchange will file
separate proposals under Section 19(b)
of the Act before the listing of Portfolio
Fund Shares; that transactions in
Portfolio Fund Shares will occur
throughout the Exchange’s trading
hours; the minimum price variation for
quoting and entry of orders in Portfolio
Fund Shares is $0.01; and that the
Exchange will implement written
surveillance procedures for Portfolio
Fund Shares.
Proposed Rule 14.11(m)(3)(B)
provides that the term ‘‘Fund Portfolio’’
means the identities and quantities of
the securities and other assets held by
the Investment Company that will form
the basis for the Investment Company’s
calculation of net asset value at the end
of the business day.
Proposed Rule 14.11(m)(3)(C)
provides that the term ‘‘Reporting
Authority’’ in respect of a particular
series of Portfolio Fund Shares means
the Exchange, an institution, or a
reporting service designated by the
Exchange or by the exchange that lists
a particular series of Portfolio Fund
Shares (if the Exchange is trading such
series pursuant to unlisted trading
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17:30 Dec 30, 2019
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privileges) as the official source for
calculating and reporting information
relating to such series, including, but
not limited to, the Proxy Basket; the
Fund Portfolio; the amount of any cash
distribution to holders of Portfolio Fund
Shares, net asset value, or other
information relating to the issuance,
redemption or trading of Portfolio Fund
Shares. A series of Portfolio Fund
Shares may have more than one
Reporting Authority, each having
different functions.
Proposed Rule 14.11(m)(3)(D)
provides that the term ‘‘Proxy Basket’’
means the identities and quantities of
the securities and other assets included
in a basket that is designed to closely
track the daily performance of the
holdings of a series of Portfolio Fund
Shares, as provided in the exemptive
relief applicable to a series of Portfolio
Fund Shares. The Proxy Basket also
serves as the creation and redemption
basket for a series of Portfolio Fund
Shares. The Proxy Basket will be
constructed as provided in the
applicable exemptive relief and will be
fully described in the proposal required
under Rule 14.11(m)(2)(A). The website
for each series of Portfolio Fund Shares
shall disclose the following information
regarding the Proxy Basket as required
under this Rule 14.11(m), to the extent
applicable: (i) Ticker symbol; (ii) CUSIP
or other identifier; (iii) Description of
the holding; (iv) Identity of the security,
commodity, index, or other asset upon
which the derivative is based; (v) The
strike price for any options; (vi) The
quantity of each security or other asset
held as measured by: (a) Par value; (b)
Notional value; (c) Number of shares; (d)
Number of contracts; (e) Number of
units; (vii) Maturity date; (viii) Coupon
rate; (ix) Effective date; (x) Market value;
and (xi) Percentage weighting of the
holding in the portfolio.
Proposed Rule 14.11(m)(4)(A)
provides the initial listing criteria for a
series of Portfolio Fund Shares, which
include the following: (A) Each series of
Portfolio Fund Shares will be listed and
traded on the Exchange subject to
application of the following initial
listing criteria: (i) For each series, the
Exchange will establish a minimum
number of Portfolio Fund Shares
required to be outstanding at the time of
commencement of trading on the
Exchange; (ii) the Exchange will obtain
a representation from the issuer of each
series of Portfolio Fund Shares that the
net asset value per share for the series
will be calculated daily and that each of
the following will be made available to
all market participants at the same time
when disclosed: The net asset value, the
Proxy Basket, and the Fund Portfolio.
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72415
Proposed Rule 14.11(m)(4)(B)
provides that each series of Portfolio
Fund Shares will be listed and traded
on the Exchange subject to application
of the following continued listing
criteria: (i)(a) The Proxy Basket will be
disseminated at least once daily and
will be made available to all market
participants at the same time; and (b)
the Reporting Authority that provides
the Proxy Basket must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material non-public
information regarding the actual
components of the Proxy Basket; (ii) the
Fund Portfolio will at a minimum be
disclosed within at least 60 days
following the end of every fiscal quarter
and will be made available to all market
participants at the same time; and (b)
the Reporting Authority that provides
the Fund Portfolio must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material non-public
information regarding the actual
components of the Fund Portfolio; (iii)
upon termination of an Investment
Company, the Exchange requires that
Portfolio Fund Shares issued in
connection with such entity be removed
from listing on the Exchange; and (iv)
voting rights shall be as set forth in the
applicable Investment Company
prospectus or Statement of Additional
Information.
Additionally, proposed Rule
14.11(m)(4)(B)(iv) provides that the
Exchange will consider the suspension
of trading in and will commence
delisting proceedings for a series of
Portfolio Fund Shares pursuant to Rule
14.12 under any of the following
circumstances: (a) If, following the
initial twelve-month period after
commencement of trading on the
Exchange of a series of Portfolio Fund
Shares, there are fewer than 50
beneficial holders of the series of
Portfolio Fund Shares for 30 or more
consecutive trading days; (b) if either
the Proxy Basket or Fund Portfolio is
not made available to all market
participants at the same time; (c) if the
Investment Company issuing the
Portfolio Fund Shares has failed to file
any filings required by the Commission
or if the Exchange is aware that the
Investment Company is not in
compliance with the conditions of any
exemptive order or no-action relief
granted by the Commission to the
Investment Company with respect to the
series of Portfolio Fund Shares; (d) if
any of the requirements set forth in this
rule are not continuously maintained;
(e) if any of the applicable Continued
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Listing Representations for the issue of
Portfolio Fund Shares are not
continuously met; or (f) if such other
event shall occur or condition exists
which, in the opinion of the Exchange,
makes further dealings on the Exchange
inadvisable.
Proposed Rule 14.11(m)(5) provides
that neither the Exchange, the Reporting
Authority, nor any agent of the
Exchange shall have any liability for
damages, claims, losses or expenses
caused by any errors, omissions, or
delays in calculating or disseminating
any current portfolio value; the current
value of the portfolio of securities
required to be deposited to the open-end
management investment company in
connection with issuance of Portfolio
Fund Shares; the amount of any
dividend equivalent payment or cash
distribution to holders of Portfolio Fund
Shares; net asset value; or other
information relating to the purchase,
redemption, or trading of Portfolio Fund
Shares, resulting from any negligent act
or omission by the Exchange, the
Reporting Authority or any agent of the
Exchange, or any act, condition, or
cause beyond the reasonable control of
the Exchange, its agent, or the Reporting
Authority, including, but not limited to,
an act of God; fire; flood; extraordinary
weather conditions; war; insurrection;
riot; strike; accident; action of
government; communications or power
failure; equipment or software
malfunction; or any error, omission, or
delay in the reports of transactions in
one or more underlying securities.
Proposed Rule 14.11(m)(6) provides
that the provisions of this subparagraph
apply only to series of Portfolio Fund
Shares that are the subject of an order
by the Commission exempting such
series from certain prospectus delivery
requirements under Section 24(d) of the
Investment Company Act of 1940 (the
‘‘1940 Act’’) and are not otherwise
subject to prospectus delivery
requirements under the Securities Act of
1933. The Exchange will inform its
members regarding application of these
provisions of this subparagraph to a
particular series of Portfolio Fund
Shares by means of an information
circular prior to commencement of
trading in such series. The Exchange
requires that members provide to all
purchasers of a series of Portfolio Fund
Shares a written description of the terms
and characteristics of those securities, in
a form prepared by the open-end
management investment company
issuing such securities, not later than
the time a confirmation of the first
transaction in such series is delivered to
such purchaser. In addition, members
shall include such a written description
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17:30 Dec 30, 2019
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with any sales material relating to a
series of Portfolio Fund Shares that is
provided to customers or the public.
Any other written materials provided by
a member to customers or the public
making specific reference to a series of
Portfolio Fund Shares as an investment
vehicle must include a statement in
substantially the following form: ‘‘A
circular describing the terms and
characteristics of (the series of Portfolio
Fund Shares) has been prepared by the
(open-end management investment
company name) and is available from
your broker. It is recommended that you
obtain and review such circular before
purchasing (the series of Portfolio Fund
Shares).’’ A member carrying an
omnibus account for a non-member
broker-dealer is required to inform such
non-member that execution of an order
to purchase a series of Portfolio Fund
Shares for such omnibus account will be
deemed to constitute agreement by the
non-member to make such written
description available to its customers on
the same terms as are directly applicable
to members under this rule. Upon
request of a customer, a member shall
also provide a prospectus for the
particular series of Portfolio Fund
Shares.
Proposed Rule 14.11(m)(7) provides
that if the investment adviser to the
Investment Company issuing Portfolio
Fund Shares is affiliated with a brokerdealer, such investment adviser shall
erect and maintain a ‘‘fire wall’’
between the investment adviser and the
broker-dealer with respect to access to
information concerning the composition
and/or changes to such Investment
Company portfolio and Proxy Basket.
Personnel who make decisions on the
Investment Company’s portfolio
composition and/or Proxy Basket must
be subject to procedures designed to
prevent the use and dissemination of
material nonpublic information
regarding the applicable Investment
Company portfolio and/or Proxy Basket.
Policy Discussion—Proposed Rule
14.11(m)
The purpose of the structure of
Portfolio Fund Shares is to provide
investors with the traditional benefits of
ETFs while protecting funds from the
potential for front running or free riding
of portfolio transactions, which could
adversely impact the performance of a
fund. While each series of Portfolio
Fund Shares will be actively managed
and, to that extent, similar to Managed
Fund Shares (as defined in Rule
14.11(i)), Portfolio Fund Shares differ
from Managed Fund Shares in one key
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way.5 A series of Portfolio Fund Shares
will disclose the Proxy Basket on a daily
basis which, as described above, is
designed to closely track the
performance of the holdings of the
Investment Company, instead of the
actual holdings of the Investment
Company, as provided by a series of
Managed Fund Shares.6
For the arbitrage mechanism for any
ETF to function effectively, authorized
participants, arbitrageurs, and other
market participants (collectively,
‘‘Market Makers’’) need sufficient
information to accurately value shares
of a fund to transact in both the primary
and secondary market. The Proxy
Basket, constructed as provided in the
applicable exemptive relief, is designed
to closely track the daily performance of
the holdings of a series of Portfolio
Fund Shares.
Given the correlation between the
Proxy Basket and the Fund Portfolio,7
5 The Exchange notes that there are two
additional differences between proposed Rule
14.11(m) and Rule 14.11(i): (i) Proposed Rule
14.11(m) would require a rule filing under Section
19(b) prior to listing any product on the Exchange
meaning that no series of Portfolio Fund Shares
could be listed on the Exchange pursuant to Rule
19b–4(e) and there are no proposed rules
comparable to the quantitative portfolio holdings
standards from Rule 14.11(i); and (ii) proposed Rule
14.11(m) would not require the dissemination of an
intraday indicative value. The Exchange has
submitted a proposal to eliminate the requirement
for series of Managed Fund Shares and generally
agrees with the Commission’s sentiment that the
intraday indicative value is not necessary to
support the arbitrage mechanism. See SR–
CboeBZX–2019–104 and Investment Company Act
Release No. 10695 (October 24, 2019) (84 FR
57162).
6 Proposed Rule 14.11(m)(4)(B)(iii) will, however,
require each series of Portfolio Fund Shares to at
a minimum disclose the entirety of its portfolio
holdings within at least 60 days following the end
of every fiscal quarter in accordance with normal
disclosure requirements otherwise applicable to
open-end investment companies registered under
the 1940 Act.
Form N–PORT requires reporting of a fund’s
complete portfolio holdings on a position-byposition basis on a quarterly basis within 60 days
after fiscal quarter end. Investors can obtain a
fund’s Statement of Additional Information, its
Shareholder Reports, its Form N–CSR, filed twice
a year, and its Form N–CEN, filed annually. A
fund’s SAI and Shareholder Reports are available
free upon request from the Investment Company,
and those documents and the Form N–PORT, Form
N–CSR, and Form N–CEN may be viewed on-screen
or downloaded from the Commission’s website at
www.sec.gov.
7 As provided in the Notices, funds and their
respective advisers will take remedial actions as
necessary if the funds do not function as
anticipated. For the first three years after a launch,
a fund will establish certain thresholds for its level
of tracking error, premiums/discounts, and spreads,
so that, upon the fund’s crossing a threshold, the
adviser will promptly call a meeting of the fund’s
board of directors and will present the board or
committee with recommendations for appropriate
remedial measures. The board would then consider
the continuing viability of the fund, whether
shareholders are being harmed, and what, if any,
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the Exchange believes that the Proxy
Basket would serve as a pricing signal
to identify arbitrage opportunities when
its value and the secondary market price
of the shares of a series of Portfolio
Fund Shares diverge. If shares began
trading at a discount to the Proxy
Basket, an authorized participant could
purchase the shares in secondary market
transactions and, after accumulating
enough shares to comprise a creation
unit,8 redeem them in exchange for a
redemption basket reflecting the Net
Asset Value (‘‘NAV’’) per share of the
fund’s portfolio holdings. The purchases
of Shares would reduce the supply of
Shares in the market, and thus tend to
drive up the Shares’ market price closer
to the fund’s NAV. Alternatively, if
shares are trading at a premium, the
transactions in the arbitrage process are
reversed. Market Makers also can engage
in arbitrage without using the creation
or redemption processes. For example,
if a fund is trading at a premium to the
Proxy Basket, Market Makers may sell
shares short and take a long position in
the Proxy Basket securities, wait for the
trading prices to move toward parity,
and then close out the positions in both
the shares and the securities, to realize
a profit from the relative movement of
their trading prices. Similarly, a Market
Maker could buy shares and take a short
position in the Proxy Basket securities
in an attempt to profit when shares are
trading at a discount to the Proxy
Basket.
Overall, the Exchange believes that
the arbitrage process would operate
similarly to the arbitrage process in
place today for existing ETFs that use
in-kind baskets for creations and
redemptions that do not reflect the
ETF’s complete holdings but
nonetheless produce performance that is
highly correlated to the performance of
the ETF’s actual portfolio. The Exchange
has observed highly efficient trading of
ETFs that invest in markets where
security values are not fully known at
the time of ETF trading, and where a
perfect hedge is not possible, such as
international equity and fixed-income
ETFs. While the ability to value and
hedge many of these existing ETFs in
action would be appropriate. Specifically, the
Applications and Notices provide that such a
meeting would occur: (1) If the tracking error
exceeds 1%; or (2) if, for 30 or more days in any
quarter or 15 days in a row (a) the absolute
difference between either the market closing price
or bid/ask price, on one hand, and NAV, on the
other, exceeds 2%, or (b) the bid/ask spread exceeds
2%.
8 Portfolio Fund Shares will be purchased or
redeemed only in large aggregations, or ‘‘creation
units,’’ and the Proxy Basket will constitute the
names and quantities of instruments for both
purchases and redemptions of Creation Units.
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the market may be limited, such ETFs
have generally maintained an effective
arbitrage mechanism and traded
efficiently.
As provided in the Notice, the
Commission believes that an arbitrage
mechanism based largely on the
combination of a daily disclosed Proxy
Basket and at a minimum quarterly
disclosure of the Fund Portfolio can
work in an efficient manner to maintain
a fund’s secondary market prices close
to its NAV.9 Consistent with the
Commission’s view, the Exchange
believes that because the arbitrage
mechanism for Portfolio Fund Shares
will be sufficient to keep secondary
market prices in line with NAV and
because the proposed rules are except as
described above nearly identical to the
generic listing standards for Managed
Fund Shares, proposed Rule 14.11(m) is
consistent with the Act.
The Exchange notes that while the
Proxy Basket does not reflect the 1-for1 holdings of each series of Portfolio
Fund Shares, a significant amount of
information about the holdings is
publicly available at all times. Each
series will disclose the Proxy Basket on
a daily basis. Each series of Portfolio
Fund Shares will at a minimum disclose
the entirety of its portfolio holdings,
including the name, identifier, market
value and weight of each security and
instrument in the portfolio within at
least 60 days following the end of every
fiscal quarter in a manner consistent
with normal disclosure requirements
otherwise applicable to open-end
investment companies registered under
the 1940 Act.
While not providing daily disclosure
of the Fund Portfolio could open the
door to potential information leakage
and misuse of material non-public
information. However, the Exchange
believes that proposed Rule 14.11(m)(7)
provides sufficient safeguards to prevent
such leakage and misuse because the
fire wall requirement will act to make
sure that no entity will be able to misuse
the data for their own purposes and the
requirement related to information
protection will act as a deterrent to any
misuse and improper dissemination of a
fund’s portfolio composition and other
material non-public information.
Surveillance
The Exchange believes that its
surveillance procedures are adequate to
9 See Fidelity Notice at 17. The Commission also
notes that as long as arbitrage continues to keep the
Fund’s secondary market price and NAV close, and
does so efficiently so that spreads remain narrow,
that investors would benefit from the opportunity
to invest in active strategies through a vehicle that
offers the traditional benefits of ETFs.
PO 00000
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72417
properly monitor the trading of Portfolio
Fund 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 Portfolio Fund Shares
through the Exchange will be subject to
the Exchange’s surveillance procedures
for derivative products. The Exchange
will require the issuer of each series of
Portfolio Fund Shares listed on the
Exchange to represent to the Exchange
that it will advise the Exchange of any
failure by a 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.
If a Fund is not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under Exchange Rule 14.12.
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
Trading Halts
As described above, proposed Rule
14.11(m)(4)(B)(iv) provides that if the
Exchange becomes aware that one of the
following is not being made available to
all market participants at the same time,
respectively: The net asset value, the
Proxy Basket, or the Fund Portfolio with
respect to a series of Portfolio Fund
Shares; then the Exchange will halt
trading in such series until such time as
the net asset value, the Proxy Basket, or
the Fund Portfolio is available to all
market participants, as applicable.
Availability of Information
As noted above, Form N–PORT
requires reporting of a fund’s complete
portfolio holdings on a position-byposition basis on a quarterly basis
within 60 days after fiscal quarter end.
Investors can obtain a fund’s Statement
of Additional Information, its
Shareholder Reports, its Form N–CSR,
filed twice a year, and its Form N–CEN,
filed annually. A fund’s SAI and
Shareholder Reports are available free
upon request from the Investment
Company, and those documents and the
Form N–PORT, Form N–CSR, and Form
N–CEN may be viewed on-screen or
downloaded from the Commission’s
website at www.sec.gov.
Information regarding market price
and trading volume of the Shares will be
continually available on a real-time
basis throughout the day on brokers’
computer screens and other electronic
services. Information regarding the
previous day’s closing price and trading
volume information for the Shares will
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be published daily in the financial
section of newspapers. Quotation and
last sale information for the Shares will
be available via the Consolidated Tape
Association (‘‘CTA’’) high-speed line.
Trading Rules
The Exchange deems Portfolio Fund
Shares to be equity securities, thus
rendering trading in the Shares subject
to the Exchange’s existing rules
governing the trading of equity
securities. As provided in proposed
Rule 14.11(m)(2)(C), the minimum price
variation for quoting and entry of orders
in securities traded on the Exchange is
$0.01.
khammond on DSKJM1Z7X2PROD with NOTICES
Information Circular
Prior to the commencement of trading
of a series of Portfolio Fund Shares, the
Exchange will inform its members in an
Information Circular (‘‘Circular’’) of the
special characteristics and risks
associated with trading the Shares.
Specifically, the Circular will discuss
the following: (1) The procedures for
purchases and redemptions of Shares;
(2) BZX Rule 3.7, which imposes
suitability obligations on Exchange
members with respect to recommending
transactions in the Shares to customers;
(3) how information regarding the Proxy
Basket is disseminated; (4) the
requirement that members deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; (5) trading information; and
(6) that the Fund Portfolio of the Shares
are not disclosed on a daily basis.
In addition, the Circular will
reference that Funds are subject to
various fees and expenses described in
the Registration Statement. The Circular
will discuss any exemptive, no-action,
and interpretive relief granted by the
Commission from any rules under the
Act. The Circular will also disclose that
the NAV for the Shares will be
calculated after 4:00 p.m., E.T. each
trading day.
The Shares
The Shares are offered by the Trust,
which is organized as a business trust
under the laws of The Commonwealth
of Massachusetts. The Trust is registered
with the Commission as an open-end
investment company and will file a
registration statement on behalf of the
Funds on Form N–1A (‘‘Registration
Statement’’) with the Commission.10
10 The Trust intends to file a post-effective
amendment to the Registration Statement in the
near future. The descriptions of the Funds and the
Shares contained herein are based, in part, on
information that will be included in the
Registration Statement. The Commission has issued
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Fidelity Management & Research
Company or FMR Co., Inc. (the
‘‘Adviser’’) will be the investment
adviser to the Funds. The Adviser is not
registered as a broker-dealer, but is
affiliated with numerous broker-dealers.
The Adviser represents that a fire wall
exists and will be maintained between
the respective personnel at the Adviser
and affiliated broker-dealers with
respect to access to information
concerning the composition and/or
changes to each Fund’s portfolio and
Proxy Basket. Personnel who make
decisions on a Fund’s portfolio
composition and/or Proxy Basket shall
be subject to procedures designed to
prevent the use and dissemination of
material non-public information
regarding such portfolio and/or Proxy
Basket. The Funds’ sub-advisers, FMR
Investment Management (UK) Limited,
Fidelity Management & Research (Hong
Kong) Limited, and Fidelity
Management & Research (Japan) Limited
(each a ‘‘Sub-Adviser’’ and, collectively,
the ‘‘Sub-Advisers’’), are not registered
as a broker-dealer but are affiliated with
numerous broker-dealers. Sub-Adviser
personnel who make decisions
regarding a Fund’s portfolio and/or
Proxy Basket are subject to procedures
designed to prevent the use and
dissemination of material nonpublic
information regarding the Fund’s
portfolio and/or Proxy Basket. In the
event that (a) the Adviser or a 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 newly affiliated with a brokerdealer; 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
and/or changes to the portfolio and/or
Proxy Basket, and will be subject to
procedures designed to prevent the use
and dissemination of material nonpublic information regarding such
portfolio and/or Proxy Basket. Each
Fund intends to qualify each year as a
regulated investment company under
Subchapter M of the Internal Revenue
Code of 1986, as amended.
The Shares will conform to the initial
and continued listing criteria under
Rule 14.11(l) as well as all terms in the
Exemptive Order. The Exchange
represents that, for initial and/or
continued listing, each Fund will be in
compliance with Rule 10A–3 under the
an order granting certain exemptive relief to the
Trust under the Investment Company Act of 1940
(15 U.S.C. 80a–1).
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Act.11 A minimum of 100,000 Shares of
each Fund will be outstanding at the
commencement of trading on the
Exchange. The Exchange will obtain a
representation from the issuer of the
Shares of each Fund that the NAV per
share of each Fund will be calculated
daily and will be made available to all
market participants at the same time.
Fidelity Value ETF
The Fund seeks long-term growth of
capital. In order to achieve its
investment objective, under Normal
Market Conditions,12 the Fund will
primarily invest its assets in: (i)
Securities that the Adviser believes are
undervalued in the marketplace in
relation to factors such as assets, sales,
earnings, growth potential, or cash flow,
or in relation to securities of other
companies in the same industry (stocks
of these companies are often called
‘‘value’’ stocks) listed on a U.S. national
securities exchange or a foreign
exchange that trade on such exchange
contemporaneously with the Fund’s
Shares; and (ii) cash and Cash
Equivalents.13
The Fund may also invest the Fund’s
assets in other securities and financial
instruments, as summarized below.
Under Normal Market Conditions, the
Fund may invest up to 5% of its assets
in each of U.S. exchange-traded index
futures, preferred securities, and shortterm US. Treasuries. The Fund may
invest in ETFs to facilitate creations and
redemptions using the Proxy Basket, as
defined above. Except as described
above, the Fund will not invest in
derivative instruments or enter into
short positions.14
11 See
17 CFR 240.10A–3.
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 proposal and as defined in
Rule 14.11(i)(4)(C)(iii), Cash Equivalents are shortterm instruments with maturities of less than three
months that are: (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 The Adviser notes that the Fund may by virtue
of its holdings be issued warrants and rights. The
12 The
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The Exchange notes that the Fund’s
holdings will meet the generic listing
standards applicable to series of
Managed Fund Shares under Rule
14.11(i)(4)(C). While such standards do
not apply directly to series of Portfolio
Fund Shares, the Exchange believes that
the overarching policy issues related to
liquidity, market cap, diversity, and
concentration of portfolio holdings that
Rule 14.11(i)(4)(C) is intended to
address are equally applicable to series
of Portfolio Fund Shares.
khammond on DSKJM1Z7X2PROD with NOTICES
Fidelity Growth ETF
The Fund seeks growth of capital over
the long term. In order to achieve its
investment objective, under Normal
Market Conditions, the Fund will
primarily invest its assets in: (i)
Securities that the Adviser believes have
above-average growth potential (stocks
of these companies are often called
‘‘growth’’ stocks) that are listed on a
U.S. national securities exchange or a
foreign exchange that trade on such
exchange contemporaneously with the
Fund’s Shares; and (ii) cash and Cash
Equivalents.
The Fund may also invest the Fund’s
assets in other securities and financial
instruments, as summarized below.
Under Normal Market Conditions, the
Fund may invest up to 5% of its assets
in each of U.S. exchange-traded index
futures, preferred securities, and shortterm US. Treasuries. The Fund may
invest in ETFs to facilitate creations and
redemptions using the Proxy Basket, as
defined above. Except as described
above, the Fund will not invest in
derivative instruments or enter into
short positions.15
The Exchange notes that the Fund’s
holdings will meet the generic listing
standards applicable to series of
Managed Fund Shares under Rule
14.11(i)(4)(C). While such standards do
not apply directly to series of Portfolio
Fund Shares, the Exchange believes that
the overarching policy issues related to
liquidity, market cap, diversity, and
concentration of portfolio holdings that
Rule 14.11(i)(4)(C) is intended to
address are equally applicable to series
of Portfolio Fund Shares.
Fidelity Opportunistic ETF
The Fund seeks long-term growth of
capital. In order to achieve its
investment objective, under Normal
Fund will not purchase such instruments and will
dispose of such holdings as the Adviser determines
is in the best interest of the Fund’s shareholders.
15 The Adviser notes that the Fund may by virtue
of its holdings be issued warrants and rights. The
Fund will not purchase such instruments and will
dispose of such holdings as the Adviser determines
is in the best interest of the Fund’s shareholders.
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17:30 Dec 30, 2019
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Market Conditions, the Fund will
primarily invest in (i) both ‘‘growth’’
and ‘‘value’’ stocks based on
fundamental analysis of factors such as
each issuer’s financial condition and
industry position, as well as market and
economic conditions that are listed on
a U.S. national securities exchange or a
foreign exchange that trade on such
exchange contemporaneously with the
Fund’s Shares; and (ii) cash and Cash
Equivalents.
The Fund may also invest the Fund’s
assets in other securities and financial
instruments, as summarized below.
Under Normal Market Conditions, the
Fund may invest up to 5% of its assets
in each of U.S. exchange-traded index
futures, preferred securities, and shortterm U.S. Treasuries. The Fund may
invest in ETFs to facilitate creations and
redemptions using the Proxy Basket, as
defined above. Except as described
above, the Fund will not invest in
derivative instruments or enter into
short positions.16
The Exchange notes that the Fund’s
holdings will meet the generic listing
standards applicable to series of
Managed Fund Shares under Rule
14.11(i)(4)(C). While such standards do
not apply directly to series of Portfolio
Fund Shares, the Exchange believes that
the overarching policy issues related to
liquidity, market cap, diversity, and
concentration of portfolio holdings that
Rule 14.11(i)(4)(C) is intended to
address are equally applicable to series
of Portfolio Fund Shares.
Proxy Basket for the Proposed Funds
For the Funds, the Proxy Basket will
consist of a combination of the Fund’s
recently disclosed portfolio holdings
and representative ETFs.17 ETFs
selected for inclusion in the Proxy
Basket will be consistent with the
Fund’s objective and selected based on
certain criteria, including, but not
limited to, liquidity, assets under
management, holding limits and
compliance considerations.
Representative ETFs can provide a
useful mechanism to reflect a Fund’s
holdings’ exposures within the Proxy
Basket without revealing a Fund’s exact
16 The Adviser notes that the Fund may by virtue
of its holdings be issued warrants and rights. The
Fund will not purchase such instruments and will
dispose of such holdings as the Adviser determines
is in the best interest of the Fund’s shareholders.
17 For purposes of this filing, the term ETF will
include only Portfolio Depositary Receipts as
defined in Rule 14.11(b), Index Fund Shares as
defined in Rule 14.11(c), and Managed Fund Shares
as defined in Rule 14.11(i), along with the
equivalent products defined in the rules of other
national securities exchanges.
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72419
positions.18 The Exchange notes that
each Fund’s NAV will form the basis for
creations and redemptions for the Funds
and creations and redemptions will
work in a manner substantively
identical to that of series of Managed
Fund Shares. The Adviser expects that
the Shares of the Funds will generally
be created and redeemed in-kind, with
limited exceptions. The names and
quantities of the instruments that
constitute the basket of securities for
creations and redemptions will be the
same as a Fund’s Proxy Basket, except
to the extent purchases and redemptions
are made entirely or in part on a cash
basis. In the event that the value of the
Proxy Basket is not the same as a Fund’s
NAV, the creation and redemption
baskets will consist of the securities
included in the Proxy Basket plus or
minus an amount of cash equal to the
difference between the NAV and the
value of the Proxy Basket, as further
described below.
The Proxy Basket will be constructed
utilizing a covariance matrix based on
an optimization process to minimize
deviations in the return of the Proxy
Basket relative to the Fund. The
proprietary optimization process
mathematically seeks to minimize three
key parameters that the Adviser believes
are important to the effectiveness of the
Proxy Basket as a hedge: Tracking error
(standard deviation of return
differentials between the Proxy Basket
and the Fund), turnover cost, and basket
creation cost.19 Typically, the Proxy
Basket is expected to be rebalanced on
schedule with the public disclosure of
the Fund’s holdings; however, a new
optimized Proxy Basket may be
generated as frequently as daily, and
therefore, rebalancing may occur more
frequently at the Adviser’s discretion. In
determining whether to rebalance a new
optimized Proxy Basket, the Adviser
will consider various factors, including
liquidity of the securities in the Proxy
Basket, tracking error, and the cost to
18 The set of ETFs that are ‘‘representative’’ to be
used in the Proxy Basket will depend on certain
factors, including the Fund’s investment objective,
past holdings, and benchmark, and may change
from time to time. For example, a U.S. diversified
fund benchmarked to a diversified U.S. index
would use liquid U.S. exchange-traded ETFs to
capture size (large, mid or small capitalization),
style (growth or value) and/or sector exposures in
the Fund’s portfolio. Leveraged and inverse ETFs
will not be included in the Proxy Basket. ETFs may
constitute no more than 50% of the Proxy Basket’s
assets.
19 Tracking error measures the deviations
between the Proxy Basket and Fund. Turnover cost
and basket creation cost are measures of the cost to
create and maintain the Proxy Basket as a hedge.
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create and trade the Proxy Basket.20 For
example, if the Adviser determines that
a new Proxy Basket would reduce the
variability of return differentials
between the Proxy Basket and the Fund
when balanced against the cost to trade
the new Proxy Basket, rebalancing may
be appropriate. The Adviser will
periodically review the Proxy Basket
parameters and Proxy Basket
performance and process.
As noted above, each Fund will also
disclose the entirety of its portfolio
holdings, including the name, identifier,
market value and weight of each
security and instrument in the portfolio,
at a minimum within at least 60 days
following the end of every fiscal quarter.
As described above, the Exchange notes
that the concept of the Proxy Basket
employed under this structure is
designed to provide investors with the
traditional benefits of ETFs while
protecting the Funds from the potential
for front running or free riding of
portfolio transactions, which could
adversely impact the performance of a
Fund.
khammond on DSKJM1Z7X2PROD with NOTICES
Policy Discussion—Proposed Funds
As discussed above, each Fund’s
holdings will meet the generic listing
standards applicable to series of
Managed Fund Shares under Rule
14.11(i)(4)(C). While such standards do
not apply directly to series of Portfolio
Fund Shares, the Exchange believes that
the overarching policy issues related to
liquidity, market cap, diversity, and
concentration of portfolio holdings that
Rule 14.11(i)(4)(C) is intended to
address are equally applicable to series
of Portfolio Fund Shares and, as such,
any such concerns related to the
portfolio are mitigated.
Separately and in addition to the
rationale supporting the arbitrage
mechanism for Portfolio Fund Shares
more broadly above, the Exchange also
believes that the particular instruments
that may be included in each Fund’s
portfolio and Proxy Basket do not raise
any concerns related to the Proxy
Baskets being able to closely track the
NAV of the Funds because such
instruments include only instruments
that trade on an exchange
20 The Adviser uses a trading cost model to
develop estimates of costs to trade a new Proxy
Basket. There are essentially two elements to this
cost: (1) The cost to purchase securities constituting
the Proxy Basket, i.e., the cost to put on the hedge
for the Authorized Participant, and (2) the cost of
any adjustments that need to be made to the
composition of the Proxy Basket, i.e., the cost to the
Authorized Participant to change or maintain the
hedge position. The inclusion of the trading cost
model in the optimization process is intended to
result in a Proxy Basket that is cost effective and
liquid without compromising its tracking ability.
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17:30 Dec 30, 2019
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contemporaneously with the Shares. In
addition, a Fund’s Proxy Basket will be
optimized so that it reliably and
consistently correlates to the
performance of the Fund. The Notice
specifically states that ‘‘in order to
facilitate arbitrage, each Fund’s portfolio
and Tracking Basket will only include
certain securities that trade on an
exchange contemporaneously with the
Fund’s Shares. Because the securities
would be exchange traded, market
participants would be able to accurately
price and readily trade the securities in
the Tracking Basket for purposes of
assessing the intraday value of the
Fund’s portfolio holdings and to hedge
their positions in the Fund’s Shares.’’ 21
The Exchange and Adviser agree with
the Commission’s conclusion.
The Adviser anticipates that the
returns between a Fund and its
respective Proxy Basket will have a
consistent relationship and that the
deviation in the returns between a Fund
and its Proxy Basket will be sufficiently
small such that the Proxy Basket will
provide Market Makers with a reliable
hedging vehicle that they can use to
effectuate low-risk arbitrage trades in
Fund Shares. The Exchange believes
that the disclosures provided by the
Funds will allow Market Makers to
understand the relationship between the
performance of a Fund and its Proxy
Basket. Market Makers will be able to
estimate the value of and hedge
positions in a Fund’s Shares, which the
Exchange believes will facilitate the
arbitrage process and help ensure that
the Fund’s Shares normally will trade at
market prices close to their NAV. The
Exchange also believes that competitive
market making, where traders are
looking to take advantage of differences
in bid-ask spread, will aid in keeping
spreads tight.
While the Proxy Basket does not
reflect the 1-for-1 holdings of each
Fund, a significant amount of
information about each Fund’s holdings
is publicly available at all times. Each
21 The Exchange notes that the instruments
enumerated herein are consistent with the
investable universe contemplated in the Notice.
Specifically, the Notice provides that ‘‘Each Fund
may invest only in ETFs, Exchange-traded notes,
Exchange-traded common stocks, common stocks
listed on a foreign exchange that trade on such
exchange contemporaneously with the Shares,
Exchange-traded preferred stocks, Exchange-traded
American depositary receipts, Exchange-traded real
estate investment trusts, Exchange-traded
commodity pools, Exchange-traded metals trusts,
Exchange-traded currency trusts, and exchangetraded futures that trade contemporaneously with
the Shares, as well as cash and cash equivalents
. . . All futures contracts that a Fund may invest
in will be traded on a U.S. futures exchange. For
these purposes, an ‘‘Exchange’’ is a national
securities exchange as defined in section 2(a)(26) of
the [1940] Act.’’ See Notice at 10.
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Fund will disclose the Proxy Basket on
a daily basis. Each series of Portfolio
Fund Shares will at a minimum disclose
the entirety of its portfolio holdings,
including the name, identifier, market
value and weight of each security and
instrument in the portfolio within at
least 60 days following the end of every
fiscal quarter in a manner consistent
with normal disclosure requirements
otherwise applicable to open-end
investment companies registered under
the 1940 Act. The website will include
additional quantitative information
updated on a daily basis, including, on
a per Share basis for each Fund, the
prior Business Day’s NAV and the
Closing Price or Bid/Ask Price at the
time of calculation of such NAV, and a
calculation of the premium or discount
of the Closing Price or Bid/Ask Price
against such NAV. The website will also
disclose any information regarding the
bid/ask spread for each Fund as may be
required for other ETFs under Rule 6c–
11 under the 1940 Act, as amended.
Additional Information
The Exchange represents that the
Shares of the Funds will continue to
comply with all other proposed
requirements applicable to Portfolio
Fund Shares, which also generally
correspond to the requirements for
Managed Fund Shares, including the
dissemination of key information such
as the Proxy Basket, the Fund Portfolio,
and Net Asset Value, suspension of
trading or removal, trading halts,
surveillance, minimum price variation
for quoting and order entry, the
information circular, and firewalls as set
forth in the proposed Exchange rules
applicable to Portfolio Fund Shares and
the orders approving such rules.
Price information for the exchangelisted instruments held by the Funds,
including both U.S. and non-U.S. listed
equity securities and U.S. exchangelisted futures will be available through
major market data vendors or securities
exchanges listing and trading such
securities. Moreover, U.S.-listed equity
securities held by the Funds 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.22 All futures contracts that
the Funds may invest in will be traded
on a U.S. futures exchange. The
Exchange or the Financial Industry
22 For a list of the current members of ISG, see
www.isgportal.com. The Exchange notes that not all
components of the Funds 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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Regulatory Authority (‘‘FINRA’’), on
behalf of the Exchange, or both, will
communicate as needed regarding
trading in the Shares, underlying U.S.
exchange-listed equity securities, and
U.S. exchange-listed futures with other
markets and other entities that are
members of the Intermarket
Surveillance Group (‘‘ISG’’), and the
Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading
information regarding trading such
instruments from such markets and
other entities. In addition, the Exchange
may obtain information regarding
trading in the Shares, underlying equity
securities, and U.S. exchange-listed
futures from markets and other entities
that are members of ISG or with which
the Exchange has in place a
comprehensive surveillance sharing
agreement.
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 reference asset and
intraday indicative values (as
applicable), or the applicability of
Exchange listing rules specified in this
filing shall constitute continued listing
requirements for the Shares. The issuer
has represented to the Exchange that it
will advise the Exchange of any failure
by the Funds or Shares to comply with
the continued listing requirements, and,
pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange
will surveil for compliance with the
continued listing requirements. 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 a Fund
is not in compliance with the applicable
listing requirements, the Exchange will
commence delisting procedures with
respect to such Fund under Exchange
Rule 14.12.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 23 in general and Section
6(b)(5) of the Act 24 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
23 15
24 15
U.S.C. 78f.
U.S.C. 78f(b)(5).
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and a national market system and, in
general, to protect investors and the
public interest.
The Exchange believes that proposed
Rule 14.11(m) is designed to prevent
fraudulent and manipulative acts and
practices in that the proposed rules
relating to listing and trading of
Portfolio Fund Shares provide specific
initial and continued listing criteria
required to be met by such securities.
Proposed Rule 14.11(m)(4)(A) provides
the initial listing criteria for a series of
Portfolio Fund Shares, which include
the following: (A) Each series of
Portfolio Fund Shares will be listed and
traded on the Exchange subject to
application of the following initial
listing criteria: (i) For each series, the
Exchange will establish a minimum
number of Portfolio Fund Shares
required to be outstanding at the time of
commencement of trading on the
Exchange; (ii) the Exchange will obtain
a representation from the issuer of each
series of Portfolio Fund Shares that the
net asset value per share for the series
will be calculated daily and that each of
the following will be made available to
all market participants at the same time
when disclosed: The net asset value, the
Proxy Basket, and the Fund Portfolio.
Proposed Rule 14.11(m)(4)(B)
provides that each series of Portfolio
Fund Shares will be listed and traded
on the Exchange subject to application
of the following continued listing
criteria: (i)(a) The Proxy Basket will be
disseminated at least once daily and
will be made available to all market
participants at the same time; and (b)
the Reporting Authority that provides
the Proxy Basket must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material non-public
information regarding the actual
components of the Proxy Basket; (ii) the
Fund Portfolio will at a minimum be
disclosed within at least 60 days
following the end of every fiscal quarter
and will be made available to all market
participants at the same time; and (b)
the Reporting Authority that provides
the Fund Portfolio must implement and
maintain, or be subject to, procedures
designed to prevent the use and
dissemination of material non-public
information regarding the actual
components of the Fund Portfolio; (iii)
upon termination of an Investment
Company, the Exchange requires that
Portfolio Fund Shares issued in
connection with such entity be removed
from listing on the Exchange; and (iv)
voting rights shall be as set forth in the
applicable Investment Company
prospectus or Statement of Additional
Information.
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Additionally, proposed Rule
14.11(m)(4)(B)(iv) provides that the
Exchange will consider the suspension
of trading in and will commence
delisting proceedings for a series of
Portfolio Fund Shares pursuant to Rule
14.12 under any of the following
circumstances: (a) If, following the
initial twelve-month period after
commencement of trading on the
Exchange of a series of Portfolio Fund
Shares, there are fewer than 50
beneficial holders of the series of
Portfolio Fund Shares for 30 or more
consecutive trading days; (b) if either
the Proxy Basket or Fund Portfolio is
not made available to all market
participants at the same time; (c) if the
Investment Company issuing the
Portfolio Fund Shares has failed to file
any filings required by the Commission
or if the Exchange is aware that the
Investment Company is not in
compliance with the conditions of any
exemptive order or no-action relief
granted by the Commission to the
Investment Company with respect to the
series of Portfolio Fund Shares; (d) if
any of the requirements set forth in this
rule are not continuously maintained;
(e) if any of the applicable Continued
Listing Representations for the issue of
Portfolio Fund Shares are not
continuously met; or (f) if such other
event shall occur or condition exists
which, in the opinion of the Exchange,
makes further dealings on the Exchange
inadvisable.
Proposed Rule 14.11(m)(7) proposed
Rule 14.11(m)(7) provides that if the
investment adviser to the Investment
Company issuing Portfolio Fund Shares
is affiliated with a broker-dealer, such
investment adviser shall erect and
maintain a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
and/or changes to such Investment
Company portfolio and Proxy Basket.
Personnel who make decisions on the
Investment Company’s portfolio
composition and/or Proxy Basket must
be subject to procedures designed to
prevent the use and dissemination of
material nonpublic information
regarding the applicable Investment
Company portfolio and/or Proxy Basket.
The Exchange believes that these
proposed rules are designed to prevent
fraudulent and manipulative acts and
practices related to the listing and
trading of Portfolio Fund Shares because
they provide meaningful requirements
about both the data that will be made
publicly available about the Shares (the
Proxy Basket) as well as the information
that will only be available to certain
parties and the controls on such
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information. Specifically, the Exchange
believes that the requirements related to
information protection enumerated
under proposed Rule 14.11(m)(7) will
act as a strong safeguard against any
misuse and improper dissemination of
information related to the securities
included in or changes made to the
Fund Portfolio and/or the Proxy Basket.
As such, the Exchange believes that this
proposal is designed to prevent
fraudulent and manipulative acts and
practices.
As noted above, the purpose of the
structure of Portfolio Fund Shares is to
provide investors with the traditional
benefits of ETFs while protecting funds
from the potential for front running or
free riding of portfolio transactions,
which could adversely impact the
performance of a fund. While each
series of Portfolio Fund Shares will be
actively managed and, to that extent,
similar to Managed Fund Shares (as
defined in Rule 14.11(i)), Portfolio Fund
Shares differ from Managed Fund
Shares in one key way.25 A series of
Portfolio Fund Shares will disclose the
Proxy Basket on a daily basis which, as
described above, is designed to closely
track the performance of the holdings of
the Investment Company, instead of the
actual holdings of the Investment
Company, as provided by a series of
Managed Fund Shares.26
25 The Exchange notes that there are two
additional differences between proposed Rule
14.11(m) and Rule 14.11(i): (i) Proposed Rule
14.11(m) would require a rule filing under Section
19(b) prior to listing any product on the Exchange
meaning that no series of Portfolio Fund Shares
could be listed on the Exchange pursuant to Rule
19b–4(e) and there are no proposed rules
comparable to the quantitative portfolio holdings
standards from Rule 14.11(i); and (ii) proposed Rule
14.11(m) would not require the dissemination of an
intraday indicative value. The Exchange has
submitted a proposal to eliminate the requirement
for series of Managed Fund Shares and generally
agrees with the Commission’s sentiment that the
intraday indicative value is not necessary to
support the arbitrage mechanism. See SR–
CboeBZX–2019–104 and Investment Company Act
Release No. 10695 (October 24, 2019) (84 FR
57162).
26 Proposed Rule 14.11(m)(4)(B)(iii) will,
however, require each series of Portfolio Fund
Shares to at a minimum disclose the entirety of its
portfolio holdings within at least 60 days following
the end of every fiscal quarter in accordance with
normal disclosure requirements otherwise
applicable to open-end investment companies
registered under the 1940 Act.
Form N–PORT requires reporting of a fund’s
complete portfolio holdings on a position-byposition basis on a quarterly basis within 60 days
after fiscal quarter end. Investors can obtain a
fund’s Statement of Additional Information, its
Shareholder Reports, its Form N–CSR, filed twice
a year, and its Form N–CEN, filed annually. A
fund’s SAI and Shareholder Reports are available
free upon request from the Investment Company,
and those documents and the Form N–PORT, Form
N–CSR, and Form N–CEN may be viewed on-screen
or downloaded from the Commission’s website at
www.sec.gov.
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For the arbitrage mechanism for any
ETF to function effectively, Market
Makers need sufficient information to
accurately value shares of a fund to
transact in both the primary and
secondary market. The Proxy Basket,
constructed as provided in the
applicable exemptive relief, is designed
to closely track the daily performance of
the holdings of a series of Portfolio
Fund Shares.
Given the correlation between the
Proxy Basket and the Fund Portfolio,27
the Exchange believes that the Proxy
Basket would serve as a pricing signal
to identify arbitrage opportunities when
its value and the secondary market price
of the shares of a series of Portfolio
Fund Shares diverge. If shares began
trading at a discount to the Proxy
Basket, an authorized participant could
purchase the shares in secondary market
transactions and, after accumulating
enough shares to comprise a creation
unit,28 redeem them in exchange for a
redemption basket reflecting the NAV
per share of the fund’s portfolio
holdings. The purchases of Shares
would reduce the supply of Shares in
the market, and thus tend to drive up
the Shares’ market price closer to the
fund’s NAV. Alternatively, if shares are
trading at a premium, the transactions
in the arbitrage process are reversed.
Market Makers also can engage in
arbitrage without using the creation or
redemption processes. For example, if a
fund is trading at a premium to the
Proxy Basket, Market Makers may sell
shares short and take a long position in
the Proxy Basket securities, wait for the
trading prices to move toward parity,
and then close out the positions in both
the shares and the securities, to realize
a profit from the relative movement of
their trading prices. Similarly, a Market
27 As provided in the Notices, funds and their
respective advisers will take remedial actions as
necessary if the funds do not function as
anticipated. For the first three years after a launch,
a fund will establish certain thresholds for its level
of tracking error, premiums/discounts, and spreads,
so that, upon the fund’s crossing a threshold, the
adviser will promptly call a meeting of the fund’s
board of directors and will present the board or
committee with recommendations for appropriate
remedial measures. The board would then consider
the continuing viability of the fund, whether
shareholders are being harmed, and what, if any,
action would be appropriate. Specifically, the
Applications and Notices provide that such a
meeting would occur: (1) If the tracking error
exceeds 1%; or (2) if, for 30 or more days in any
quarter or 15 days in a row (a) the absolute
difference between either the market closing price
or bid/ask price, on one hand, and NAV, on the
other, exceeds 2%, or (b) the bid/ask spread exceeds
2%.
28 Portfolio Fund Shares will be purchased or
redeemed only in large aggregations, or ‘‘creation
units,’’ and the Proxy Basket will constitute the
names and quantities of instruments for both
purchases and redemptions of Creation Units.
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Maker could buy shares and take a short
position in the Proxy Basket securities
in an attempt to profit when shares are
trading at a discount to the Proxy
Basket.
Overall, the Exchange believes that
the arbitrage process would operate
similarly to the arbitrage process in
place today for existing ETFs that use
in-kind baskets for creations and
redemptions that do not reflect the
ETF’s complete holdings but
nonetheless produce performance that is
highly correlated to the performance of
the ETF’s actual portfolio. The Exchange
has observed highly efficient trading of
ETFs that invest in markets where
security values are not fully known at
the time of ETF trading, and where a
perfect hedge is not possible, such as
international equity and fixed-income
ETFs. While the ability to value and
hedge many of these existing ETFs in
the market may be limited, such ETFs
have generally maintained an effective
arbitrage mechanism and traded
efficiently.
As provided in the Notice, the
Commission believes that an arbitrage
mechanism based largely on the
combination of a daily disclosed Proxy
Basket and at a minimum quarterly
disclosure of the Fund Portfolio can
work in an efficient manner to maintain
a fund’s secondary market prices close
to its NAV.29 Consistent with the
Commission’s view, the Exchange
believes that the arbitrage mechanism
for Portfolio Fund Shares will be
sufficient to keep secondary market
prices in line with NAV. This,
combined with the fact that the
proposed rules are, except as described
above, nearly identical to the generic
listing standards for Managed Fund
Shares, leads the Exchange to believe
that the proposed Rule 14.11(m) is
consistent with the Act.
The Exchange notes that while the
Proxy Basket does not reflect the 1-for1 holdings of each series of Portfolio
Fund Shares, a significant amount of
information about the holdings is
publicly available at all times. Each
series will disclose the Proxy Basket on
a daily basis. Each series of Portfolio
Fund Shares will at a minimum disclose
the entirety of its portfolio holdings,
including the name, identifier, market
value and weight of each security and
instrument in the portfolio within at
least 60 days following the end of every
29 See Fidelity Notice at 17. The Commission also
notes that as long as arbitrage continues to keep the
Fund’s secondary market price and NAV close, and
does so efficiently so that spreads remain narrow,
that investors would benefit from the opportunity
to invest in active strategies through a vehicle that
offers the traditional benefits of ETFs.
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fiscal quarter in a manner consistent
with normal disclosure requirements
otherwise applicable to open-end
investment companies registered under
the 1940 Act.
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of Portfolio
Fund 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 Portfolio Fund Shares
through the Exchange will be subject to
the Exchange’s surveillance procedures
for derivative products. The Exchange
will require the issuer of each series of
Portfolio Fund Shares listed on the
Exchange to represent to the Exchange
that it will advise the Exchange of any
failure by a 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.
If a Fund is not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under Exchange Rule 14.12.
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
As noted above, Form N–PORT
requires reporting of a fund’s complete
portfolio holdings on a position-byposition basis on a quarterly basis
within 60 days after fiscal quarter end.
Investors can obtain a fund’s Statement
of Additional Information, its
Shareholder Reports, its Form N–CSR,
filed twice a year, and its Form N–CEN,
filed annually. A fund’s SAI and
Shareholder Reports are available free
upon request from the Investment
Company, and those documents and the
Form N–PORT, Form N–CSR, and Form
N–CEN may be viewed on-screen or
downloaded from the Commission’s
website at www.sec.gov.
Information regarding market price
and trading volume of the Shares will be
continually available on a real-time
basis throughout the day on brokers’
computer screens and other electronic
services. Information regarding the
previous day’s closing price and trading
volume information for the Shares will
be published daily in the financial
section of newspapers. Quotation and
last sale information for the Shares will
be available via the CTA high-speed
line. The Exchange deems Portfolio
Fund Shares to be equity securities, thus
rendering trading in the Shares subject
to the Exchange’s existing rules
governing the trading of equity
securities. As provided in proposed
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Rule 14.11(m)(2)(C), the minimum price
variation for quoting and entry of orders
in securities traded on the Exchange is
$0.01.
The Funds
As discussed above, each Fund’s
holdings will meet the generic listing
standards applicable to series of
Managed Fund Shares under Rule
14.11(i)(4)(C). While such standards do
not apply directly to series of Portfolio
Fund Shares, the Exchange believes that
the overarching policy issues related to
liquidity, market cap, diversity, and
concentration of portfolio holdings that
Rule 14.11(i)(4)(C) is intended to
address are equally applicable to series
of Portfolio Fund Shares and, as such,
any such concerns related to the
portfolio are mitigated.
Separately and in addition to the
rationale supporting the arbitrage
mechanism for Portfolio Fund Shares
more broadly above, the Exchange also
believes that the particular instruments
that may be included in each Fund’s
portfolio and Proxy Basket do not raise
any concerns related to the Proxy
Baskets being able to closely track the
NAV of the Funds because such
instruments include only instruments
that trade on an exchange
contemporaneously with the Shares. In
addition, a Fund’s Proxy Basket will be
optimized so that it reliably and
consistently correlates to the
performance of the Fund. The Notice
specifically states that ‘‘in order to
facilitate arbitrage, each Fund’s portfolio
and Tracking Basket will only include
certain securities that trade on an
exchange contemporaneously with the
Fund’s Shares. Because the securities
would be exchange traded, market
participants would be able to accurately
price and readily trade the securities in
the Tracking Basket for purposes of
assessing the intraday value of the
Fund’s portfolio holdings and to hedge
their positions in the Fund’s Shares.’’ 30
30 The Exchange notes that the instruments
enumerated herein are consistent with the
investable universe contemplated in the Notice.
Specifically, the Notice provides that ‘‘Each Fund
may invest only in ETFs, Exchange-traded notes,
Exchange-traded common stocks, common stocks
listed on a foreign exchange that trade on such
exchange contemporaneously with the Shares,
Exchange-traded preferred stocks, Exchange-traded
American depositary receipts, Exchange-traded real
estate investment trusts, Exchange-traded
commodity pools, Exchange-traded metals trusts,
Exchange-traded currency trusts, and exchangetraded futures that trade contemporaneously with
the Shares, as well as cash and cash equivalents
. . . All futures contracts that a Fund may invest
in will be traded on a U.S. futures exchange. For
these purposes, an ‘‘Exchange’’ is a national
securities exchange as defined in section 2(a)(26) of
the [1940] Act.’’ See Notice at 10.
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The Exchange and Adviser agree with
the Commission’s conclusion.
The Adviser anticipates that the
returns between a Fund and its
respective Proxy Basket will have a
consistent relationship and that the
deviation in the returns between a Fund
and its Proxy Basket will be sufficiently
small such that the Proxy Basket will
provide Market Makers with a reliable
hedging vehicle that they can use to
effectuate low-risk arbitrage trades in
Fund Shares. The Exchange believes
that the disclosures provided by the
Funds will allow Market Makers to
understand the relationship between the
performance of a Fund and its Proxy
Basket. Market Makers will be able to
estimate the value of and hedge
positions in a Fund’s Shares, which the
Exchange believes will facilitate the
arbitrage process and help ensure that
the Fund’s Shares normally will trade at
market prices close to their NAV. The
Exchange also believes that competitive
market making, where traders are
looking to take advantage of differences
in bid-ask spread, will aid in keeping
spreads tight.
While the Proxy Basket does not
reflect the 1-for-1 holdings of each
Fund, a significant amount of
information about each Fund’s holdings
is publicly available at all times. Each
Fund will disclose the Proxy Basket on
a daily basis. Each series of Portfolio
Fund Shares will at a minimum disclose
the entirety of its portfolio holdings,
including the name, identifier, market
value and weight of each security and
instrument in the portfolio within at
least 60 days following the end of every
fiscal quarter in a manner consistent
with normal disclosure requirements
otherwise applicable to open-end
investment companies registered under
the 1940 Act. The website will include
additional quantitative information
updated on a daily basis, including, on
a per Share basis for each Fund, the
prior Business Day’s NAV and the
Closing Price or Bid/Ask Price at the
time of calculation of such NAV, and a
calculation of the premium or discount
of the Closing Price or Bid/Ask Price
against such NAV. The website will also
disclose any information regarding the
bid/ask spread for each Fund as may be
required for other ETFs under Rule 6c–
11 under the 1940 Act, as amended.
The Exchange represents that the
Shares of the Funds will continue to
comply with all other proposed
requirements applicable to Portfolio
Fund Shares, which also generally
correspond to the requirements for
Managed Fund Shares, including the
dissemination of key information such
as the Proxy Basket, the Fund Portfolio,
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and Net Asset Value, suspension of
trading or removal, trading halts,
surveillance, minimum price variation
for quoting and order entry, the
information circular, and firewalls as set
forth in the proposed Exchange rules
applicable to Portfolio Fund Shares and
the orders approving such rules.
Moreover, U.S.-listed equity securities
held by the Funds will trade on markets
that are a member of ISG or affiliated
with a member of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement.31 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 reference asset and
intraday indicative values (as
applicable), or the applicability of
Exchange listing rules specified in this
filing shall constitute continued listing
requirements for the Shares. The issuer
has represented to the Exchange that it
will advise the Exchange of any failure
by a Fund or Shares to comply with the
continued listing requirements, and,
pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange
will surveil for compliance with the
continued listing requirements. 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 a Fund
is not in compliance with the applicable
listing requirements, the Exchange will
commence delisting procedures with
respect to such Fund under Exchange
Rule 14.12.
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. Rather, the
Exchange notes that the proposed rule
change will facilitate the listing of a new
type of actively-managed exchangetraded products, thus enhancing
competition among both market
participants and listing venues, to the
benefit of investors and the marketplace.
31 For a list of the current members of ISG, see
www.isgportal.com. The Exchange notes that not all
components of the Funds 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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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 within such longer period
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 Exchange consents, the Commission
will:
A. By order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
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–2019–107, and
should be submitted on or before
January 21, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Eduardo A. Aleman,
Deputy Secretary.
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. 2019–28217 Filed 12–30–19; 8:45 am]
Electronic Comments
Global Magnitsky Human Rights
Accountability Act Annual Report
• 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–2019–107 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–2019–107. 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
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BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice: 10976]
This notice contains the text
of the report required by the Global
Magnitsky Human Rights
Accountability Act, as submitted by the
Secretary of State pursuant to Executive
Order 13818.
FOR FURTHER INFORMATION CONTACT: Bob
Viglietta, Email: VigliettaR@state.gov,
Phone: (202) 647–6526
SUPPLEMENTARY INFORMATION: On
December 10, 2019, the Secretary of
State approved the following report
pursuant to Executive Order 13818 of
December 20, 2017, ‘‘Executive Order
Blocking the Property of Persons
Involved in Serious Human Rights
Abuse or Corruption’’ (E.O. 13818),
which builds on and implements the
Global Magnitsky Human Rights
Accountability Act (Pub. L. 114–328,
Title XII, Subtitle F) (‘‘the Act’’). The
text of the report follows:
Pursuant to Section 1264 of the Global
Magnitsky Human Rights
Accountability Act of 2016 (Pub. L.
114–328, Title XII, Subtitle F), and in
accordance with E.O. 13818, ‘‘Executive
Order Blocking the Property of Persons
Involved in Serious Human Rights
SUMMARY:
32 17
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Agencies
[Federal Register Volume 84, Number 250 (Tuesday, December 31, 2019)]
[Notices]
[Pages 72414-72424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28217]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87856; File No. SR-CboeBZX-2019-107]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt Rule 14.11(m), Portfolio Fund
Shares, and To List and Trade Shares of the Fidelity Value ETF,
Fidelity Growth ETF, and Fidelity Opportunistic ETF, Each a Series of
the Fidelity Beach Street Trust, Under Proposed Rule 14.11(m)
December 23, 2019.
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 December 12, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III 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 proposes a rule change to adopt Rule 14.11(m),
Portfolio Fund Shares, and to list and trade shares of the Fidelity
Value ETF, Fidelity Growth ETF, and Fidelity Opportunistic ETF (each a
``Fund'' and, collectively, the ``Funds''), each a series of the
Fidelity Beach Street Trust (the ``Trust''), under such proposed Rule
14.11(m). The shares of each Fund are referred to herein as the
``Shares.'' The text of the proposed rule change is also available on
the Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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
The Exchange proposes to add new Rule 14.11(m) \3\ for the purpose
of permitting the listing and trading, or trading pursuant to unlisted
trading privileges, of Portfolio Fund Shares, which are securities
issued by an actively managed open-end management investment
company.\4\
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\3\ The Exchange notes that it is proposing new Rule 14.11(m)
because it has also proposed a new Rule 14.11(k) and new Rule
14.11(l) under two separate proposals. See Securities Exchange Act
Release Nos. 87062 (September 23, 2019), 84 FR 51193 (September 27,
2019) (SR-CboeBZX-2019-047) and 87560 (November 18, 2019), 84 FR
64607 (November 22, 2019) (CboeBZX-2019-097).
\4\ The basis of this proposal are several applications for
exemptive relief that were filed with the Commission and for which
public notice was issued on November 14, 2019 (the ``Notice'') and
subsequent order granting certain exemptive relief to, among others,
Fidelity Management & Research Company and FMR Co., Inc., Fidelity
Beach Street Trust, and Fidelity Distributors Corporation (File No.
812-14364), issued on December 10, 2019 (the ``Order'' and,
collectively, with the Application and the Notice, the ``Exemptive
Order''). See Investment Company Act Release Nos. 33683 and 33712.
The Order specifically notes that ``granting the requested
exemptions is appropriate in and consistent with the public interest
and consistent with the protection of investors and the purposes
fairly intended by the policy and provisions of the Act. It is
further found that the terms of the proposed transactions, including
the consideration to be paid or received, are reasonable and fair
and do not involve overreaching on the part of any person concerned,
and that the proposed transactions are consistent with the policy of
each registered investment company concerned and with the general
purposes of the Act.'' The Exchange notes that it also referred to
the application for exemptive relief orders for T. Rowe Price
Associates, Inc. and T. Rowe Price Equity Series, Inc. (File No.
812-14214 and Investment Company Act Release Nos. 33685 and 33713),
Natixis ETF Trust II, et al. (File No. 812-14870 and Investment
Company Act Release Nos. 33684 and 33711), Blue Tractor ETF Trust
and Blue Tractor Group, LLC (File No. 812-14625 and Investment
Company Act Release Nos. 33682 and 33710), and Gabelli ETFs Trust,
et al. (File No. 812-15036 and Investment Company Act Release Nos.
33681 and 33708). While there are certain differences between the
applications, the Exchange believes that each would qualify as
Portfolio Fund Shares under proposed Rule 14.11(m).
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Proposed Rule 14.11(m)
Proposed Rule 14.11(m)(3)(A) provides that the term ``Portfolio
Fund Share'' means a security that: (i) Represents an interest in a
registered investment company (``Investment Company'') organized as an
open-end management investment company or
[[Page 72415]]
similar entity, that: (a) Invests in a portfolio of securities selected
by the Investment Company's investment adviser consistent with the
Investment Company's investment objectives and policies; and (b) will
at a minimum disclose the Fund Portfolio within at least 60 days
following the end of every fiscal quarter; (ii) is issued in a
specified aggregate minimum number in return for a deposit of a
specified portfolio of securities and/or a cash amount with a value
equal to the next determined net asset value; and (iii) when aggregated
in the same specified minimum number, may be redeemed at a holder's
request, which holder will be paid a specified portfolio of securities
and/or cash with a value equal to the next determined net asset value.
Proposed Rule 14.11(m)(1) provides that the Exchange will consider
for trading, whether by listing or pursuant to unlisted trading
privileges, Portfolio Fund Shares that meet the criteria of this Rule.
Proposed Rule 14.11(m)(2) provides that this proposed Rule is
applicable only to Portfolio Fund Shares. Except to the extent
inconsistent with this Rule, or unless the context otherwise requires,
the rules and procedures of the Board of Directors shall be applicable
to the trading on the Exchange of such securities. Portfolio Fund
Shares are included within the definition of ``security'' or
``securities'' as such terms are used in the Rules of the Exchange.
Proposed Rule 14.11(m)(2)(A)-(D) provide that the Exchange will
file separate proposals under Section 19(b) of the Act before the
listing of Portfolio Fund Shares; that transactions in Portfolio Fund
Shares will occur throughout the Exchange's trading hours; the minimum
price variation for quoting and entry of orders in Portfolio Fund
Shares is $0.01; and that the Exchange will implement written
surveillance procedures for Portfolio Fund Shares.
Proposed Rule 14.11(m)(3)(B) provides that the term ``Fund
Portfolio'' means the identities and quantities of the securities and
other assets held by the Investment Company that will form the basis
for the Investment Company's calculation of net asset value at the end
of the business day.
Proposed Rule 14.11(m)(3)(C) provides that the term ``Reporting
Authority'' in respect of a particular series of Portfolio Fund Shares
means the Exchange, an institution, or a reporting service designated
by the Exchange or by the exchange that lists a particular series of
Portfolio Fund Shares (if the Exchange is trading such series pursuant
to unlisted trading privileges) as the official source for calculating
and reporting information relating to such series, including, but not
limited to, the Proxy Basket; the Fund Portfolio; the amount of any
cash distribution to holders of Portfolio Fund Shares, net asset value,
or other information relating to the issuance, redemption or trading of
Portfolio Fund Shares. A series of Portfolio Fund Shares may have more
than one Reporting Authority, each having different functions.
Proposed Rule 14.11(m)(3)(D) provides that the term ``Proxy
Basket'' means the identities and quantities of the securities and
other assets included in a basket that is designed to closely track the
daily performance of the holdings of a series of Portfolio Fund Shares,
as provided in the exemptive relief applicable to a series of Portfolio
Fund Shares. The Proxy Basket also serves as the creation and
redemption basket for a series of Portfolio Fund Shares. The Proxy
Basket will be constructed as provided in the applicable exemptive
relief and will be fully described in the proposal required under Rule
14.11(m)(2)(A). The website for each series of Portfolio Fund Shares
shall disclose the following information regarding the Proxy Basket as
required under this Rule 14.11(m), to the extent applicable: (i) Ticker
symbol; (ii) CUSIP or other identifier; (iii) Description of the
holding; (iv) Identity of the security, commodity, index, or other
asset upon which the derivative is based; (v) The strike price for any
options; (vi) The quantity of each security or other asset held as
measured by: (a) Par value; (b) Notional value; (c) Number of shares;
(d) Number of contracts; (e) Number of units; (vii) Maturity date;
(viii) Coupon rate; (ix) Effective date; (x) Market value; and (xi)
Percentage weighting of the holding in the portfolio.
Proposed Rule 14.11(m)(4)(A) provides the initial listing criteria
for a series of Portfolio Fund Shares, which include the following: (A)
Each series of Portfolio Fund Shares will be listed and traded on the
Exchange subject to application of the following initial listing
criteria: (i) For each series, the Exchange will establish a minimum
number of Portfolio Fund Shares required to be outstanding at the time
of commencement of trading on the Exchange; (ii) the Exchange will
obtain a representation from the issuer of each series of Portfolio
Fund Shares that the net asset value per share for the series will be
calculated daily and that each of the following will be made available
to all market participants at the same time when disclosed: The net
asset value, the Proxy Basket, and the Fund Portfolio.
Proposed Rule 14.11(m)(4)(B) provides that each series of Portfolio
Fund Shares will be listed and traded on the Exchange subject to
application of the following continued listing criteria: (i)(a) The
Proxy Basket will be disseminated at least once daily and will be made
available to all market participants at the same time; and (b) the
Reporting Authority that provides the Proxy Basket must implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Proxy Basket; (ii) the Fund Portfolio will at a
minimum be disclosed within at least 60 days following the end of every
fiscal quarter and will be made available to all market participants at
the same time; and (b) the Reporting Authority that provides the Fund
Portfolio must implement and maintain, or be subject to, procedures
designed to prevent the use and dissemination of material non-public
information regarding the actual components of the Fund Portfolio;
(iii) upon termination of an Investment Company, the Exchange requires
that Portfolio Fund Shares issued in connection with such entity be
removed from listing on the Exchange; and (iv) voting rights shall be
as set forth in the applicable Investment Company prospectus or
Statement of Additional Information.
Additionally, proposed Rule 14.11(m)(4)(B)(iv) provides that the
Exchange will consider the suspension of trading in and will commence
delisting proceedings for a series of Portfolio Fund Shares pursuant to
Rule 14.12 under any of the following circumstances: (a) If, following
the initial twelve-month period after commencement of trading on the
Exchange of a series of Portfolio Fund Shares, there are fewer than 50
beneficial holders of the series of Portfolio Fund Shares for 30 or
more consecutive trading days; (b) if either the Proxy Basket or Fund
Portfolio is not made available to all market participants at the same
time; (c) if the Investment Company issuing the Portfolio Fund Shares
has failed to file any filings required by the Commission or if the
Exchange is aware that the Investment Company is not in compliance with
the conditions of any exemptive order or no-action relief granted by
the Commission to the Investment Company with respect to the series of
Portfolio Fund Shares; (d) if any of the requirements set forth in this
rule are not continuously maintained; (e) if any of the applicable
Continued
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Listing Representations for the issue of Portfolio Fund Shares are not
continuously met; or (f) if such other event shall occur or condition
exists which, in the opinion of the Exchange, makes further dealings on
the Exchange inadvisable.
Proposed Rule 14.11(m)(5) provides that neither the Exchange, the
Reporting Authority, nor any agent of the Exchange shall have any
liability for damages, claims, losses or expenses caused by any errors,
omissions, or delays in calculating or disseminating any current
portfolio value; the current value of the portfolio of securities
required to be deposited to the open-end management investment company
in connection with issuance of Portfolio Fund Shares; the amount of any
dividend equivalent payment or cash distribution to holders of
Portfolio Fund Shares; net asset value; or other information relating
to the purchase, redemption, or trading of Portfolio Fund Shares,
resulting from any negligent act or omission by the Exchange, the
Reporting Authority or any agent of the Exchange, or any act,
condition, or cause beyond the reasonable control of the Exchange, its
agent, or the Reporting Authority, including, but not limited to, an
act of God; fire; flood; extraordinary weather conditions; war;
insurrection; riot; strike; accident; action of government;
communications or power failure; equipment or software malfunction; or
any error, omission, or delay in the reports of transactions in one or
more underlying securities.
Proposed Rule 14.11(m)(6) provides that the provisions of this
subparagraph apply only to series of Portfolio Fund Shares that are the
subject of an order by the Commission exempting such series from
certain prospectus delivery requirements under Section 24(d) of the
Investment Company Act of 1940 (the ``1940 Act'') and are not otherwise
subject to prospectus delivery requirements under the Securities Act of
1933. The Exchange will inform its members regarding application of
these provisions of this subparagraph to a particular series of
Portfolio Fund Shares by means of an information circular prior to
commencement of trading in such series. The Exchange requires that
members provide to all purchasers of a series of Portfolio Fund Shares
a written description of the terms and characteristics of those
securities, in a form prepared by the open-end management investment
company issuing such securities, not later than the time a confirmation
of the first transaction in such series is delivered to such purchaser.
In addition, members shall include such a written description with any
sales material relating to a series of Portfolio Fund Shares that is
provided to customers or the public. Any other written materials
provided by a member to customers or the public making specific
reference to a series of Portfolio Fund Shares as an investment vehicle
must include a statement in substantially the following form: ``A
circular describing the terms and characteristics of (the series of
Portfolio Fund Shares) has been prepared by the (open-end management
investment company name) and is available from your broker. It is
recommended that you obtain and review such circular before purchasing
(the series of Portfolio Fund Shares).'' A member carrying an omnibus
account for a non-member broker-dealer is required to inform such non-
member that execution of an order to purchase a series of Portfolio
Fund Shares for such omnibus account will be deemed to constitute
agreement by the non-member to make such written description available
to its customers on the same terms as are directly applicable to
members under this rule. Upon request of a customer, a member shall
also provide a prospectus for the particular series of Portfolio Fund
Shares.
Proposed Rule 14.11(m)(7) provides that if the investment adviser
to the Investment Company issuing Portfolio Fund Shares is affiliated
with a broker-dealer, such investment adviser shall erect and maintain
a ``fire wall'' between the investment adviser and the broker-dealer
with respect to access to information concerning the composition and/or
changes to such Investment Company portfolio and Proxy Basket.
Personnel who make decisions on the Investment Company's portfolio
composition and/or Proxy Basket must be subject to procedures designed
to prevent the use and dissemination of material nonpublic information
regarding the applicable Investment Company portfolio and/or Proxy
Basket.
Policy Discussion--Proposed Rule 14.11(m)
The purpose of the structure of Portfolio Fund Shares is to provide
investors with the traditional benefits of ETFs while protecting funds
from the potential for front running or free riding of portfolio
transactions, which could adversely impact the performance of a fund.
While each series of Portfolio Fund Shares will be actively managed
and, to that extent, similar to Managed Fund Shares (as defined in Rule
14.11(i)), Portfolio Fund Shares differ from Managed Fund Shares in one
key way.\5\ A series of Portfolio Fund Shares will disclose the Proxy
Basket on a daily basis which, as described above, is designed to
closely track the performance of the holdings of the Investment
Company, instead of the actual holdings of the Investment Company, as
provided by a series of Managed Fund Shares.\6\
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\5\ The Exchange notes that there are two additional differences
between proposed Rule 14.11(m) and Rule 14.11(i): (i) Proposed Rule
14.11(m) would require a rule filing under Section 19(b) prior to
listing any product on the Exchange meaning that no series of
Portfolio Fund Shares could be listed on the Exchange pursuant to
Rule 19b-4(e) and there are no proposed rules comparable to the
quantitative portfolio holdings standards from Rule 14.11(i); and
(ii) proposed Rule 14.11(m) would not require the dissemination of
an intraday indicative value. The Exchange has submitted a proposal
to eliminate the requirement for series of Managed Fund Shares and
generally agrees with the Commission's sentiment that the intraday
indicative value is not necessary to support the arbitrage
mechanism. See SR-CboeBZX-2019-104 and Investment Company Act
Release No. 10695 (October 24, 2019) (84 FR 57162).
\6\ Proposed Rule 14.11(m)(4)(B)(iii) will, however, require
each series of Portfolio Fund Shares to at a minimum disclose the
entirety of its portfolio holdings within at least 60 days following
the end of every fiscal quarter in accordance with normal disclosure
requirements otherwise applicable to open-end investment companies
registered under the 1940 Act.
Form N-PORT requires reporting of a fund's complete portfolio
holdings on a position-by-position basis on a quarterly basis within
60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its
Form N-CSR, filed twice a year, and its Form N-CEN, filed annually.
A fund's SAI and Shareholder Reports are available free upon request
from the Investment Company, and those documents and the Form N-
PORT, Form N-CSR, and Form N-CEN may be viewed on-screen or
downloaded from the Commission's website at www.sec.gov.
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For the arbitrage mechanism for any ETF to function effectively,
authorized participants, arbitrageurs, and other market participants
(collectively, ``Market Makers'') need sufficient information to
accurately value shares of a fund to transact in both the primary and
secondary market. The Proxy Basket, constructed as provided in the
applicable exemptive relief, is designed to closely track the daily
performance of the holdings of a series of Portfolio Fund Shares.
Given the correlation between the Proxy Basket and the Fund
Portfolio,\7\
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the Exchange believes that the Proxy Basket would serve as a pricing
signal to identify arbitrage opportunities when its value and the
secondary market price of the shares of a series of Portfolio Fund
Shares diverge. If shares began trading at a discount to the Proxy
Basket, an authorized participant could purchase the shares in
secondary market transactions and, after accumulating enough shares to
comprise a creation unit,\8\ redeem them in exchange for a redemption
basket reflecting the Net Asset Value (``NAV'') per share of the fund's
portfolio holdings. The purchases of Shares would reduce the supply of
Shares in the market, and thus tend to drive up the Shares' market
price closer to the fund's NAV. Alternatively, if shares are trading at
a premium, the transactions in the arbitrage process are reversed.
Market Makers also can engage in arbitrage without using the creation
or redemption processes. For example, if a fund is trading at a premium
to the Proxy Basket, Market Makers may sell shares short and take a
long position in the Proxy Basket securities, wait for the trading
prices to move toward parity, and then close out the positions in both
the shares and the securities, to realize a profit from the relative
movement of their trading prices. Similarly, a Market Maker could buy
shares and take a short position in the Proxy Basket securities in an
attempt to profit when shares are trading at a discount to the Proxy
Basket.
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\7\ As provided in the Notices, funds and their respective
advisers will take remedial actions as necessary if the funds do not
function as anticipated. For the first three years after a launch, a
fund will establish certain thresholds for its level of tracking
error, premiums/discounts, and spreads, so that, upon the fund's
crossing a threshold, the adviser will promptly call a meeting of
the fund's board of directors and will present the board or
committee with recommendations for appropriate remedial measures.
The board would then consider the continuing viability of the fund,
whether shareholders are being harmed, and what, if any, action
would be appropriate. Specifically, the Applications and Notices
provide that such a meeting would occur: (1) If the tracking error
exceeds 1%; or (2) if, for 30 or more days in any quarter or 15 days
in a row (a) the absolute difference between either the market
closing price or bid/ask price, on one hand, and NAV, on the other,
exceeds 2%, or (b) the bid/ask spread exceeds 2%.
\8\ Portfolio Fund Shares will be purchased or redeemed only in
large aggregations, or ``creation units,'' and the Proxy Basket will
constitute the names and quantities of instruments for both
purchases and redemptions of Creation Units.
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Overall, the Exchange believes that the arbitrage process would
operate similarly to the arbitrage process in place today for existing
ETFs that use in-kind baskets for creations and redemptions that do not
reflect the ETF's complete holdings but nonetheless produce performance
that is highly correlated to the performance of the ETF's actual
portfolio. The Exchange has observed highly efficient trading of ETFs
that invest in markets where security values are not fully known at the
time of ETF trading, and where a perfect hedge is not possible, such as
international equity and fixed-income ETFs. While the ability to value
and hedge many of these existing ETFs in the market may be limited,
such ETFs have generally maintained an effective arbitrage mechanism
and traded efficiently.
As provided in the Notice, the Commission believes that an
arbitrage mechanism based largely on the combination of a daily
disclosed Proxy Basket and at a minimum quarterly disclosure of the
Fund Portfolio can work in an efficient manner to maintain a fund's
secondary market prices close to its NAV.\9\ Consistent with the
Commission's view, the Exchange believes that because the arbitrage
mechanism for Portfolio Fund Shares will be sufficient to keep
secondary market prices in line with NAV and because the proposed rules
are except as described above nearly identical to the generic listing
standards for Managed Fund Shares, proposed Rule 14.11(m) is consistent
with the Act.
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\9\ See Fidelity Notice at 17. The Commission also notes that as
long as arbitrage continues to keep the Fund's secondary market
price and NAV close, and does so efficiently so that spreads remain
narrow, that investors would benefit from the opportunity to invest
in active strategies through a vehicle that offers the traditional
benefits of ETFs.
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The Exchange notes that while the Proxy Basket does not reflect the
1-for-1 holdings of each series of Portfolio Fund Shares, a significant
amount of information about the holdings is publicly available at all
times. Each series will disclose the Proxy Basket on a daily basis.
Each series of Portfolio Fund Shares will at a minimum disclose the
entirety of its portfolio holdings, including the name, identifier,
market value and weight of each security and instrument in the
portfolio within at least 60 days following the end of every fiscal
quarter in a manner consistent with normal disclosure requirements
otherwise applicable to open-end investment companies registered under
the 1940 Act.
While not providing daily disclosure of the Fund Portfolio could
open the door to potential information leakage and misuse of material
non-public information. However, the Exchange believes that proposed
Rule 14.11(m)(7) provides sufficient safeguards to prevent such leakage
and misuse because the fire wall requirement will act to make sure that
no entity will be able to misuse the data for their own purposes and
the requirement related to information protection will act as a
deterrent to any misuse and improper dissemination of a fund's
portfolio composition and other material non-public information.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of Portfolio Fund 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 Portfolio Fund Shares through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products. The
Exchange will require the issuer of each series of Portfolio Fund
Shares listed on the Exchange to represent to the Exchange that it will
advise the Exchange of any failure by a 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. If a Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. In addition,
the Exchange also has a general policy prohibiting the distribution of
material, non-public information by its employees.
Trading Halts
As described above, proposed Rule 14.11(m)(4)(B)(iv) provides that
if the Exchange becomes aware that one of the following is not being
made available to all market participants at the same time,
respectively: The net asset value, the Proxy Basket, or the Fund
Portfolio with respect to a series of Portfolio Fund Shares; then the
Exchange will halt trading in such series until such time as the net
asset value, the Proxy Basket, or the Fund Portfolio is available to
all market participants, as applicable.
Availability of Information
As noted above, Form N-PORT requires reporting of a fund's complete
portfolio holdings on a position-by-position basis on a quarterly basis
within 60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its Form
N-CSR, filed twice a year, and its Form N-CEN, filed annually. A fund's
SAI and Shareholder Reports are available free upon request from the
Investment Company, and those documents and the Form N-PORT, Form N-
CSR, and Form N-CEN may be viewed on-screen or downloaded from the
Commission's website at www.sec.gov.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will
[[Page 72418]]
be published daily in the financial section of newspapers. Quotation
and last sale information for the Shares will be available via the
Consolidated Tape Association (``CTA'') high-speed line.
Trading Rules
The Exchange deems Portfolio Fund Shares to be equity securities,
thus rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. As provided in
proposed Rule 14.11(m)(2)(C), the minimum price variation for quoting
and entry of orders in securities traded on the Exchange is $0.01.
Information Circular
Prior to the commencement of trading of a series of Portfolio Fund
Shares, the Exchange will inform its members in an Information Circular
(``Circular'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Circular will discuss the
following: (1) The procedures for purchases and redemptions of Shares;
(2) BZX Rule 3.7, which imposes suitability obligations on Exchange
members with respect to recommending transactions in the Shares to
customers; (3) how information regarding the Proxy Basket is
disseminated; (4) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; (5) trading information; and (6)
that the Fund Portfolio of the Shares are not disclosed on a daily
basis.
In addition, the Circular will reference that Funds are subject to
various fees and expenses described in the Registration Statement. The
Circular will discuss any exemptive, no-action, and interpretive relief
granted by the Commission from any rules under the Act. The Circular
will also disclose that the NAV for the Shares will be calculated after
4:00 p.m., E.T. each trading day.
The Shares
The Shares are offered by the Trust, which is organized as a
business trust under the laws of The Commonwealth of Massachusetts. The
Trust is registered with the Commission as an open-end investment
company and will file a registration statement on behalf of the Funds
on Form N-1A (``Registration Statement'') with the Commission.\10\
Fidelity Management & Research Company or FMR Co., Inc. (the
``Adviser'') will be the investment adviser to the Funds. The Adviser
is not registered as a broker-dealer, but is affiliated with numerous
broker-dealers. The Adviser represents that a fire wall exists and will
be maintained between the respective personnel at the Adviser and
affiliated broker-dealers with respect to access to information
concerning the composition and/or changes to each Fund's portfolio and
Proxy Basket. Personnel who make decisions on a Fund's portfolio
composition and/or Proxy Basket shall be subject to procedures designed
to prevent the use and dissemination of material non-public information
regarding such portfolio and/or Proxy Basket. The Funds' sub-advisers,
FMR Investment Management (UK) Limited, Fidelity Management & Research
(Hong Kong) Limited, and Fidelity Management & Research (Japan) Limited
(each a ``Sub-Adviser'' and, collectively, the ``Sub-Advisers''), are
not registered as a broker-dealer but are affiliated with numerous
broker-dealers. Sub-Adviser personnel who make decisions regarding a
Fund's portfolio and/or Proxy Basket are subject to procedures designed
to prevent the use and dissemination of material nonpublic information
regarding the Fund's portfolio and/or Proxy Basket. In the event that
(a) the Adviser or a 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 newly 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
and/or changes to the portfolio and/or Proxy Basket, and will be
subject to procedures designed to prevent the use and dissemination of
material non-public information regarding such portfolio and/or Proxy
Basket. Each Fund intends to qualify each year as a regulated
investment company under Subchapter M of the Internal Revenue Code of
1986, as amended.
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\10\ The Trust intends to file a post-effective amendment to the
Registration Statement in the near future. The descriptions of the
Funds and the Shares contained herein are based, in part, on
information that will be included 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).
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The Shares will conform to the initial and continued listing
criteria under Rule 14.11(l) as well as all terms in the Exemptive
Order. The Exchange represents that, for initial and/or continued
listing, each Fund will be in compliance with Rule 10A-3 under the
Act.\11\ A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange. The Exchange will
obtain a representation from the issuer of the Shares of each Fund that
the NAV per share of each Fund will be calculated daily and will be
made available to all market participants at the same time.
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\11\ See 17 CFR 240.10A-3.
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Fidelity Value ETF
The Fund seeks long-term growth of capital. In order to achieve its
investment objective, under Normal Market Conditions,\12\ the Fund will
primarily invest its assets in: (i) Securities that the Adviser
believes are undervalued in the marketplace in relation to factors such
as assets, sales, earnings, growth potential, or cash flow, or in
relation to securities of other companies in the same industry (stocks
of these companies are often called ``value'' stocks) listed on a U.S.
national securities exchange or a foreign exchange that trade on such
exchange contemporaneously with the Fund's Shares; and (ii) cash and
Cash Equivalents.\13\
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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.
\13\ For purposes of this proposal and as defined in Rule
14.11(i)(4)(C)(iii), Cash Equivalents are short-term instruments
with maturities of less than three months that are: (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.
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The Fund may also invest the Fund's assets in other securities and
financial instruments, as summarized below. Under Normal Market
Conditions, the Fund may invest up to 5% of its assets in each of U.S.
exchange-traded index futures, preferred securities, and short-term US.
Treasuries. The Fund may invest in ETFs to facilitate creations and
redemptions using the Proxy Basket, as defined above. Except as
described above, the Fund will not invest in derivative instruments or
enter into short positions.\14\
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\14\ The Adviser notes that the Fund may by virtue of its
holdings be issued warrants and rights. The Fund will not purchase
such instruments and will dispose of such holdings as the Adviser
determines is in the best interest of the Fund's shareholders.
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[[Page 72419]]
The Exchange notes that the Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares.
Fidelity Growth ETF
The Fund seeks growth of capital over the long term. In order to
achieve its investment objective, under Normal Market Conditions, the
Fund will primarily invest its assets in: (i) Securities that the
Adviser believes have above-average growth potential (stocks of these
companies are often called ``growth'' stocks) that are listed on a U.S.
national securities exchange or a foreign exchange that trade on such
exchange contemporaneously with the Fund's Shares; and (ii) cash and
Cash Equivalents.
The Fund may also invest the Fund's assets in other securities and
financial instruments, as summarized below. Under Normal Market
Conditions, the Fund may invest up to 5% of its assets in each of U.S.
exchange-traded index futures, preferred securities, and short-term US.
Treasuries. The Fund may invest in ETFs to facilitate creations and
redemptions using the Proxy Basket, as defined above. Except as
described above, the Fund will not invest in derivative instruments or
enter into short positions.\15\
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\15\ The Adviser notes that the Fund may by virtue of its
holdings be issued warrants and rights. The Fund will not purchase
such instruments and will dispose of such holdings as the Adviser
determines is in the best interest of the Fund's shareholders.
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The Exchange notes that the Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares.
Fidelity Opportunistic ETF
The Fund seeks long-term growth of capital. In order to achieve its
investment objective, under Normal Market Conditions, the Fund will
primarily invest in (i) both ``growth'' and ``value'' stocks based on
fundamental analysis of factors such as each issuer's financial
condition and industry position, as well as market and economic
conditions that are listed on a U.S. national securities exchange or a
foreign exchange that trade on such exchange contemporaneously with the
Fund's Shares; and (ii) cash and Cash Equivalents.
The Fund may also invest the Fund's assets in other securities and
financial instruments, as summarized below. Under Normal Market
Conditions, the Fund may invest up to 5% of its assets in each of U.S.
exchange-traded index futures, preferred securities, and short-term
U.S. Treasuries. The Fund may invest in ETFs to facilitate creations
and redemptions using the Proxy Basket, as defined above. Except as
described above, the Fund will not invest in derivative instruments or
enter into short positions.\16\
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\16\ The Adviser notes that the Fund may by virtue of its
holdings be issued warrants and rights. The Fund will not purchase
such instruments and will dispose of such holdings as the Adviser
determines is in the best interest of the Fund's shareholders.
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The Exchange notes that the Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares.
Proxy Basket for the Proposed Funds
For the Funds, the Proxy Basket will consist of a combination of
the Fund's recently disclosed portfolio holdings and representative
ETFs.\17\ ETFs selected for inclusion in the Proxy Basket will be
consistent with the Fund's objective and selected based on certain
criteria, including, but not limited to, liquidity, assets under
management, holding limits and compliance considerations.
Representative ETFs can provide a useful mechanism to reflect a Fund's
holdings' exposures within the Proxy Basket without revealing a Fund's
exact positions.\18\ The Exchange notes that each Fund's NAV will form
the basis for creations and redemptions for the Funds and creations and
redemptions will work in a manner substantively identical to that of
series of Managed Fund Shares. The Adviser expects that the Shares of
the Funds will generally be created and redeemed in-kind, with limited
exceptions. The names and quantities of the instruments that constitute
the basket of securities for creations and redemptions will be the same
as a Fund's Proxy Basket, except to the extent purchases and
redemptions are made entirely or in part on a cash basis. In the event
that the value of the Proxy Basket is not the same as a Fund's NAV, the
creation and redemption baskets will consist of the securities included
in the Proxy Basket plus or minus an amount of cash equal to the
difference between the NAV and the value of the Proxy Basket, as
further described below.
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\17\ For purposes of this filing, the term ETF will include only
Portfolio Depositary Receipts as defined in Rule 14.11(b), Index
Fund Shares as defined in Rule 14.11(c), and Managed Fund Shares as
defined in Rule 14.11(i), along with the equivalent products defined
in the rules of other national securities exchanges.
\18\ The set of ETFs that are ``representative'' to be used in
the Proxy Basket will depend on certain factors, including the
Fund's investment objective, past holdings, and benchmark, and may
change from time to time. For example, a U.S. diversified fund
benchmarked to a diversified U.S. index would use liquid U.S.
exchange-traded ETFs to capture size (large, mid or small
capitalization), style (growth or value) and/or sector exposures in
the Fund's portfolio. Leveraged and inverse ETFs will not be
included in the Proxy Basket. ETFs may constitute no more than 50%
of the Proxy Basket's assets.
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The Proxy Basket will be constructed utilizing a covariance matrix
based on an optimization process to minimize deviations in the return
of the Proxy Basket relative to the Fund. The proprietary optimization
process mathematically seeks to minimize three key parameters that the
Adviser believes are important to the effectiveness of the Proxy Basket
as a hedge: Tracking error (standard deviation of return differentials
between the Proxy Basket and the Fund), turnover cost, and basket
creation cost.\19\ Typically, the Proxy Basket is expected to be
rebalanced on schedule with the public disclosure of the Fund's
holdings; however, a new optimized Proxy Basket may be generated as
frequently as daily, and therefore, rebalancing may occur more
frequently at the Adviser's discretion. In determining whether to
rebalance a new optimized Proxy Basket, the Adviser will consider
various factors, including liquidity of the securities in the Proxy
Basket, tracking error, and the cost to
[[Page 72420]]
create and trade the Proxy Basket.\20\ For example, if the Adviser
determines that a new Proxy Basket would reduce the variability of
return differentials between the Proxy Basket and the Fund when
balanced against the cost to trade the new Proxy Basket, rebalancing
may be appropriate. The Adviser will periodically review the Proxy
Basket parameters and Proxy Basket performance and process.
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\19\ Tracking error measures the deviations between the Proxy
Basket and Fund. Turnover cost and basket creation cost are measures
of the cost to create and maintain the Proxy Basket as a hedge.
\20\ The Adviser uses a trading cost model to develop estimates
of costs to trade a new Proxy Basket. There are essentially two
elements to this cost: (1) The cost to purchase securities
constituting the Proxy Basket, i.e., the cost to put on the hedge
for the Authorized Participant, and (2) the cost of any adjustments
that need to be made to the composition of the Proxy Basket, i.e.,
the cost to the Authorized Participant to change or maintain the
hedge position. The inclusion of the trading cost model in the
optimization process is intended to result in a Proxy Basket that is
cost effective and liquid without compromising its tracking ability.
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As noted above, each Fund will also disclose the entirety of its
portfolio holdings, including the name, identifier, market value and
weight of each security and instrument in the portfolio, at a minimum
within at least 60 days following the end of every fiscal quarter. As
described above, the Exchange notes that the concept of the Proxy
Basket employed under this structure is designed to provide investors
with the traditional benefits of ETFs while protecting the Funds from
the potential for front running or free riding of portfolio
transactions, which could adversely impact the performance of a Fund.
Policy Discussion--Proposed Funds
As discussed above, each Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares and, as such, any such concerns related to the portfolio are
mitigated.
Separately and in addition to the rationale supporting the
arbitrage mechanism for Portfolio Fund Shares more broadly above, the
Exchange also believes that the particular instruments that may be
included in each Fund's portfolio and Proxy Basket do not raise any
concerns related to the Proxy Baskets being able to closely track the
NAV of the Funds because such instruments include only instruments that
trade on an exchange contemporaneously with the Shares. In addition, a
Fund's Proxy Basket will be optimized so that it reliably and
consistently correlates to the performance of the Fund. The Notice
specifically states that ``in order to facilitate arbitrage, each
Fund's portfolio and Tracking Basket will only include certain
securities that trade on an exchange contemporaneously with the Fund's
Shares. Because the securities would be exchange traded, market
participants would be able to accurately price and readily trade the
securities in the Tracking Basket for purposes of assessing the
intraday value of the Fund's portfolio holdings and to hedge their
positions in the Fund's Shares.'' \21\ The Exchange and Adviser agree
with the Commission's conclusion.
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\21\ The Exchange notes that the instruments enumerated herein
are consistent with the investable universe contemplated in the
Notice. Specifically, the Notice provides that ``Each Fund may
invest only in ETFs, Exchange-traded notes, Exchange-traded common
stocks, common stocks listed on a foreign exchange that trade on
such exchange contemporaneously with the Shares, Exchange-traded
preferred stocks, Exchange-traded American depositary receipts,
Exchange-traded real estate investment trusts, Exchange-traded
commodity pools, Exchange-traded metals trusts, Exchange-traded
currency trusts, and exchange-traded futures that trade
contemporaneously with the Shares, as well as cash and cash
equivalents . . . All futures contracts that a Fund may invest in
will be traded on a U.S. futures exchange. For these purposes, an
``Exchange'' is a national securities exchange as defined in section
2(a)(26) of the [1940] Act.'' See Notice at 10.
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The Adviser anticipates that the returns between a Fund and its
respective Proxy Basket will have a consistent relationship and that
the deviation in the returns between a Fund and its Proxy Basket will
be sufficiently small such that the Proxy Basket will provide Market
Makers with a reliable hedging vehicle that they can use to effectuate
low-risk arbitrage trades in Fund Shares. The Exchange believes that
the disclosures provided by the Funds will allow Market Makers to
understand the relationship between the performance of a Fund and its
Proxy Basket. Market Makers will be able to estimate the value of and
hedge positions in a Fund's Shares, which the Exchange believes will
facilitate the arbitrage process and help ensure that the Fund's Shares
normally will trade at market prices close to their NAV. The Exchange
also believes that competitive market making, where traders are looking
to take advantage of differences in bid-ask spread, will aid in keeping
spreads tight.
While the Proxy Basket does not reflect the 1-for-1 holdings of
each Fund, a significant amount of information about each Fund's
holdings is publicly available at all times. Each Fund will disclose
the Proxy Basket on a daily basis. Each series of Portfolio Fund Shares
will at a minimum disclose the entirety of its portfolio holdings,
including the name, identifier, market value and weight of each
security and instrument in the portfolio within at least 60 days
following the end of every fiscal quarter in a manner consistent with
normal disclosure requirements otherwise applicable to open-end
investment companies registered under the 1940 Act. The website will
include additional quantitative information updated on a daily basis,
including, on a per Share basis for each Fund, the prior Business Day's
NAV and the Closing Price or Bid/Ask Price at the time of calculation
of such NAV, and a calculation of the premium or discount of the
Closing Price or Bid/Ask Price against such NAV. The website will also
disclose any information regarding the bid/ask spread for each Fund as
may be required for other ETFs under Rule 6c-11 under the 1940 Act, as
amended.
Additional Information
The Exchange represents that the Shares of the Funds will continue
to comply with all other proposed requirements applicable to Portfolio
Fund Shares, which also generally correspond to the requirements for
Managed Fund Shares, including the dissemination of key information
such as the Proxy Basket, the Fund Portfolio, and Net Asset Value,
suspension of trading or removal, trading halts, surveillance, minimum
price variation for quoting and order entry, the information circular,
and firewalls as set forth in the proposed Exchange rules applicable to
Portfolio Fund Shares and the orders approving such rules.
Price information for the exchange-listed instruments held by the
Funds, including both U.S. and non-U.S. listed equity securities and
U.S. exchange-listed futures will be available through major market
data vendors or securities exchanges listing and trading such
securities. Moreover, U.S.-listed equity securities held by the Funds
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.\22\ All futures contracts that the Funds may invest in will
be traded on a U.S. futures exchange. The Exchange or the Financial
Industry
[[Page 72421]]
Regulatory Authority (``FINRA''), on behalf of the Exchange, or both,
will communicate as needed regarding trading in the Shares, underlying
U.S. exchange-listed equity securities, and U.S. exchange-listed
futures with other markets and other entities that are members of the
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on
behalf of the Exchange, or both, may obtain trading information
regarding trading such instruments from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares, underlying equity securities, and U.S. exchange-
listed futures from markets and other entities that are members of ISG
or with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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\22\ For a list of the current members of ISG, see
www.isgportal.com. The Exchange notes that not all components of the
Funds 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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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 reference asset and intraday indicative values (as applicable), or
the applicability of Exchange listing rules specified in this filing
shall constitute continued listing requirements for the Shares. The
issuer has represented to the Exchange that it will advise the Exchange
of any failure by the Funds or Shares to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will surveil for compliance with the
continued listing requirements. 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 a Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures with respect to such Fund under Exchange
Rule 14.12.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \23\ in general and Section 6(b)(5) of the Act \24\ 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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\23\ 15 U.S.C. 78f.
\24\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that proposed Rule 14.11(m) is designed to
prevent fraudulent and manipulative acts and practices in that the
proposed rules relating to listing and trading of Portfolio Fund Shares
provide specific initial and continued listing criteria required to be
met by such securities. Proposed Rule 14.11(m)(4)(A) provides the
initial listing criteria for a series of Portfolio Fund Shares, which
include the following: (A) Each series of Portfolio Fund Shares will be
listed and traded on the Exchange subject to application of the
following initial listing criteria: (i) For each series, the Exchange
will establish a minimum number of Portfolio Fund Shares required to be
outstanding at the time of commencement of trading on the Exchange;
(ii) the Exchange will obtain a representation from the issuer of each
series of Portfolio Fund Shares that the net asset value per share for
the series will be calculated daily and that each of the following will
be made available to all market participants at the same time when
disclosed: The net asset value, the Proxy Basket, and the Fund
Portfolio.
Proposed Rule 14.11(m)(4)(B) provides that each series of Portfolio
Fund Shares will be listed and traded on the Exchange subject to
application of the following continued listing criteria: (i)(a) The
Proxy Basket will be disseminated at least once daily and will be made
available to all market participants at the same time; and (b) the
Reporting Authority that provides the Proxy Basket must implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Proxy Basket; (ii) the Fund Portfolio will at a
minimum be disclosed within at least 60 days following the end of every
fiscal quarter and will be made available to all market participants at
the same time; and (b) the Reporting Authority that provides the Fund
Portfolio must implement and maintain, or be subject to, procedures
designed to prevent the use and dissemination of material non-public
information regarding the actual components of the Fund Portfolio;
(iii) upon termination of an Investment Company, the Exchange requires
that Portfolio Fund Shares issued in connection with such entity be
removed from listing on the Exchange; and (iv) voting rights shall be
as set forth in the applicable Investment Company prospectus or
Statement of Additional Information.
Additionally, proposed Rule 14.11(m)(4)(B)(iv) provides that the
Exchange will consider the suspension of trading in and will commence
delisting proceedings for a series of Portfolio Fund Shares pursuant to
Rule 14.12 under any of the following circumstances: (a) If, following
the initial twelve-month period after commencement of trading on the
Exchange of a series of Portfolio Fund Shares, there are fewer than 50
beneficial holders of the series of Portfolio Fund Shares for 30 or
more consecutive trading days; (b) if either the Proxy Basket or Fund
Portfolio is not made available to all market participants at the same
time; (c) if the Investment Company issuing the Portfolio Fund Shares
has failed to file any filings required by the Commission or if the
Exchange is aware that the Investment Company is not in compliance with
the conditions of any exemptive order or no-action relief granted by
the Commission to the Investment Company with respect to the series of
Portfolio Fund Shares; (d) if any of the requirements set forth in this
rule are not continuously maintained; (e) if any of the applicable
Continued Listing Representations for the issue of Portfolio Fund
Shares are not continuously met; or (f) if such other event shall occur
or condition exists which, in the opinion of the Exchange, makes
further dealings on the Exchange inadvisable.
Proposed Rule 14.11(m)(7) proposed Rule 14.11(m)(7) provides that
if the investment adviser to the Investment Company issuing Portfolio
Fund Shares is affiliated with a broker-dealer, such investment adviser
shall erect and maintain a ``fire wall'' between the investment adviser
and the broker-dealer with respect to access to information concerning
the composition and/or changes to such Investment Company portfolio and
Proxy Basket. Personnel who make decisions on the Investment Company's
portfolio composition and/or Proxy Basket must be subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the applicable Investment Company portfolio and/
or Proxy Basket.
The Exchange believes that these proposed rules are designed to
prevent fraudulent and manipulative acts and practices related to the
listing and trading of Portfolio Fund Shares because they provide
meaningful requirements about both the data that will be made publicly
available about the Shares (the Proxy Basket) as well as the
information that will only be available to certain parties and the
controls on such
[[Page 72422]]
information. Specifically, the Exchange believes that the requirements
related to information protection enumerated under proposed Rule
14.11(m)(7) will act as a strong safeguard against any misuse and
improper dissemination of information related to the securities
included in or changes made to the Fund Portfolio and/or the Proxy
Basket. As such, the Exchange believes that this proposal is designed
to prevent fraudulent and manipulative acts and practices.
As noted above, the purpose of the structure of Portfolio Fund
Shares is to provide investors with the traditional benefits of ETFs
while protecting funds from the potential for front running or free
riding of portfolio transactions, which could adversely impact the
performance of a fund. While each series of Portfolio Fund Shares will
be actively managed and, to that extent, similar to Managed Fund Shares
(as defined in Rule 14.11(i)), Portfolio Fund Shares differ from
Managed Fund Shares in one key way.\25\ A series of Portfolio Fund
Shares will disclose the Proxy Basket on a daily basis which, as
described above, is designed to closely track the performance of the
holdings of the Investment Company, instead of the actual holdings of
the Investment Company, as provided by a series of Managed Fund
Shares.\26\
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\25\ The Exchange notes that there are two additional
differences between proposed Rule 14.11(m) and Rule 14.11(i): (i)
Proposed Rule 14.11(m) would require a rule filing under Section
19(b) prior to listing any product on the Exchange meaning that no
series of Portfolio Fund Shares could be listed on the Exchange
pursuant to Rule 19b-4(e) and there are no proposed rules comparable
to the quantitative portfolio holdings standards from Rule 14.11(i);
and (ii) proposed Rule 14.11(m) would not require the dissemination
of an intraday indicative value. The Exchange has submitted a
proposal to eliminate the requirement for series of Managed Fund
Shares and generally agrees with the Commission's sentiment that the
intraday indicative value is not necessary to support the arbitrage
mechanism. See SR-CboeBZX-2019-104 and Investment Company Act
Release No. 10695 (October 24, 2019) (84 FR 57162).
\26\ Proposed Rule 14.11(m)(4)(B)(iii) will, however, require
each series of Portfolio Fund Shares to at a minimum disclose the
entirety of its portfolio holdings within at least 60 days following
the end of every fiscal quarter in accordance with normal disclosure
requirements otherwise applicable to open-end investment companies
registered under the 1940 Act.
Form N-PORT requires reporting of a fund's complete portfolio
holdings on a position-by-position basis on a quarterly basis within
60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its
Form N-CSR, filed twice a year, and its Form N-CEN, filed annually.
A fund's SAI and Shareholder Reports are available free upon request
from the Investment Company, and those documents and the Form N-
PORT, Form N-CSR, and Form N-CEN may be viewed on-screen or
downloaded from the Commission's website at www.sec.gov.
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For the arbitrage mechanism for any ETF to function effectively,
Market Makers need sufficient information to accurately value shares of
a fund to transact in both the primary and secondary market. The Proxy
Basket, constructed as provided in the applicable exemptive relief, is
designed to closely track the daily performance of the holdings of a
series of Portfolio Fund Shares.
Given the correlation between the Proxy Basket and the Fund
Portfolio,\27\ the Exchange believes that the Proxy Basket would serve
as a pricing signal to identify arbitrage opportunities when its value
and the secondary market price of the shares of a series of Portfolio
Fund Shares diverge. If shares began trading at a discount to the Proxy
Basket, an authorized participant could purchase the shares in
secondary market transactions and, after accumulating enough shares to
comprise a creation unit,\28\ redeem them in exchange for a redemption
basket reflecting the NAV per share of the fund's portfolio holdings.
The purchases of Shares would reduce the supply of Shares in the
market, and thus tend to drive up the Shares' market price closer to
the fund's NAV. Alternatively, if shares are trading at a premium, the
transactions in the arbitrage process are reversed. Market Makers also
can engage in arbitrage without using the creation or redemption
processes. For example, if a fund is trading at a premium to the Proxy
Basket, Market Makers may sell shares short and take a long position in
the Proxy Basket securities, wait for the trading prices to move toward
parity, and then close out the positions in both the shares and the
securities, to realize a profit from the relative movement of their
trading prices. Similarly, a Market Maker could buy shares and take a
short position in the Proxy Basket securities in an attempt to profit
when shares are trading at a discount to the Proxy Basket.
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\27\ As provided in the Notices, funds and their respective
advisers will take remedial actions as necessary if the funds do not
function as anticipated. For the first three years after a launch, a
fund will establish certain thresholds for its level of tracking
error, premiums/discounts, and spreads, so that, upon the fund's
crossing a threshold, the adviser will promptly call a meeting of
the fund's board of directors and will present the board or
committee with recommendations for appropriate remedial measures.
The board would then consider the continuing viability of the fund,
whether shareholders are being harmed, and what, if any, action
would be appropriate. Specifically, the Applications and Notices
provide that such a meeting would occur: (1) If the tracking error
exceeds 1%; or (2) if, for 30 or more days in any quarter or 15 days
in a row (a) the absolute difference between either the market
closing price or bid/ask price, on one hand, and NAV, on the other,
exceeds 2%, or (b) the bid/ask spread exceeds 2%.
\28\ Portfolio Fund Shares will be purchased or redeemed only in
large aggregations, or ``creation units,'' and the Proxy Basket will
constitute the names and quantities of instruments for both
purchases and redemptions of Creation Units.
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Overall, the Exchange believes that the arbitrage process would
operate similarly to the arbitrage process in place today for existing
ETFs that use in-kind baskets for creations and redemptions that do not
reflect the ETF's complete holdings but nonetheless produce performance
that is highly correlated to the performance of the ETF's actual
portfolio. The Exchange has observed highly efficient trading of ETFs
that invest in markets where security values are not fully known at the
time of ETF trading, and where a perfect hedge is not possible, such as
international equity and fixed-income ETFs. While the ability to value
and hedge many of these existing ETFs in the market may be limited,
such ETFs have generally maintained an effective arbitrage mechanism
and traded efficiently.
As provided in the Notice, the Commission believes that an
arbitrage mechanism based largely on the combination of a daily
disclosed Proxy Basket and at a minimum quarterly disclosure of the
Fund Portfolio can work in an efficient manner to maintain a fund's
secondary market prices close to its NAV.\29\ Consistent with the
Commission's view, the Exchange believes that the arbitrage mechanism
for Portfolio Fund Shares will be sufficient to keep secondary market
prices in line with NAV. This, combined with the fact that the proposed
rules are, except as described above, nearly identical to the generic
listing standards for Managed Fund Shares, leads the Exchange to
believe that the proposed Rule 14.11(m) is consistent with the Act.
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\29\ See Fidelity Notice at 17. The Commission also notes that
as long as arbitrage continues to keep the Fund's secondary market
price and NAV close, and does so efficiently so that spreads remain
narrow, that investors would benefit from the opportunity to invest
in active strategies through a vehicle that offers the traditional
benefits of ETFs.
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The Exchange notes that while the Proxy Basket does not reflect the
1-for-1 holdings of each series of Portfolio Fund Shares, a significant
amount of information about the holdings is publicly available at all
times. Each series will disclose the Proxy Basket on a daily basis.
Each series of Portfolio Fund Shares will at a minimum disclose the
entirety of its portfolio holdings, including the name, identifier,
market value and weight of each security and instrument in the
portfolio within at least 60 days following the end of every
[[Page 72423]]
fiscal quarter in a manner consistent with normal disclosure
requirements otherwise applicable to open-end investment companies
registered under the 1940 Act.
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of Portfolio Fund 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 Portfolio Fund Shares through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products. The
Exchange will require the issuer of each series of Portfolio Fund
Shares listed on the Exchange to represent to the Exchange that it will
advise the Exchange of any failure by a 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. If a Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. In addition,
the Exchange also has a general policy prohibiting the distribution of
material, non-public information by its employees.
As noted above, Form N-PORT requires reporting of a fund's complete
portfolio holdings on a position-by-position basis on a quarterly basis
within 60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its Form
N-CSR, filed twice a year, and its Form N-CEN, filed annually. A fund's
SAI and Shareholder Reports are available free upon request from the
Investment Company, and those documents and the Form N-PORT, Form N-
CSR, and Form N-CEN may be viewed on-screen or downloaded from the
Commission's website at www.sec.gov.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last sale information for the
Shares will be available via the CTA high-speed line. The Exchange
deems Portfolio Fund Shares to be equity securities, thus rendering
trading in the Shares subject to the Exchange's existing rules
governing the trading of equity securities. As provided in proposed
Rule 14.11(m)(2)(C), the minimum price variation for quoting and entry
of orders in securities traded on the Exchange is $0.01.
The Funds
As discussed above, each Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares and, as such, any such concerns related to the portfolio are
mitigated.
Separately and in addition to the rationale supporting the
arbitrage mechanism for Portfolio Fund Shares more broadly above, the
Exchange also believes that the particular instruments that may be
included in each Fund's portfolio and Proxy Basket do not raise any
concerns related to the Proxy Baskets being able to closely track the
NAV of the Funds because such instruments include only instruments that
trade on an exchange contemporaneously with the Shares. In addition, a
Fund's Proxy Basket will be optimized so that it reliably and
consistently correlates to the performance of the Fund. The Notice
specifically states that ``in order to facilitate arbitrage, each
Fund's portfolio and Tracking Basket will only include certain
securities that trade on an exchange contemporaneously with the Fund's
Shares. Because the securities would be exchange traded, market
participants would be able to accurately price and readily trade the
securities in the Tracking Basket for purposes of assessing the
intraday value of the Fund's portfolio holdings and to hedge their
positions in the Fund's Shares.'' \30\ The Exchange and Adviser agree
with the Commission's conclusion.
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\30\ The Exchange notes that the instruments enumerated herein
are consistent with the investable universe contemplated in the
Notice. Specifically, the Notice provides that ``Each Fund may
invest only in ETFs, Exchange-traded notes, Exchange-traded common
stocks, common stocks listed on a foreign exchange that trade on
such exchange contemporaneously with the Shares, Exchange-traded
preferred stocks, Exchange-traded American depositary receipts,
Exchange-traded real estate investment trusts, Exchange-traded
commodity pools, Exchange-traded metals trusts, Exchange-traded
currency trusts, and exchange-traded futures that trade
contemporaneously with the Shares, as well as cash and cash
equivalents . . . All futures contracts that a Fund may invest in
will be traded on a U.S. futures exchange. For these purposes, an
``Exchange'' is a national securities exchange as defined in section
2(a)(26) of the [1940] Act.'' See Notice at 10.
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The Adviser anticipates that the returns between a Fund and its
respective Proxy Basket will have a consistent relationship and that
the deviation in the returns between a Fund and its Proxy Basket will
be sufficiently small such that the Proxy Basket will provide Market
Makers with a reliable hedging vehicle that they can use to effectuate
low-risk arbitrage trades in Fund Shares. The Exchange believes that
the disclosures provided by the Funds will allow Market Makers to
understand the relationship between the performance of a Fund and its
Proxy Basket. Market Makers will be able to estimate the value of and
hedge positions in a Fund's Shares, which the Exchange believes will
facilitate the arbitrage process and help ensure that the Fund's Shares
normally will trade at market prices close to their NAV. The Exchange
also believes that competitive market making, where traders are looking
to take advantage of differences in bid-ask spread, will aid in keeping
spreads tight.
While the Proxy Basket does not reflect the 1-for-1 holdings of
each Fund, a significant amount of information about each Fund's
holdings is publicly available at all times. Each Fund will disclose
the Proxy Basket on a daily basis. Each series of Portfolio Fund Shares
will at a minimum disclose the entirety of its portfolio holdings,
including the name, identifier, market value and weight of each
security and instrument in the portfolio within at least 60 days
following the end of every fiscal quarter in a manner consistent with
normal disclosure requirements otherwise applicable to open-end
investment companies registered under the 1940 Act. The website will
include additional quantitative information updated on a daily basis,
including, on a per Share basis for each Fund, the prior Business Day's
NAV and the Closing Price or Bid/Ask Price at the time of calculation
of such NAV, and a calculation of the premium or discount of the
Closing Price or Bid/Ask Price against such NAV. The website will also
disclose any information regarding the bid/ask spread for each Fund as
may be required for other ETFs under Rule 6c-11 under the 1940 Act, as
amended.
The Exchange represents that the Shares of the Funds will continue
to comply with all other proposed requirements applicable to Portfolio
Fund Shares, which also generally correspond to the requirements for
Managed Fund Shares, including the dissemination of key information
such as the Proxy Basket, the Fund Portfolio,
[[Page 72424]]
and Net Asset Value, suspension of trading or removal, trading halts,
surveillance, minimum price variation for quoting and order entry, the
information circular, and firewalls as set forth in the proposed
Exchange rules applicable to Portfolio Fund Shares and the orders
approving such rules. Moreover, U.S.-listed equity securities held by
the Funds will trade on markets that are a member of ISG or affiliated
with a member of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.\31\ 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 reference asset and
intraday indicative values (as applicable), or the applicability of
Exchange listing rules specified in this filing shall constitute
continued listing requirements for the Shares. The issuer has
represented to the Exchange that it will advise the Exchange of any
failure by a Fund or Shares to comply with the continued listing
requirements, and, pursuant to its obligations under Section 19(g)(1)
of the Act, the Exchange will surveil for compliance with the continued
listing requirements. 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 a Fund is not in compliance with the
applicable listing requirements, the Exchange will commence delisting
procedures with respect to such Fund under Exchange Rule 14.12.
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\31\ For a list of the current members of ISG, see
www.isgportal.com. The Exchange notes that not all components of the
Funds 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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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. Rather, the Exchange notes
that the proposed rule change will facilitate the listing of a new type
of actively-managed exchange-traded products, thus enhancing
competition among both market participants and listing venues, 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 within such longer period 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 Exchange consents, the Commission will:
A. By order approve or disapprove such 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-2019-107 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-2019-107. 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-2019-107, and should be
submitted on or before January 21, 2020.
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\32\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-28217 Filed 12-30-19; 8:45 am]
BILLING CODE 8011-01-P