Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 2 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 2, To Adopt BZX Rule 14.11(l) Governing the Listing and Trading of Exchange-Traded Fund Shares, 20312-20323 [2020-07550]
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Federal Register / Vol. 85, No. 70 / Friday, April 10, 2020 / Notices
market participants at the same time.
Further, investors would continue to
have ready access to information
regarding each Fund’s holdings, the
Intraday Indicative Value, the Disclosed
Portfolio, and quotation and last sale
information for the Shares.
For the above reasons, Nasdaq
believes 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 purposes of the Act. The
Exchange believes that the proposed
rule change would provide the Adviser
with additional flexibility in managing
the Funds, thereby helping each Fund to
achieve its investment goals. As such, it
is expected that each Fund may become
a more attractive investment product in
the marketplace and, therefore, that the
proposed rule change would not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A)(iii) of the Act 16 and
subparagraph (f)(6) of Rule 19b–4
thereunder.17
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
16 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6) requires a self-regulatory organization to give
the Commission written notice of its intent to file
the proposed rule change at least five business days
prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
17 17
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investors, or otherwise in furtherance of
the purposes of the Act.
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:
• 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–
NASDAQ–2020–014 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–NASDAQ–2020–014. 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–NASDAQ–2020–014 and
should be submitted on or before May
1, 2020.
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[FR Doc. 2020–07548 Filed 4–9–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88566; File No. SR–
CboeBZX–2019–097]
Electronic Comments
PO 00000
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
J. Matthew DeLesDernier,
Assistant Secretary.
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Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed
Rule Change, as Modified by
Amendment No. 2, To Adopt BZX Rule
14.11(l) Governing the Listing and
Trading of Exchange-Traded Fund
Shares
April 6, 2020.
On November 15, 2019, Cboe BZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to, among other things, adopt
new BZX Rule 14.11(l) to list and trade
Exchange-Traded Fund Shares. The
proposed rule change was published for
comment in the Federal Register on
November 22, 2019.3
On December 17, 2019, pursuant to
Section 19(b)(2) of the Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On February 12,
2020, the Exchange filed Amendment
No. 1 to the proposed rule change,
which amended and replaced the
proposed rule change in its entirety.6
On February 20, 2020, the Commission
published the proposed rule change, as
modified by Amendment No. 1, for
notice and comment and instituted
proceedings to determine whether to
approve or disapprove the proposed
change, as modified by Amendment No.
1.7 On March 20, 2020, the Exchange
18 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 87560
(November 18, 2019), 84 FR 64607.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 87777,
84 FR 70598 (December 23, 2019).
6 See infra note 8.
7 See Securities Exchange Act Release No. 88208
(February 13, 2020), 85 FR 9834.
1 15
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filed Amendment No. 2 to the proposed
rule change, which amended and
replaced the proposed rule change, as
modified by Amendment No. 1.8 The
Commission has received no comments
on the proposed rule change.
The Commission is publishing this
notice to solicit comments on
Amendment No. 2 to the proposed rule
change from interested persons, and is
approving the proposed rule change, as
modified by Amendment No. 2, on an
accelerated basis.
I. The Exchange’s Description of the
Proposal, as Modified by Amendment
No. 2
The Exchange proposes a rule change
to adopt BZX Rule 14.11(l) to permit the
listing and trading of Exchange-Traded
Fund Shares that are permitted to
operate in reliance on Rule 6c–11 under
the Investment Company Act of 1940.
The Exchange is also proposing to
discontinue the quarterly reports
required with respect to Managed Fund
Shares listed on the Exchange pursuant
to the generic listing standards under
Rule 14.11(i).
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.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This Amendment No. 2 to SR–
CboeBZX–2019–097 amends and
replaces in its entirety the proposal as
amended by Amendment No. 1, which
was submitted on February 12, 2020,
8 Amendments No. 1 and 2 to the proposed rule
change is available on the Commission’s website at:
https://www.sec.gov/comments/sr-cboebzx-2019097/srcboebzx2019097.htm.
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and amended and replaced in its
entirety the proposal as originally
submitted on November 15, 2019. The
Exchange submits this Amendment No.
1 in order to clarify certain points and
add additional details to the proposal.
The Exchange proposes to add new
Rule 14.11(l) 9 for the purpose of
permitting the generic listing and
trading, or trading pursuant to unlisted
trading privileges, of Exchange-Traded
Fund Shares 10 that are permitted to
operate in reliance on Rule 6c–11 (‘‘Rule
6c–11’’) under the Investment Company
Act of 1940 (the ‘‘1940 Act’’).11 The
Exchange is also proposing to make
conforming changes to the Exchange’s
corporate governance requirements
under Rule 14.10(e) in order to
accommodate the proposed listing of
Exchange-Traded Fund Shares. Finally,
the Exchange is proposing to
discontinue the quarterly reports
required with respect to Managed Fund
Shares listed on the Exchange pursuant
to the generic listing standards under
Rule 14.11(i). The Exchange notes that
it plans to submit a separate filing
related to fees applicable to ETF Shares
listed on the Exchange.
The Commission recently adopted
Rule 6c–11 to permit exchange-traded
funds (‘‘ETFs’’) that satisfy certain
conditions to operate without obtaining
an exemptive order from the
Commission under the 1940 Act.12
Since the first ETF was approved by the
Commission in 1992, the Commission
has routinely granted exemptive orders
permitting ETFs to operate under the
1940 Act because there was no ETF
specific rule in place and they have
characteristics that distinguish them
from the types of structures
contemplated and included in the 1940
Act. After such an extended period
operating without a specific rule set and
only under exemptive relief, Rule 6c–11
is designed to provide a consistent,
9 The Exchange notes that it is proposing new
Rule 14.11(l) because it has also proposed a new
Rule 14.11(k) as part of another proposal. See
Securities Exchange Act Release No. 87062
(September 23, 2019), 84 FR 51193 (September 27,
2019) (SR–CboeBZX–2019–047).
10 As provided below, proposed Rule
14.11(l)(3)(A) provides that the term ‘‘ETF Shares’’
shall mean the shares issued by a registered openend management investment company that: (i) Is
eligible to operate in reliance on Rule 6c–11 under
the Investment Company Act of 1940; (ii) issues
(and redeems) creation units to (and from)
authorized participants in exchange for a basket and
a cash balancing amount (if any); and (iii) issues
shares that it intends to list or are listed on a
national securities exchange and traded at marketdetermined prices.
11 15 U.S.C. 80a–1.
12 See Release Nos. 33–10695; IC–33646; File No.
S7–15–18 (Exchange-Traded Funds) (September 25,
2019), 84 FR 57162 (October 24, 2019) (the ‘‘Rule
6c–11 Release’’).
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20313
transparent, and efficient regulatory
framework for ETFs.13 Exchange listing
standards applicable to ETFs have been
similarly adopted and tweaked over the
years and the Exchange believes that,
just as the Commission has undertaken
a review of the 1940 Act as it is
applicable to ETFs, it is appropriate to
perform a similar holistic review and
overhaul of Exchange listing rules. With
this in mind, the Exchange submits this
proposal to add new Rule 14.11(l) and
certain corresponding rule changes
because it believes that this proposal
similarly promotes consistency,
transparency, and efficiency
surrounding the exchange listing
process for ETF Shares in a manner that
is consistent with the Act, as further
described below.14 Except as otherwise
provided, the Exchange would continue
to enforce all governance, disclosure,
and trading rules for ETF Shares, as
defined below, listed on the Exchange.
Consistent with Index Fund Shares
and Managed Fund Shares listed under
the generic listing standards in Rules
14.11(c) and 14.11(i), respectively,
series of Exchange-Traded Fund Shares
that are permitted to operate in reliance
on Rule 6c–11 would be permitted to be
listed and traded on the Exchange
without a prior Commission approval
order or notice of effectiveness pursuant
to Section 19(b) of the Act.15
13 In approving the rule, the Commission stated
that the ‘‘rule will modernize the regulatory
framework for ETFs to reflect our more than two
decades of experience with these investment
products. The rule is designed to further important
Commission objectives, including establishing a
consistent, transparent, and efficient regulatory
framework for ETFs and facilitating greater
competition and innovation among ETFs.’’ Rule 6c–
11 Release, at 57163. The Commission also stated
the following regarding the rule’s impact: ‘‘We
believe rule 6c–11 will establish a regulatory
framework that: (1) Reduces the expense and delay
currently associated with forming and operating
certain ETFs unable to rely on existing orders; and
(2) creates a level playing field for ETFs that can
rely on the rule. As such, the rule will enable
increased product competition among certain ETF
providers, which can lead to lower fees for
investors, encourage financial innovation, and
increase investor choice in the ETF market.’’ Rule
6c–11 Release, at 57204
14 The Exchange deems ETF Shares to be equity
securities, thus rendering trading in any series of
ETF Shares subject to the Exchange’s existing rules
governing the trading of equity securities. With
respect to trading in ETF Shares, all of the BZX
Member obligations relating to product description
and prospectus delivery requirements will continue
to apply in accordance with Exchange rules and
federal securities laws, and the Exchange will
continue to monitor its Members for compliance
with such requirements, which are not changing as
a result of Rule 6c–11 under the 1940 Act.
15 Rule 19b–4(e)(1) provides that the listing and
trading of a new derivative securities product by a
self-regulatory organization (‘‘SRO’’) is not deemed
a proposed rule change, pursuant to paragraph
(c)(1) of Rule 19b–4, if the Commission has
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Proposed Listing Rules
Proposed Rule 14.11(l)(1) provides
that the Exchange will consider for
trading, whether by listing or pursuant
to unlisted trading privileges, the shares
of Exchange-Traded Funds (‘‘ETF
Shares’’) that meet the criteria of this
Rule 14.11(l).16
Proposed Rule 14.11(l)(2) provides
that the proposed rule would be
applicable only to ETF Shares. Except to
the extent inconsistent with this Rule
14.11(l), 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. ETF 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(l)(2) further
provides that: (A) Transactions in ETF
Shares will occur throughout the
Exchange’s trading hours; (B) the
minimum price variation for quoting
and entry of orders in ETF Shares is
$0.01; 17 and (C) the Exchange will
implement and maintain written
surveillance procedures for ETF Shares.
Proposed Rule 14.11(l)(3)(A) provides
that the term ‘‘ETF Shares’’ shall mean
shares of stock issued by an ExchangeTraded Fund.
approved, pursuant to Section 19(b) of the Act, the
SRO’s trading rules, procedures and listing
standards for the product class that would include
the new derivative securities product and the SRO
has a surveillance program for the product class. As
contemplated by this Rule 14.11(l), the Exchange
proposes new Rule 14.11(l) to establish generic
listing standards for ETFs that are permitted to
operate in reliance on Rule 6c–11. An ETF listed
under proposed Rule 14.11(l) would therefore not
need a separate proposed rule change pursuant to
Rule 19b–4 before it can be listed and traded on the
Exchange.
16 To the extent that a series of ETF Shares does
not satisfy one or more of the criteria in proposed
Rule 14.11(l), the Exchange may file a separate
proposal under Section 19(b) of the Act in order to
list such series on the Exchange. Consistent with
Rule 14.11(a), any of the statements or
representations in that proposal regarding the index
composition, the description of the portfolio or
reference assets, limitations on portfolio holdings or
reference assets, dissemination and availability of
index, reference asset, and intraday indicative
values (as applicable), or the applicability of
Exchange listing rules specified in any filing to list
such series of ETF Shares shall constitute continued
listing requirements for the series of ETF Shares.
Further, in the event that a series of ETF Shares
becomes listed under proposed Rule 14.11(l) and
subsequently can no longer rely on Rule 6c–11, so
long as the series of ETF Shares may otherwise rely
on exemptive relief issued by the Commission, such
series of ETF Shares may be listed as a series of
Index Fund Shares under Rule 14.11(c) or Managed
Fund Shares under Rule 14.11(i), as applicable, as
long as the series of ETF Shares meets all listing
requirements applicable under the applicable rule.
17 Consistent with Exchange Rules 11.11(a)(1) and
14.11(i)(2)(B), the Exchange notes that the proposed
minimum price variation is identical to the
minimum price variation for Index Fund Shares
and Managed Fund Shares.
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Proposed Rule 14.11(l)(3)(B) provides
that the term ‘‘Exchange-Traded Fund’’
has the same meaning as the term
‘‘exchange-traded fund’’ as defined in
Rule 6c–11 under the Investment
Company Act of 1940.
Proposed Rule 14.11(l)(3)(C) provides
that the term ‘‘Reporting Authority’’ in
respect of a particular series of ETF
Shares means the Exchange, an
institution, or a reporting service
designated by the Exchange or by the
exchange that lists a particular series of
ETF 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 amount of any
dividend equivalent payment or cash
distribution to holders of ETF Shares,
net asset value, index or portfolio value,
the current value of the portfolio of
securities required in connection with
issuance of ETF Shares, or other
information relating to the issuance,
redemption or trading of ETF Shares. A
series of ETF Shares may have more
than one Reporting Authority, each
having different functions.18
Proposed Rule 14.11(l)(4) provides
that the Exchange may approve a series
of ETF Shares for listing and/or trading
(including pursuant to unlisted trading
privileges) on the Exchange pursuant to
Rule 19b–4(e) under the Act, provided
such series of ETF Shares is eligible to
operate in reliance on Rule 6c–11 under
the Investment Company Act of 1940
and must satisfy the requirements of
this Rule 14.11(l) on an initial and
continued listing basis.
Proposed Rule 14.11(l)(4)(A) provides
that the requirements of Rule 6c–11
must be satisfied by a series of ETF
Shares on an initial and continued
listing basis. Such securities must also
satisfy the following criteria on an
initial and, except for paragraph (i)
below, continued, listing basis. Further,
proposed Rule 14.11(l)(4)(A) provides
that: (i) For each series, the Exchange
will establish a minimum number of
ETF Shares required to be outstanding
at the time of commencement of trading
on the Exchange; (ii) if an index
underlying a series of ETF Shares is
maintained by a broker-dealer or fund
adviser, the broker-dealer or fund
adviser shall erect and maintain a ‘‘fire
wall’’ around the personnel who have
access to information concerning
changes and adjustments to the index
and the index shall be calculated by a
18 The
Exchange notes that the definition of
Reporting Authority is based on the definitions
provided under Rule 14.11(c)(1)(C) and
14.11(i)(3)(D) related to Index Fund Shares and
Managed Fund Shares, respectively.
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Fmt 4703
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third party who is not a broker-dealer or
fund adviser. If the investment adviser
to the investment company issuing an
actively managed series of ETF 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 ExchangeTraded Fund’s portfolio; and (iii) any
advisory committee, supervisory board,
or similar entity that advises a Reporting
Authority or that makes decisions on
the composition, methodology, and
related matters of an index underlying
a series of ETF Shares, must implement
and maintain, or be subject to,
procedures designed to prevent the use
and dissemination of material nonpublic information regarding the
applicable index. For actively managed
Exchange-Traded Funds, personnel who
make decisions on the portfolio
composition must be subject to
procedures designed to prevent the use
and dissemination of material
nonpublic information regarding the
applicable portfolio.19
Proposed Rule 14.11(l)(4)(B) provides
that each series of ETF Shares will be
listed and traded on the Exchange
subject to application of Proposed Rule
14.11(l)(4)(B)(i) and (ii). Proposed Rule
14.11(l)(4)(B)(i) provides that the
Exchange will consider the suspension
of trading in, and will commence
delisting proceedings under Rule 14.12
for, a series of ETF Shares under any of
the following circumstances: (a) If the
Exchange becomes aware that the issuer
of the ETF Shares is no longer eligible
to operate in reliance on Rule 6c–11
under the Investment Company Act of
1940; (b) if any of the other listing
requirements set forth in this Rule
14.11(l) are not continuously
maintained; (c) if, following the initial
twelve month period after
commencement of trading on the
Exchange of a series of ETF Shares,
there are fewer than 50 beneficial
holders of the series of ETF Shares for
30 or more consecutive trading days; or
(d) 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(l)(4)(B)(ii) provides that
upon termination of an investment
company, the Exchange requires that
ETF Shares issued in connection with
19 The proposed requirements under proposed
Rule 14.11(l)(4)(A) are substantively identical to the
equivalent provisions for Index Fund Shares and
Managed Fund Shares under Rules 14.11(c)(3)(B)(i)
and (iii), 14.11(c)(4)(C)(i) and (iii), 14.11(c)(5)(A)(i)
and (iii), and 14.11(i)(7).
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such entity be removed from Exchange
listing.
Proposed Rule 14.11(l)(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 index or portfolio value; the
current value of the portfolio of
securities required to be deposited in
connection with issuance of ETF Shares;
the amount of any dividend equivalent
payment or cash distribution to holders
of ETF Shares; net asset value; or other
information relating to the purchase,
redemption, or trading of ETF 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.20
Proposed Rule 14.11(l)(6) provides
that a security that has previously been
approved for listing on the Exchange
pursuant to the generic listing
requirements specified in Rule 14.11(c)
or Rule 14.11(i), or pursuant to the
approval of a proposed rule change or
subject to a notice of effectiveness by
the Commission, may be considered for
listing solely under this Rule 14.11(l) if
such security is eligible to operate in
reliance on Rule 6c–11 under the 1940
Act. At the time of listing of such
security under this Rule 14.11(l), the
continued listing requirements
applicable to such previously-listed
security will be those specified in
paragraph (b) of this Rule 14.11(l). Any
requirements for listing as specified in
Rule 14.11(c) or Rule 14.11(i), or an
approval order or notice of effectiveness
of a separate proposed rule change, that
differ from the requirements of this Rule
14.11(l) will no longer be applicable to
such security.
The Exchange is also proposing to
make two corresponding amendments to
include ETF Shares in other Exchange
rules. Specifically, the Exchange is also
proposing: (i) To amend Rule
14.10(e)(1)(E) and Interpretation and
20 The Exchange notes that proposed Rule
14.11(l)(5) is substantively identical to the
equivalent Rules for Index Fund Shares and
Managed Fund Shares under Rule 14.11(c)(10) and
14.11(i)(5).
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18:00 Apr 09, 2020
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Policy .13 to Rule 14.10 in order to add
ETF Shares to a list of product types
listed on the Exchange, including Index
Fund Shares, Managed Fund Shares,
and Managed Portfolio Shares, that are
exempted from the Audit Committee
requirements set forth in Rule
14.10(c)(3), except for the applicable
requirements of SEC Rule 10A–3; 21 and
(ii) to amend Rule 14.11(c)(3)(A)(i)(a) in
order to include ETF Shares in the
definition of Derivative Securities
Products.
Discussion
Proposed Rule 14.11(l) is based in
large part on Rules 14.11(c) and (i)
related to the listing and trading of
Index Fund Shares and Managed Fund
Shares on the Exchange, respectively,
both of which are issued under the 1940
Act and would qualify as ETF Shares
after Rule 6c–11 is effective. Rule
14.11(c) and 14.11(i) are very similar,
their primary difference being that
Index Fund Shares are designed to track
an underlying index and Managed Fund
Shares are based on an actively
managed portfolio that is not designed
to track an index. As such, the Exchange
believes that using Rules 14.11(c) and (i)
(collectively, the ‘‘Current ETF
Standards’’) as the basis for proposed
Rule 14.11(l) is appropriate because
they are generally designed to address
the issues associated with ETF Shares.
The only substantial differences
between proposed Rule 14.11(l) and the
Current ETF Standards that are not
otherwise required under Rule 6c–11
are as follows: (i) Proposed Rule 14.11(l)
does not include the quantitative
standards applicable to a fund or an
index that are included in the Current
ETF Standards; and (ii) proposed Rule
14.11(l) does not include any
requirements related to the
dissemination of a fund’s Intraday
Indicative Value.22 These differences
are discussed below.
Quantitative Standards
The Exchange believes that the
proposal is designed to prevent
fraudulent and manipulative acts and
practices because the Exchange will
perform ongoing surveillance of ETF
Shares listed on the Exchange in order
to ensure compliance with Rule 6c–11
and the 1940 Act on an ongoing basis.
21 The Exchange notes that these proposed
changes would subject ETF Shares to the same
corporate governance requirements as other openend management investment companies listed on
the Exchange.
22 For purposes of this filing, the term ‘‘Intraday
Indicative Value’’ or ‘‘IIV’’ shall mean an intraday
estimate of the value of a share of each series of
either Index Fund Shares or Managed Fund Shares.
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20315
While proposed Rule 14.11(l) does not
include the quantitative requirements
applicable to an ETF or an ETF’s
holdings or underlying index that are
included in Rules 14.(c) and 14.11(i),23
the Exchange believes that the
manipulation concerns that such
standards are intended to address are
otherwise mitigated by a combination of
the Exchange’s surveillance procedures,
the Exchange’s ability to halt trading
under the proposed Rule
14.11(l)(4)(B)(ii), and the Exchange’s
ability to suspend trading and
commence delisting proceedings under
proposed Rule 14.11(l)(4)(B)(i). The
Exchange will also halt trading in ETF
Shares under the conditions specified in
Rule 11.18, ‘‘Trading Halts Due to
Extraordinary Market Volatility.’’ The
Exchange also believes that such
concerns are further mitigated by
enhancements to the arbitrage
mechanism that will come from Rule
6c–11, specifically the additional
flexibility provided to issuers of ETF
Shares through the use of custom
baskets for creations and redemptions
and the additional information made
available to the public through the
additional daily website disclosure
obligations applicable under Rule 6c–
11.24 The Exchange believes that the
combination of these factors will act to
keep ETF Shares trading near the value
of their underlying holdings and further
mitigate concerns around manipulation
of ETF Shares on the Exchange without
the inclusion of quantitative
standards.25 The Exchange will monitor
for compliance with Rule 6c–11 in order
to ensure that the continued listing
standards are being met.26 Specifically,
the Exchange will review the website of
each series of ETF Shares listed on the
Exchange in order to ensure that the
23 The Exchange notes that Rules 14.11(c) and (i)
include certain quantitative standards related to the
size, trading volume, concentration, and diversity of
the holdings of a series of Index Fund Shares or
Managed Fund Shares (the ‘‘Holdings Standards’’)
as well as related to the minimum number of
beneficial holders of a fund (the ‘‘Distribution
Standards’’). The Exchange believes that to the
extent that manipulation concerns are mitigated
based on the factors described herein, such
concerns are mitigated both as it relates to the
Holdings Standards and the Distribution Standards.
24 The Exchange notes that the Commission came
to a similar conclusion in several places in the Rule
6c–11 Release. See Rule 6c–11 Release at 15–18;
60–61; 69–70; 78–79; 82–84; and 95–96.
25 The Exchange believes that this applies to all
quantitative standards, whether applicable to the
portfolio holdings of a series of ETF Shares or the
distribution of the ETF Shares.
26 As noted throughout, proposed Rule 14.11(l),
unlike Rule 14.11(c) and 14.11(i), does not include
Holdings Standards and, as such, there will be no
quantitative standards applicable by the Exchange
to the portfolio holdings of a series of ETF Shares
on an initial or continued listing basis.
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requirements of Rule 6c–11 are being
met. The Exchange will also employ
numerous intraday alerts that will notify
Exchange personnel of trading activity
throughout the day that is potentially
indicative of certain disclosures not
being made accurately or the presence
of other unusual conditions or
circumstances that could be detrimental
to the maintenance of a fair and orderly
market. As a backstop to the
surveillances described above, the
Exchange also notes that Rule 14.11(a)
would require an issuer of ETF Shares
to notify the Exchange of any failure to
comply with Rule 6c–11 or the 1940
Act.
The Exchange may suspend trading in
and commence delisting proceedings for
a series of ETF Shares where such series
is not in compliance with the applicable
listing standards or where the Exchange
believes that further dealings on the
Exchange are inadvisable.27 The
Exchange also notes that Rule 14.11(a)
requires any issuer to provide the
Exchange with prompt notification after
it becomes aware of any noncompliance with proposed Rule
14.11(l), which would include any
failure of the issuer to comply with Rule
6c–11 or the 1940 Act.28
Further, the Exchange also represents
that its surveillance procedures are
adequate to properly monitor the
trading of the ETF Shares in all trading
sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws.
Specifically, the Exchange intends to
27 Specifically, proposed Rule 14.11(l)(4)(B)
provides that each series of ETF Shares will be
listed and traded on the Exchange subject to
application of Proposed Rule 14.11(l)(4)(B)(i) and
(ii). Proposed Rule 14.11(l)(4)(B)(i) provides that the
Exchange will consider the suspension of trading
in, and will commence delisting proceedings under
Rule 14.12 for, a series of ETF Shares under any of
the following circumstances: (a) If the Exchange
becomes aware that the issuer of the ETF Shares is
no longer eligible to operate in reliance on Rule 6c–
11 under the Investment Company Act of 1940; (b)
if any of the other listing requirements set forth in
this Rule 14.11(l) are not continuously maintained;
(c) if, following the initial twelve month period
after commencement of trading on the Exchange of
a series of ETF Shares, there are fewer than 50
beneficial holders of the series of ETF Shares for 30
or more consecutive trading days; or (d) 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(l)(4)(B)(ii) provides that upon
termination of an investment company, the
Exchange requires that ETF Shares issued in
connection with such entity be removed from
Exchange listing.
28 The Exchange notes that failure by an issuer to
notify the Exchange of non-compliance pursuant to
Rule 14.11(a) would itself be considered noncompliance with the requirements of Rule 14.11
and would subject the series of ETF Shares to
potential trading halts and the delisting process
under Rule 14.12.
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utilize its existing surveillance
procedures applicable to derivative
products, which are currently
applicable to Index Fund Shares and
Managed Fund Shares, among other
product types, to monitor trading in ETF
Shares. The Exchange or the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’), on behalf of the Exchange,
will communicate as needed regarding
trading in ETF Shares and certain of
their applicable underlying components
with other markets that are members of
the Intermarket Surveillance Group
(‘‘ISG’’) or with which the Exchange has
in place a comprehensive surveillance
sharing agreement. In addition, the
Exchange may obtain information
regarding trading in ETF Shares and
certain of their applicable underlying
components from markets and other
entities that are members of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement. Additionally, FINRA, on
behalf of the Exchange, is able to access,
as needed, trade information for certain
fixed income securities that may be held
by a series of ETF Shares reported to
FINRA’s Trade Reporting and
Compliance Engine (‘‘TRACE’’). FINRA
also can access data obtained from the
Municipal Securities Rulemaking
Board’s (‘‘MSRB’’) Electronic Municipal
Market Access (‘‘EMMA’’) system
relating to municipal bond trading
activity for surveillance purposes in
connection with trading in a series of
ETF Shares, to the extent that a series
of ETF Shares holds municipal
securities. Finally, as noted above, the
issuer of a series of ETF Shares will be
required to comply with Rule 10A–3
under the Act for the initial and
continued listing of Exchange-Traded
Fund Shares, as provided under Rule
14.10(e)(1)(E) and Interpretation and
Policy .13 to Rule 14.10.29
The Exchange notes that it may
consider all relevant factors in
exercising its discretion to halt or
suspend trading in a series of ETF
Shares. Trading may be halted if the
circuit breaker parameters in Rule 11.18
have been reached, because of other
market conditions, or for reasons that, in
the view of the Exchange, make trading
in the Shares inadvisable. These may
include: (1) The extent to which certain
information about the ETF Shares that is
required to be disclosed under Rule 6c–
11 of the Investment Company Act of
1940 is not being made available,
29 The Exchange notes that these proposed
changes would subject ETF Shares to the same
corporate governance requirements as other openend management investment companies listed on
the Exchange.
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including specifically where the
Exchange becomes aware that the net
asset value with respect to a series of
ETF Shares is not disseminated to all
market participants at the same time, it
will halt trading in such series until
such time as the net asset value is
available to all market participants; 30
(2) if an interruption to the
dissemination to the value of the index
or reference asset on which a series of
ETF Shares is based persists past the
trading day in which it occurred or is no
longer calculated or available; (3)
trading in the securities comprising the
underlying index or portfolio has been
halted in the primary market(s); or (4)
whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present.
Intraday Indicative Value
As described above, proposed Rule
14.11(l) does not include any
requirements related to the
dissemination of an Intraday Indicative
Value. Both Rule 14.11(c) and Rule
14.11(i) include the requirement that a
series of Index Fund Shares and
Managed Fund Shares, respectively,
disseminate and update an Intraday
Indicative Value at least every 15
seconds.31 The Exchange believes that it
is consistent with the Act to not require
the calculation and dissemination of the
Intraday Indicative Value for the same
reasons enumerated in the Rule 6c–11
Release, which specifically discusses
and describes why Rule 6c–11 does not
require ETFs to publicly calculate and
disseminate the Intraday Indicative
Value,32 and a separate Exchange
proposal to eliminate the requirement to
calculate and disseminate the Intraday
Indicative Value for certain series of
Index Fund Shares and Managed Fund
Shares.33
As such, the Exchange believes that it
is appropriate and consistent with the
Act to not include a requirement for the
dissemination of an IIV for a series of
ETF Shares to be listed on the Exchange.
30 The Exchange will obtain a representation from
the issuer of ETF Shares that the net asset value per
share for the series will be calculated daily and
made available to all market participants at the
same time.
31 See Rules 14.11(c)(3)(C), 14.11(c)(6)(A), and
14.11(c)(9)(B)(e) related to Index Fund Shares and
Rules 14.11(i)(3)(C), 14.11(i)(4)(B)(i),
14.11(i)(4)(B)(iii)(b), and 14.11(i)(4)(B)(iv) related to
Managed Fund Shares.
32 See Rule 6c–11 Release at 61–66.
33 See Securities Exchange Act Release No. 88259
(February 21, 2020), 85 FR 11419 (February 27,
2020) (SR–CboeBZX–2020–007).
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Discontinuing Quarterly Reporting for
Managed Fund Shares
Finally, the Exchange is proposing to
eliminate certain quarterly reporting
obligations related to the listing and
trading of Managed Fund Shares on the
Exchange. In the order approving the
Exchange’s proposal to adopt generic
listing standards for Managed Fund
Shares,34 the Commission noted that the
Exchange had represented that ‘‘on a
quarterly basis, the Exchange will
provide a report to the Commission staff
that contains, for each ETF whose
shares are generically listed and traded
under BATS Rule 14.11(i): (a) Symbol
and date of listing; (b) the number of
active authorized participants (‘‘APs’’)
and a description of any failure by
either a fund or an AP to deliver
promised baskets of shares, cash, or
cash and instruments in connection
with creation or redemption orders; and
(c) a description of any failure by an
ETF to comply with BATS Rule
14.11(i).’’ 35 This reporting requirement
is not specifically enumerated in Rule
14.11(i).
The Exchange has provided such
information to the Commission on a
quarterly basis since the MFS Approval
Order was issued in 2016. The type of
information provided in the reports was
created to provide a window into the
creation and redemption process for
Managed Fund Shares in order to ensure
that the arbitrage mechanism would
work as expected for products that were
listed pursuant to the newly approved
generic listing standards. The approval
of the Rule 6c–11 collapses the
distinction between index funds and
active funds, which the Exchange
believes represents that the Commission
is generally comfortable with actively
managed funds, rendering the reports
unnecessary. Further, because the same
general types of information provided in
those reports will be made available
under Rule 6c–11 directly from the
issuers of such securities the Exchange
also believes that it is consistent with
the Act to remove this reporting
obligation because it will be duplicative
and no longer necessary.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 36 in general and Section
6(b)(5) of the Act 37 in particular in that
it is designed to prevent fraudulent and
34 See Securities Exchange Act Release No. 78396
(July 22, 2016), 81 FR 49698 (July 28, 2016) (SR–
BATS–2015–100) (the ‘‘MFS Approval Order’’).
35 See MFS Approval Order at footnote 14.
36 15 U.S.C. 78f.
37 15 U.S.C. 78f(b)(5).
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manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The Exchange believes that proposed
Rule 14.11(l) is designed to prevent
fraudulent and manipulative acts and
practices in that the proposed rules
relating to listing and trading ETF
Shares on the Exchange provide specific
initial and continued listing criteria
required to be met by such securities.
Proposed Rule 14.11(l)(4) sets forth
initial and continued listing criteria
applicable to ETF Shares, specifically
providing that the Exchange may
approve a series of ETF Shares for
listing and/or trading (including
pursuant to unlisted trading privileges)
on the Exchange pursuant to Rule 19b–
4(e) under the Act, provided such series
of ETF Shares is eligible to operate in
reliance on Rule 6c–11 under the
Investment Company Act of 1940 and
must satisfy the requirements of this
Rule 14.11(l) on an initial and
continued listing basis.38 The Exchange
will submit a Form 19b–4(e) for all
series of ETF Shares upon being listed
pursuant to Rule 14.11(l), including
those series of ETF Shares that are listed
under Rule 14.11(l) pursuant to
proposed Rule 14.11(l)(6) and such
Form 19b–4(e) will specifically note that
such series of ETF Shares are being
listed on the Exchange pursuant to Rule
14.11(l).
Proposed Rule 14.11(l)(4)(B) provides
that each series of ETF Shares will be
listed and traded on the Exchange
subject to application of Proposed Rule
14.11(l)(4)(B)(i) and (ii). Proposed Rule
14.11(l)(4)(B)(i) provides that the
Exchange will consider the suspension
of trading in, and will commence
delisting proceedings under Rule 14.12
for, a series of ETF Shares under any of
the following circumstances: (a) If the
Exchange becomes aware that the issuer
38 The Exchange notes that eligibility to operate
in reliance on Rule 6c–11 does not necessarily
mean that an investment company would be listed
on the Exchange pursuant to proposed Rule
14.11(l). To this point, an investment company that
operates in reliance on 6c–11 could also be listed
as a series of Index Fund Shares or Managed Fund
Shares pursuant to Rule 14.11(c) or 14.11(i),
respectively, and would be subject to all
requirements under each of those rules. Further to
this point, in the event that a series of ETF Shares
listed on the Exchange preferred to be listed as a
series of Index Fund Shares or Managed Fund
Shares (as applicable), nothing would preclude
such a series from changing to be listed as a series
of Index Fund Shares or Managed Fund Shares (as
applicable), as long as the series met each of the
initial and continued listing obligations under the
applicable rules.
PO 00000
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20317
of the ETF Shares is no longer eligible
to operate in reliance on Rule 6c–11
under the Investment Company Act of
1940; (b) if any of the other listing
requirements set forth in this Rule
14.11(l) are not continuously
maintained; (c) if, following the initial
twelve month period after
commencement of trading on the
Exchange of a series of ETF Shares,
there are fewer than 50 beneficial
holders of the series of ETF Shares for
30 or more consecutive trading days; or
(d) if such other event shall occur or
condition exists which, in the opinion
of the Exchange, makes further dealings
on the Exchange inadvisable. The
Exchange notes that it may become
aware that the issuer is no longer
eligible to operate in reliance on Rule
6c–11, as described in proposed Rule
14.11(l)(4)(B)(i)(a), as a result of either
the Exchange identifying noncompliance through its own monitoring
process or through notification by the
issuer. Proposed Rule 14.11(l)(4)(B)(ii)
provides that upon termination of an
investment company, the Exchange
requires that ETF Shares issued in
connection with such entity be removed
from Exchange listing. The Exchange
also notes that it will obtain a
representation from the issuer of each
series of ETF Shares stating that the
requirements of Rule 6c–11 will be
continuously satisfied and that the
issuer will notify the Exchange of any
failure to do so.
The Exchange further believes that
proposed Rule 14.11(l) is designed to
prevent fraudulent and manipulative
acts and practices because of the robust
surveillances in place on the Exchange
as required under proposed Rule
14.11(l)(2)(C) along with the similarities
of proposed Rule 14.11(l) to the rules
related to other securities that are
already listed and traded on the
Exchange and which would qualify as
ETF Shares. Proposed Rule 14.11(l) is
based in large part on Rules 14.11(c) and
(i) related to the listing and trading of
Index Fund Shares and Managed Fund
Shares on the Exchange, respectively,
both of which are issued under the 1940
Act and would qualify as ETF Shares
after Rule 6c–11 is effective. Rule
14.11(c) and 14.11(i) are very similar,
their primary difference being that
Index Fund Shares are designed to track
an underlying index and Managed Fund
Shares are based on an actively
managed portfolio that is not designed
to track an index. As such, the Exchange
believes that using the Current ETF
Standards as the basis for proposed Rule
14.11(l) is appropriate because they are
generally designed to address the issues
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associated with ETF Shares. The only
substantial differences between
proposed Rule 14.11(l) and the Current
ETF Standards that are not otherwise
required under Rule 6c–11 are as
follows: (i) Proposed Rule 14.11(l) does
not include the quantitative standards
applicable to a fund or an index that are
included in the Current ETF Standards;
and (ii) proposed Rule 14.11(l) does not
include any requirements related to the
dissemination of a fund’s Intraday
Indicative Value.
Quantitative Standards
The Exchange believes that the
proposal is consistent with Section
6(b)(1) of the Act 39 in that, in addition
to being designed to prevent fraudulent
and manipulative acts and practices, the
Exchange has the capacity to enforce
proposed Rule 14.11(l) by performing
ongoing surveillance of ETF Shares
listed on the Exchange in order to
ensure compliance with Rule 6c–11 and
the 1940 Act on an ongoing basis. While
proposed Rule 14.11(l) does not include
the quantitative requirements applicable
to a fund and a fund’s holdings or
underlying index that are included in
Rules 14.(c) and 14.11(i),40 the
Exchange believes that the manipulation
concerns that such standards are
intended to address are otherwise
mitigated by a combination of the
Exchange’s surveillance procedures, the
Exchange’s ability to halt trading under
the proposed Rule 14.11(l)(4)(B)(ii), and
the Exchange’s ability to suspend
trading and commence delisting
proceedings under proposed Rule
14.11(l)(4)(B)(i). The Exchange also
believes that such concerns are further
mitigated by enhancements to the
arbitrage mechanism that will come
from compliance with Rule 6c–11,
specifically the additional flexibility
provided to issuers of ETF Shares
through the use of custom baskets for
creations and redemptions and the
additional information made available
to the public through the additional
daily website disclosure obligations
applicable under Rule 6c–11.41 The
Exchange believes that the combination
of these factors will act to keep ETF
Shares trading near the value of their
underlying holdings and further
39 15
U.S.C. 78f(b)(1).
Exchange notes that Rules 14.11(c) and (i)
include certain Holdings Standards and
Distribution Standards. The Exchange believes that
to the extent that manipulation concerns are
mitigated based on the factors described herein,
such concerns are mitigated both as it relates to the
Holdings Standards and the Distribution Standards.
41 The Exchange notes that the Commission came
to a similar conclusion in several places in the Rule
6c–11 Release. See Rule 6c–11 Release at 15–18;
60–61; 69–70; 78–79; 82–84; and 95–96.
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40 The
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mitigate concerns around manipulation
of ETF Shares on the Exchange without
the inclusion of quantitative
standards.42 The Exchange will monitor
for compliance with Rule 6c–11 in order
to ensure that the continued listing
standards are being met. Specifically,
the Exchange plans to review the
website of series of ETF Shares in order
to ensure that the requirements of Rule
6c–11 are being met. The Exchange will
also employ numerous intraday alerts
that will notify Exchange personnel of
trading activity throughout the day that
is potentially indicative of certain
disclosures not being made accurately
or the presence of other unusual
conditions or circumstances that could
be detrimental to the maintenance of a
fair and orderly market. As a backstop
to the surveillances described above, the
Exchange also notes that Rule 14.11(a)
would require an issuer of ETF Shares
to notify the Exchange of any failure to
comply with Rule 6c–11 or the 1940
Act.
To the extent that any of the
requirements under Rule 6c–11 or the
1940 Act are not being met, the
Exchange may halt trading in a series of
ETF Shares as provided in proposed
Rule 14.11(l)(4)(B)(ii). Further, the
Exchange may also suspend trading in
and commence delisting proceedings for
a series of ETF Shares where such series
is not in compliance with the applicable
listing standards or where the Exchange
believes that further dealings on the
Exchange are inadvisable.43 The
Exchange also notes that Rule 14.11(a)
requires any issuer to provide the
Exchange with prompt notification after
it becomes aware of any non42 The Exchange believes that this applies to all
quantitative standards, whether applicable to the
portfolio holdings of a series of ETF Shares or the
distribution of the ETF Shares.
43 Specifically, proposed Rule 14.11(l)(4)(B)
provides that each series of ETF Shares will be
listed and traded on the Exchange subject to
application of Proposed Rule 14.11(l)(4)(B)(i) and
(ii). Proposed Rule 14.11(l)(4)(B)(i) provides that the
Exchange will consider the suspension of trading
in, and will commence delisting proceedings under
Rule 14.12 for, a series of ETF Shares under any of
the following circumstances: (a) If the Exchange
becomes aware that the issuer of the ETF Shares is
no longer eligible to operate in reliance on Rule 6c–
11 under the Investment Company Act of 1940; (b)
if any of the other listing requirements set forth in
this Rule 14.11(l) are not continuously maintained;
(c) if, following the initial twelve month period
after commencement of trading on the Exchange of
a series of ETF Shares, there are fewer than 50
beneficial holders of the series of ETF Shares for 30
or more consecutive trading days; or (d) 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(l)(4)(B)(ii) provides that upon
termination of an investment company, the
Exchange requires that ETF Shares issued in
connection with such entity be removed from
Exchange listing.
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compliance with proposed Rule
14.11(l), which would include any
failure of the issuer to comply with Rule
6c–11 or the 1940 Act.44
Further, the Exchange also represents
that its surveillance procedures are
adequate to properly monitor the
trading of the ETF Shares in all trading
sessions and to deter and detect
violations of Exchange rules.
Specifically, the Exchange intends to
utilize its existing surveillance
procedures applicable to derivative
products, which are currently
applicable to Index Fund Shares and
Managed Fund Shares, among other
product types, to monitor trading in ETF
Shares. The Exchange or FINRA, on
behalf of the Exchange, will
communicate as needed regarding
trading in ETF Shares and certain of
their applicable underlying components
with other markets that are members of
the ISG or with which the Exchange has
in place a comprehensive surveillance
sharing agreement. In addition, the
Exchange may obtain information
regarding trading in ETF Shares and
certain of their applicable underlying
components from markets and other
entities that are members of ISG or with
which the Exchange has in place a
comprehensive surveillance sharing
agreement. Additionally, FINRA, on
behalf of the Exchange, is able to access,
as needed, trade information for certain
fixed income securities that may be held
by a series of ETF Shares reported to
FINRA’s TRACE. FINRA also can access
data obtained from the MSRB’s EMMA
system relating to municipal bond
trading activity for surveillance
purposes in connection with trading in
a series of ETF Shares, to the extent that
a series of ETF Shares holds municipal
securities. Finally, as noted above, the
issuer of a series of ETF Shares will be
required to comply with Rule 10A–3
under the Act for the initial and
continued listing of Exchange-Traded
Fund Shares, as provided under Rule
14.10(e)(1)(E) and Interpretation and
Policy .13 to Rule 14.10.45
Intraday Indicative Value
As described above, proposed Rule
14.11(l) does not include any
requirements related to the
44 The Exchange notes that failure by an issuer to
notify the Exchange of non-compliance pursuant to
Rule 14.11(a) would itself be considered noncompliance with the requirements of Rule 14.11
and would subject the series of ETF Shares to
potential trading halts and the delisting process
under Rule 14.12.
45 The Exchange notes that these proposed
changes would subject ETF Shares to the same
corporate governance requirements as other openend management investment companies listed on
the Exchange.
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dissemination of an Intraday Indicative
Value. Both Rule 14.11(c) and Rule
14.11(i) include the requirement that a
series of Index Fund Shares and
Managed Fund Shares, respectively,
disseminate and update an Intraday
Indicative Value at least every 15
seconds.46 The Exchange believes that it
is consistent with the Act to not require
the calculation and dissemination of the
Intraday Indicative Value for the same
reasons enumerated in the Rule 6c–11
Release, which specifically discusses
and describes why Rule 6c–11 does not
require ETFs to publicly calculate and
disseminate the Intraday Indicative
Value,47 and a separate Exchange
proposal to eliminate the requirement to
calculate and disseminate the Intraday
Indicative Value for certain series of
Index Fund Shares and Managed Fund
Shares.48
As such, the Exchange believes that it
is appropriate and consistent with the
Act to not include a requirement for the
dissemination of an IIV for a series of
ETF Shares to be listed on the Exchange.
The Exchange also believes that the
proposed rule change is designed to
promote just and equitable principles of
trade and to protect investors and the
public interest in that a large amount of
information will be publicly available
regarding the Funds and the Shares,
thereby promoting market transparency.
Quotation and last sale information for
ETF Shares will be available via the
CTA high-speed line. The website for
each series of ETF Shares will include
a form of the prospectus for the Fund
that may be downloaded, and additional
data relating to NAV and other
applicable quantitative information,
updated on a daily basis. Moreover,
prior to the commencement of trading,
the Exchange will inform its members in
a circular of the special characteristics
and risks associated with trading in the
series of ETF Shares. As noted above,
series of ETF Shares will not be required
to publicly disseminate an IIV. The
Exchange continues to believe that this
proposal is consistent with the Act and
is designed to promote just and
equitable principles of trade and to
protect investors and the public interest
because the transparency that comes
from daily portfolio holdings disclosure
as required under Rule 6c–11 provides
market participants with sufficient
46 See Rules 14.11(c)(3)(C), 14.11(c)(6)(A), and
14.11(c)(9)(B)(e) related to Index Fund Shares and
Rules 14.11(i)(3)(C), 14.11(i)(4)(B)(i),
14.11(i)(4)(B)(iii)(b), and 14.11(i)(4)(B)(iv) related to
Managed Fund Shares.
47 See Rule 6c–11 Release at 61–66.
48 See Securities Exchange Act Release No. 88259
(February 21, 2020), 85 FR 11419 (February 27,
2020) (SR–CboeBZX–2020–007).
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information to facilitate the intraday
valuation of ETF Shares, rendering the
dissemination of the IIV unnecessary.
The Exchange notes that it is not
proposing to prohibit the dissemination
of an IIV for a series of ETF Shares and
believes that there could be certain
instances in which the dissemination of
an IIV could provide valuable
information to the investing public. The
Exchange proposes to leave that
decision to an issuer of ETF Shares and
is simply not proposing to require the
dissemination of an IIV.
Based on the foregoing discussion
regarding proposed Rule 14.11(l) and its
similarities to and differences between
the Current ETF Standards, the
Exchange believes that the proposal is
consistent with the Act and is designed
to prevent fraudulent and manipulative
transactions and that the manipulation
concerns that the quantitative standards
and the IIV requirements are designed to
address are otherwise mitigated by the
proposal and the new daily website
disclosure obligations and flexibility
under Rule 6c–11.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of ETF Shares in a manner that will
enhance competition among market
participants, to the benefit of investors
and the marketplace. The Exchange
believes that approval of this proposal
will streamline current procedures,
reduce the costs and timeline associated
with bringing ETFs to market, and
provide significantly greater regulatory
certainty to potential issuers
considering bringing ETF Shares to
market, thereby enhancing competition
among ETF issuers and reducing costs
for investors.49
The Exchange also believes that the
corresponding change to amend Rule
14.10(e)(1)(E) and Interpretation and
49 In approving the rule, the Commission stated
that the ‘‘rule will modernize the regulatory
framework for ETFs to reflect our more than two
decades of experience with these investment
products. The rule is designed to further important
Commission objectives, including establishing a
consistent, transparent, and efficient regulatory
framework for ETFs and facilitating greater
competition and innovation among ETFs.’’ Rule 6c–
11 Release, at 57163. The Commission also stated
the following regarding the rule’s impact: ‘‘We
believe rule 6c–11 will establish a regulatory
framework that: (1) Reduces the expense and delay
currently associated with forming and operating
certain ETFs unable to rely on existing orders; and
(2) creates a level playing field for ETFs that can
rely on the rule. As such, the rule will enable
increased product competition among certain ETF
providers, which can lead to lower fees for
investors, encourage financial innovation, and
increase investor choice in the ETF market.’’ Rule
6c–11 Release, at 57204.
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Policy .13 to Rule 14.10 in order to add
ETF Shares to a list of product types
listed on the Exchange, including Index
Fund Shares, Managed Fund Shares,
and Managed Portfolio Shares, that are
exempted from the Audit Committee
requirements set forth in Rule
14.10(c)(3), except for the applicable
requirements of SEC Rule 10A–3
because it is a non-substantive change
meant only to subject ETF Shares to the
same corporate governance
requirements currently applicable to
Index Fund Shares and Managed Fund
Shares. All other corporate governance
requirements that ETF Shares are not
specifically exempted from will
otherwise apply. The Exchange also
believes that the non-substantive change
to amend Rule 14.11(c)(3)(A)(i)(a) in
order to include ETF Shares in the
definition of Derivative Securities
Products is also a non-substantive
change because it is just intended to add
ETF Shares to a definition that includes
Index Fund Shares and Managed Fund
Shares in order to make sure that ETF
Shares are treated consistently with
Index Fund Shares and Managed Fund
Shares throughout the Exchange’s rules.
Finally, the Exchange believes that
eliminating the quarterly reporting
requirement for Managed Fund Shares
is designed to prevent fraudulent and
manipulative acts and practices and, in
general, to protect investors and the
public interest because the report no
longer serves the purpose for which it
was originally intended. The type of
information provided in the reports was
created to provide a window into the
creation and redemption process for
Managed Fund Shares in order to ensure
that the arbitrage mechanism would
work as expected for products that were
listed pursuant to the newly approved
generic listing standards. The Exchange
and Commission have had several years
of this reporting process and no
significant issues have arisen. The
Exchange believes that this speaks
further to the maturity of the
marketplace for ETFs and, further, Rule
6c–11 collapsing the difference between
Index Fund Shares and Managed Fund
Shares indicates a general comfort with
Managed Fund Shares that further
justifies eliminating this reporting
obligation. In the Rule 6c–11 Release,
the Commission concluded that ‘‘the
arbitrage mechanism for existing
actively managed ETFs has worked
effectively with small deviations
between market price and NAV per
share.’’ 50 The Exchange generally agrees
with this conclusion and, while such
quarterly reports were useful when
50 See
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Managed Fund Shares were first able to
be listed pursuant to generic listing
standards, the Exchange believes that
such a window into the creation and
redemption process for Managed Fund
Shares no longer provides useful
information related to the prevention of
manipulation or protection of investors
which it was originally designed to
provide. Further, because the same
general types of information provided in
those reports will be made available
under Rule 6c–11 directly from the
issuers of such securities the Exchange
also believes that it is consistent with
the Act to remove this reporting
obligation because it will be duplicative
and no longer necessary.
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. To the
contrary, the Exchange believes that the
proposed rule change would enhance
competition by streamlining current
procedures, reducing the costs and
timeline associated with bringing ETFs
to market, and providing significantly
greater regulatory certainty to potential
issuers considering bringing ETF Shares
to market, all of which the Exchange
believes would enhance competition
among ETF issuers and reduce costs for
investors. The Exchange also believes
that the proposed change would
enhance competition among ETF Shares
by ensuring the application of uniform
listing standards.
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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. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change, as
modified by Amendment No. 2, is
consistent with the Act and rules and
regulations thereunder applicable to a
national securities exchange.51 In
particular, the Commission finds that
the proposed rule change, as modified
51 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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by Amendment No. 2, is consistent with
Section 6(b)(5) of the Act,52 which
requires, among other things, that the
Exchange’s rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
A. Proposed BZX Rule 14.11(l)
As an initial matter, the Commission
notes that the Exchange currently has
generic listing standards for Index Fund
Shares, Managed Fund Shares, and
Portfolio Depositary Receipts,53 and
therefore proposed Rule 14.11(l) would
not permit the Exchange to generically
list any novel product types. The
Commission also notes that a number of
the provisions of proposed Rule 14.11(l)
are substantively identical to provisions
of other BZX listing rules.54
The Commission believes that
proposed BZX Rule 14.11(l) is
reasonably designed to help prevent
fraudulent and manipulative acts and
practices. A central qualification for
listing under the proposed rule is
ongoing compliance with Rule 6c–11
under the 1940 Act, which requires,
among other things, ETFs to
prominently disclose the portfolio
holdings that will form the basis for
each calculation of net asset value per
share.55 Because initial and ongoing
compliance with Rule 6c–11 of the 1940
Act is a condition for listing and trading
on the Exchange, the proposed rule
would permit Nasdaq to list and trade
shares of an investment company with
a fully transparent portfolio,56 and the
Commission believes that portfolio
transparency should help prevent
manipulation of the price of ETF
Shares.57 Additionally, proposed BZX
Rule 14.11(l) includes requirements
52 15
U.S.C. 78f(b)(5).
BZX Rules.
54 See supra notes 17, 19, and 20 and
accompanying text, respectively. Additionally, the
proposed definition of ‘‘Reporting Authority’’ is
based on the definitions in BZX Rules 14.11(c)(1)(C)
and 14.11(i)(3)(D). See supra note 18.
55 See Rule 6c–11 Release, supra note 12, at
57180–81.
56 See supra note 9. The Commission also noted
that, with respect to ETF portfolio transparency, the
disclosures are designed to promote an effective
arbitrage mechanism and inform investors about the
risks of deviation between market price and net
asset value when deciding whether to invest in
ETFs generally or in a particular ETF. See Rule 6c–
11 Release, supra note 12, at 57166.
57 See id. at 57169 (concluding that portfolio
transparency combined with existing requirements
should be sufficient to protect against certain
abuses).
53 See
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relating to fire walls and procedures to
prevent the use and dissemination of
material, non-public information
regarding the applicable ETF index and
portfolio,58 all such requirements of
which are designed to prevent
fraudulent and manipulative acts and
practices.59 The Commission
specifically notes that certain of these
requirements relating to such fire walls
and procedures, which are substantively
identical to BZX’s rules governing the
listing and trading of index-based and
actively managed ETFs, apply in
addition to what is already required
under the Act and the 1940 Act and
respective rules and regulations
thereunder, and the Commission
believes that such requirements
collectively provide additional
protections against the potential misuse
of material, non-public information.
Therefore, the Commission concludes
that the proposed requirements relating
to such fire walls and procedures,
combined with ETF portfolio
transparency and the existing
requirements under the Act and 1940
Act, should help to protect against
fraudulent and manipulative acts and
practices under Section 6(b)(5) of the
Act.
Proposed BZX Rule 14.11(l)(2)(C)
requires that the Exchange implement
and maintain written surveillance
58 For example, proposed BZX Rule
14.11(l)(4)(A)(ii) provides that if the index
underlying a series of ETF Shares is maintained by
a broker-dealer or fund adviser, the broker-dealer or
fund adviser shall erect and maintain a ‘‘fire wall’’
around the personnel who have access to
information concerning changes and adjustments to
the index and the index will be calculated by a
third party who is not a broker-dealer or fund
adviser. Proposed BZX Rule 14.11(l)(4)(A)(ii)
further states that if the investment adviser to an
ETF is affiliated with a broker-dealer, such
investment adviser will 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 the
underlying portfolio. Proposed BZX Rule
14.11(l)(4)(A)(iii) requires that any advisory
committee, supervisory board, or similar entity that
advises a Reporting Authority or that makes
decisions on the composition, methodology and
related matters, of an index underlying a series of
ETF Shares must implement and maintain, or be
subject to, procedures designed to prevent the use
and dissemination of material non-public
information regarding the applicable index. In
addition, for actively managed ETFs, personnel who
make decisions on the portfolio composition must
be subject to procedures designed to prevent the use
and dissemination of material non-public
information regarding the applicable portfolio. See
generally proposed BZX Rule 14.11(l)(4)(A).
59 In adopting Rule 6c–11, the Commission
determined that the safeguards in the existing
regulatory regime adequately address ‘‘special
concerns that self-indexed ETFs present, including
the potential ability of an affiliated index provider
to manipulate an underlying index to the benefit or
detriment of a self-indexed ETF.’’ Rule 6c–11
Release, supra note 12, 84 FR at 57168.
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procedures for ETF Shares. The
Exchange will employ its existing
surveillance procedures applicable to
derivative products, which are currently
applicable to Index Fund Shares and
Managed Fund Shares, to trading in ETF
Shares, and represents that its
surveillance procedures are adequate to
(a) properly monitor the trading of such
securities during all trading sessions
and (b) deter and detect violations of
Exchange rules and the applicable
federal securities laws. The Exchange
represents that, consistent with Section
6(b)(1) of the Act, it has the capacity to
enforce proposed BZX Rule 14.11(l) by
performing ongoing surveillance of ETF
Shares listed on the Exchange in order
to ensure compliance with Rule 6c–11
and the 1940 Act on an ongoing basis.60
Further, the Exchange represents that it,
or FINRA on behalf of the Exchange,
will communicate as needed regarding
trading in ETF Shares and certain of
their applicable underlying components
with other markets that are members of
the ISG or with which BZX has in place
a comprehensive surveillance sharing
agreement. The Exchange represents
that it will perform ongoing surveillance
of ETF Shares listed on the Exchange in
order to ensure compliance with Rule
6c–11 under the 1940 Act on an ongoing
basis. The Exchange also notes that BZX
Rule 14.11(a) requires any issuer to
provide the Exchange with prompt
notification after it becomes aware of
any non-compliance with proposed
Rule 14.11(l), which would include any
failure of the issuer to comply with Rule
6c–11 or the 1940 Act.61 Additionally,
BZX plans to review the website of
series of ETF Shares in order to ensure
that the requirements of Rule 6c–11 are
being met. Finally, proposed BZX Rule
14.11(l)(4)(B)(i)(c) requires that the
Exchange commence delisting
proceedings for a series of ETF Shares
if, following the initial 12-month period
60 The Commission also finds that the proposed
rule change, as modified by Amendment No. 2, is
consistent with Section 6(b)(1) of the Act (15 U.S.C.
78f(b)(1)), which requires (among other things) that
a national securities exchange be organized and
have the capacity to comply with its own rules. The
Exchange represents that it will: (1) Monitor for
compliance with Rule 6c–11 under the 1940 Act to
ensure that the continued listing standards are
being met; (2) review the website of series of ETF
Shares to ensure that the requirements of Rule 6c–
11 under the 1940 Act are being met; and (3) obtain
a representation from the issuer of each series of
ETF Shares that the requirements of proposed BZX
Rule 14.11(l) will be satisfied and that the issuer
will notify the Exchange of any failure to do so.
61 The Exchange further represents that failure by
an issuer to notify the Exchange of non-compliance
pursuant to Rule 14.11(a) would itself be
considered non-compliance with the requirements
of BZX Rule 14.11 and would subject the series of
ETF Shares to potential trading halts and the
delisting process under BZX Rule 14.12.
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after commencement of trading on the
Exchange, there are fewer than 50
beneficial holders of such series of ETF
Shares for 30 or more consecutive
trading days.
Consistent with the requirement of
Section 6(b)(5) of the Act 62 that the
Exchange’s rules be designed to remove
impediments to and perfect the
mechanism of a free and open market,
the Exchange’s rules regarding trading
halts will help to ensure the
maintenance of fair and orderly markets
for ETF Shares. Specifically, as
discussed above, the Exchange may
consider all relevant factors in
exercising its discretion to halt or
suspend trading in a series of ETF
Shares. BZX states that trading in ETF
Shares will be halted if the circuit
breaker parameters in BZX Rule 11.18
have been reached or when the
Exchange becomes aware that the net
asset value for a series of ETF Shares is
not being disseminated to all market
participants at the same time.63
Additionally, trading may be halted
because of market conditions or for
reasons that, in the view of the
Exchange, make trading in ETF Shares
inadvisable. As BZX represents in the
proposal, examples of such market
conditions or reasons may be: (1) The
extent to which certain information
about the ETF Shares that is required to
be disclosed under Rule 6c–11 of the
1940 Act is not being made available; (2)
if an interruption to the dissemination
to the value of the index or reference
asset on which a series of ETF Shares
is based persists past the trading day in
which it occurred or is no longer
calculated or available; (3) trading in the
securities comprising the underlying
index or portfolio has been halted in the
primary market(s); or (4) in the presence
of other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market. Further, BZX will employ
numerous intraday alerts that will notify
Exchange personnel of trading activity
throughout the day that is potentially
indicative of certain disclosures not
being made accurately or the presence
of other unusual conditions or
circumstances that could be detrimental
to the maintenance of a fair and orderly
market.64 The Exchange also may
suspend trading in and commence
delisting proceedings for a series of ETF
Shares where such series is not in
compliance with the applicable listing
standards or where the Exchange
62 15
U.S.C. 78f(b)(5).
supra note 30 and accompanying text.
64 See Amendment No. 2, supra note 8, at 15.
63 See
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believes that further dealings on the
Exchange are inadvisable.
B. Discontinuance of Quarterly Reports
of Generically Listed Managed Fund
Shares
In support of its proposal to adopt
generic listing standards for Managed
Fund Shares, the Exchange proposed to
submit quarterly reports to the
Commission disclosing certain
information.65 These reports were
designed to identify problems
associated with generically listed
Managed Fund Shares. In adopting Rule
6c–11 under the 1940 Act, the
Commission largely eliminated prior
distinctions between actively managed
and index-based ETFs, and BZX does
not submit quarterly reports regarding
the shares of index-based ETFs that it
generically lists. In addition, the
Commission recognizes that, since the
adoption of the Managed Fund Shares
generic listing standards, the
marketplace for ETFs has matured and
developed, an increased number of
actively managed ETFs have been listed
and are trading on national securities
exchanges, and market participants have
become more familiar with such
securities. Moreover, proposed BZX
Rule 14.11(l)(2)(C) requires that the
Exchange implement and maintain
written surveillance procedures for ETF
Shares.66 The Exchange represents that
it intends to utilize its existing
surveillance procedures applicable to
derivative products, which will include
ETF Shares, to monitor trading in the
ETF Shares, and will perform ongoing
surveillance of ETF Shares listed on the
Exchange to ensure compliance with
Rule 6c–11 and the 1940 Act on an
ongoing basis. The Commission notes
that manipulation concerns are
mitigated by a combination of the
Exchange’s surveillance procedures,
BZX’s ability to halt trading under
proposed BZX Rule 14.11(l),67 and the
Exchange’s ability to commence
65 The information included in these reports is
summarized above. See supra note 35 and
accompanying text.
66 Moreover, BZX Rule 14.11(i)(2)(C) requires that
the Exchange implement and maintain written
surveillance procedures for Managed Fund Shares.
67 The Exchange states that it may consider all
relevant factors in exercising its discretion to halt
or suspend trading in a series of ETF Shares, and
that it may halt trading due to market conditions
that make trading in the ETF Shares inadvisable,
including the following circumstances: (1) Where
the Exchange becomes aware that the net asset
value with respect to a series of ETF Shares is not
disseminated to all market participants at the same
time; and (2) if an interruption to the dissemination
to the value of the index or reference asset on which
a series of ETF Shares is based persists past the
trading day in which it occurred or is no longer
calculated or available.
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delisting proceedings under proposed
BZX Rule 14.11(l)(4)(i). In light of these
reasons, as well as the Commission’s
experience with the quarterly reports,
the Commission believes that this
proposal is consistent with Section
6(b)(5) of the Act, and it therefore finds
that it is no longer necessary for BZX to
continue to submit such quarterly
reports.
C. Other Related Rule Changes
The Exchange proposes to: (1) Expand
the definition of ‘‘Derivative Securities
Products’’ in BZX Rule
14.11(c)(3)(A)(i)(a) to include ETF
Shares; and (2) exempt ETF Shares from
certain corporate governance
requirements by including ETF Shares
among the product types enumerated in
BZX Rules 14.10(e)(1)(E) and
Interpretations and Policies .13 to BZX
Rule 14.10.68 The Exchange states that
these changes will subject ETF Shares to
the same corporate governance
requirements currently applicable to
Index Fund Shares and Managed Fund
Shares. The Commission believes that
these proposed changes simply
incorporate proposed BZX Rule 14.11(l)
into the existing framework of BZX’s
rules, and therefore finds that such
changes are consistent with Section
6(b)(5) of the Act.
D. Exchange Representations
In support of this proposal, the
Exchange has made the following
representations:
(1) BZX deems ETF Shares to be
equity securities, thus rendering trading
in ETF Shares subject to the Exchange’s
existing rules governing the trading of
equity securities.69 The Exchange notes
that ETF Shares will be subject to rules
governing Exchange member disclosure
obligations in connection with equities
trading, and that Rule 6c–11 does not
change the applicability of these
Exchange rules with respect to these
securities.70
(2) BZX will (a) monitor for
compliance with Rule 6c–11 to ensure
that the continued listing standards are
being met; (b) review the website of
series of ETF Shares to ensure that the
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68 Under
the current version of these rules, Index
Fund Shares and Managed Fund Shares are
exempted from the specified corporate governance
requirements.
69 See supra note 14.
70 With respect to trading in ETF Shares, the
Exchange represents that all of the BZX member
obligations relating to product description and
prospectus delivery requirements will continue to
apply in accordance with the Exchange rules and
federal securities laws, and BZX will continue to
monitor its members for compliance with such
requirements, which are not changing as a result of
Rule 6c–11 under the 1940 Act. See supra note 14.
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requirements of Rule 6c–11 are being
met; and (c) employ numerous intraday
alerts that will notify Exchange
personnel of unusual trading activity
throughout the day that could be
indicative of unusual conditions or
circumstances that could be detrimental
to the maintenance of a fair and orderly
market.71
(3) BZX will obtain a representation
from the issuer of ETF Shares that the
net asset value for the series will be
calculated daily and will be made
available to all market participants at
the same time.72 BZX will also obtain a
representation from the issuer of each
series of ETF Shares that the
requirements of Rule 6c–11 will be
continuously satisfied and that the
issuer will notify the Exchange of any
failure to do so.73
(4) BZX’s surveillance procedures are
adequate to properly monitor the
trading of the ETF Shares in all trading
sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws.74
(5) The Exchange, or FINRA on behalf
of the Exchange, will communicate as
needed regarding trading in ETF Shares
and certain of their applicable
underlying components with other
markets that are members of the ISG or
with which the Exchange has in place
a comprehensive surveillance sharing
agreement. Additionally, FINRA, on
behalf of the Exchange, is able to access,
as needed, trade information for certain
fixed income securities that may be held
by a series of ETF Shares reported to
TRACE. FINRA also can access data
obtained from the EMMA system
relating to municipal bond trading
activity for surveillance purposes in
connection with trading in a series of
ETF Shares, to the extent that a series
of ETF Shares holds municipal
securities.75
(6) The issuer of a series of ETF
Shares will be required to comply with
Rule 10A–3 under the Act for the initial
and continued listing of ETF Shares, as
provided under BZX Rule 14.10(e)(1)(E)
71 See Amendment No. 2, supra note 8, at 15. The
Exchange also notes that BZX Rule 14.11(a) would
require an issuer of ETF Shares to notify BZX of any
failure to comply with Rule 6c–11 or the 1940 Act.
See id. The Exchange notes that failure by an issuer
to notify the Exchange of non-compliance pursuant
to Rule 14.11(a) would itself be considered noncompliance with the requirements of Rule 14.11
and would subject the series of ETF Shares to
potential trading halts and the delisting process
under Rule 14.12. See id. at 16, n.22.
72 See id. at 18, n.24.
73 See id. at 22.
74 See id. at 16.
75 See id. at 16–17.
PO 00000
Frm 00084
Fmt 4703
Sfmt 4703
and Interpretation and Policy .13 to BZX
Rule 14.10.76
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
Amendment No. 2. For the foregoing
reasons, the Commission finds that the
proposed rule change, as modified by
Amendment No. 2, is consistent with
Sections 6(b)(1) and 6(b)(5) of the Act 77
and the rules and regulations
thereunder applicable to a national
securities exchange.
IV. Solicitation of Comments to the
Proposed Rule Change, as Modified by
Amendment No. 2
Interested persons are invited to
submit written data, views, and
arguments concerning whether
Amendment No. 2 to 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 rule-comments@
sec.gov. Please include File Number SR–
CboeBZX–2019–097 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–2019–097. 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,
76 The Exchange also notes that these proposed
changes would subject ETF Shares to the same
corporate governance requirements as other openend management investment companies listed on
the Exchange. See id. at 17.
77 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5),
respectively.
E:\FR\FM\10APN1.SGM
10APN1
Federal Register / Vol. 85, No. 70 / Friday, April 10, 2020 / Notices
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–2019–097, and
should be submitted on or before May
1, 2020.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 2, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 2 in the Federal
Register. In Amendment No. 2, the
Exchange (among other things): (1)
Modified the circumstances in which it
will consider suspending trading in a
series of ETF Shares; (2) broadened its
undertakings with respect to ensuring
compliance with the proposed generic
listing standard; (3) clarified that ETF
Shares would be subject to all Exchange
rules applicable to equities trading,
including rules governing Exchange
member disclosure obligations; and (4)
clarified the applicability of certain
current listing rules in light of proposed
BZX Rule 14.11(l). Amendment No. 2
also provides other clarifications and
additional information in support of the
proposed rule change. These changes, as
well as additional information in
Amendment No. 2, assisted the
Commission in finding that the proposal
is consistent with the Act. Accordingly,
the Commission finds good cause,
pursuant to Section 19(b)(2) of the
Exchange Act,78 to approve the
proposed rule change, as modified by
Amendment No. 2, on an accelerated
basis.
lotter on DSKBCFDHB2PROD with NOTICES
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 79 that the
proposed rule change (SR–CboeBZX–
2019–097), as modified by Amendment
No. 2, be, and it hereby is, approved on
an accelerated basis.
78 15
U.S.C. 78s(b)(2).
[FR Doc. 2020–07550 Filed 4–9–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88572; File No. SR–NYSE–
2020–30]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Waive the
Application of Certain of the
Shareholder Approval Requirements in
Section 312.03 of the NYSE Listed
Company Manual Through June 30,
2020 Subject to Certain Conditions
April 6, 2020.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on April 3,
2020, New York Stock Exchange LLC
(‘‘NYSE’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to waive
through and including June 30, 2020 the
application of certain of the shareholder
approval requirements set forth in
Section 312.03 of the NYSE Listed
Company Manual (‘‘Manual’’) subject to
certain conditions. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
79 Id.
80 17
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.80
J. Matthew DeLesDernier,
Assistant Secretary.
2 15
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
18:00 Apr 09, 2020
Jkt 250001
PO 00000
Frm 00085
Fmt 4703
20323
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The U.S. and global economies have
experienced unprecedented disruption
as a result of the ongoing spread of
COVID–19, including severe limitations
on companies’ ability to operate their
businesses, dramatic market declines
and volatility in the U.S. and global
equity markets, and severe disruption in
the credit markets. The Exchange
believes that it is likely that many listed
companies will have urgent liquidity
needs in the coming months due to lost
revenues and maturing debt obligations.
In those circumstances, listed
companies will need to access
additional capital that may not be
available in the public equity or credit
markets. When similar conditions
existed after the financial crisis of 2008–
09, the Exchange observed that many
companies sought capital by selling
significant amounts of equity in private
placement transactions to a single
investor or small group of investors, in
many cases limited to or including
existing major shareholders in the
company. The Exchange notes that
companies raising capital in that
manner at that time were often limited
by the NYSE’s shareholder approval
requirements with respect to the size
and structure of the transactions they
were able to undertake.
Section 312.03 of the Manual, which
requires listed companies to acquire
shareholder approval prior to certain
kinds of equity issuances, imposes
significant limitations on the ability of
a listed company to engage in the sort
of large private placement transaction
described above. The most important
limitations are as follows:
• Issuance to a Related Party. Subject
to an exception for early stage
companies set forth therein, Section
312.03(b) of the Manual requires
shareholder approval of any issuance to
a director, officer or substantial security
holder 4 of the company (each a
4 For purposes of Section 312.03(b), Section
312.04(e) provides that: ‘‘An interest consisting of
less than either five percent of the number of shares
of common stock or five percent of the voting power
Continued
Sfmt 4703
E:\FR\FM\10APN1.SGM
10APN1
]]>Agencies
[Federal Register Volume 85, Number 70 (Friday, April 10, 2020)]
[Notices]
[Pages 20312-20323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-07550]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88566; File No. SR-CboeBZX-2019-097]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, To Adopt BZX Rule
14.11(l) Governing the Listing and Trading of Exchange-Traded Fund
Shares
April 6, 2020.
On November 15, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to, among other things, adopt new BZX Rule
14.11(l) to list and trade Exchange-Traded Fund Shares. The proposed
rule change was published for comment in the Federal Register on
November 22, 2019.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 87560 (November 18,
2019), 84 FR 64607.
---------------------------------------------------------------------------
On December 17, 2019, pursuant to Section 19(b)(2) of the Act,\4\
the Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On February 12, 2020, the Exchange filed Amendment No. 1 to
the proposed rule change, which amended and replaced the proposed rule
change in its entirety.\6\ On February 20, 2020, the Commission
published the proposed rule change, as modified by Amendment No. 1, for
notice and comment and instituted proceedings to determine whether to
approve or disapprove the proposed change, as modified by Amendment No.
1.\7\ On March 20, 2020, the Exchange
[[Page 20313]]
filed Amendment No. 2 to the proposed rule change, which amended and
replaced the proposed rule change, as modified by Amendment No. 1.\8\
The Commission has received no comments on the proposed rule change.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 87777, 84 FR 70598
(December 23, 2019).
\6\ See infra note 8.
\7\ See Securities Exchange Act Release No. 88208 (February 13,
2020), 85 FR 9834.
\8\ Amendments No. 1 and 2 to the proposed rule change is
available on the Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2019-097/srcboebzx2019097.htm.
---------------------------------------------------------------------------
The Commission is publishing this notice to solicit comments on
Amendment No. 2 to the proposed rule change from interested persons,
and is approving the proposed rule change, as modified by Amendment No.
2, on an accelerated basis.
I. The Exchange's Description of the Proposal, as Modified by Amendment
No. 2
The Exchange proposes a rule change to adopt BZX Rule 14.11(l) to
permit the listing and trading of Exchange-Traded Fund Shares that are
permitted to operate in reliance on Rule 6c-11 under the Investment
Company Act of 1940. The Exchange is also proposing to discontinue the
quarterly reports required with respect to Managed Fund Shares listed
on the Exchange pursuant to the generic listing standards under Rule
14.11(i).
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 the
Statutory Basis for, the Proposed Rule Change
1. Purpose
This Amendment No. 2 to SR-CboeBZX-2019-097 amends and replaces in
its entirety the proposal as amended by Amendment No. 1, which was
submitted on February 12, 2020, and amended and replaced in its
entirety the proposal as originally submitted on November 15, 2019. The
Exchange submits this Amendment No. 1 in order to clarify certain
points and add additional details to the proposal.
The Exchange proposes to add new Rule 14.11(l) \9\ for the purpose
of permitting the generic listing and trading, or trading pursuant to
unlisted trading privileges, of Exchange-Traded Fund Shares \10\ that
are permitted to operate in reliance on Rule 6c-11 (``Rule 6c-11'')
under the Investment Company Act of 1940 (the ``1940 Act'').\11\ The
Exchange is also proposing to make conforming changes to the Exchange's
corporate governance requirements under Rule 14.10(e) in order to
accommodate the proposed listing of Exchange-Traded Fund Shares.
Finally, the Exchange is proposing to discontinue the quarterly reports
required with respect to Managed Fund Shares listed on the Exchange
pursuant to the generic listing standards under Rule 14.11(i). The
Exchange notes that it plans to submit a separate filing related to
fees applicable to ETF Shares listed on the Exchange.
---------------------------------------------------------------------------
\9\ The Exchange notes that it is proposing new Rule 14.11(l)
because it has also proposed a new Rule 14.11(k) as part of another
proposal. See Securities Exchange Act Release No. 87062 (September
23, 2019), 84 FR 51193 (September 27, 2019) (SR-CboeBZX-2019-047).
\10\ As provided below, proposed Rule 14.11(l)(3)(A) provides
that the term ``ETF Shares'' shall mean the shares issued by a
registered open-end management investment company that: (i) Is
eligible to operate in reliance on Rule 6c-11 under the Investment
Company Act of 1940; (ii) issues (and redeems) creation units to
(and from) authorized participants in exchange for a basket and a
cash balancing amount (if any); and (iii) issues shares that it
intends to list or are listed on a national securities exchange and
traded at market-determined prices.
\11\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------
The Commission recently adopted Rule 6c-11 to permit exchange-
traded funds (``ETFs'') that satisfy certain conditions to operate
without obtaining an exemptive order from the Commission under the 1940
Act.\12\ Since the first ETF was approved by the Commission in 1992,
the Commission has routinely granted exemptive orders permitting ETFs
to operate under the 1940 Act because there was no ETF specific rule in
place and they have characteristics that distinguish them from the
types of structures contemplated and included in the 1940 Act. After
such an extended period operating without a specific rule set and only
under exemptive relief, Rule 6c-11 is designed to provide a consistent,
transparent, and efficient regulatory framework for ETFs.\13\ Exchange
listing standards applicable to ETFs have been similarly adopted and
tweaked over the years and the Exchange believes that, just as the
Commission has undertaken a review of the 1940 Act as it is applicable
to ETFs, it is appropriate to perform a similar holistic review and
overhaul of Exchange listing rules. With this in mind, the Exchange
submits this proposal to add new Rule 14.11(l) and certain
corresponding rule changes because it believes that this proposal
similarly promotes consistency, transparency, and efficiency
surrounding the exchange listing process for ETF Shares in a manner
that is consistent with the Act, as further described below.\14\ Except
as otherwise provided, the Exchange would continue to enforce all
governance, disclosure, and trading rules for ETF Shares, as defined
below, listed on the Exchange.
---------------------------------------------------------------------------
\12\ See Release Nos. 33-10695; IC-33646; File No. S7-15-18
(Exchange-Traded Funds) (September 25, 2019), 84 FR 57162 (October
24, 2019) (the ``Rule 6c-11 Release'').
\13\ In approving the rule, the Commission stated that the
``rule will modernize the regulatory framework for ETFs to reflect
our more than two decades of experience with these investment
products. The rule is designed to further important Commission
objectives, including establishing a consistent, transparent, and
efficient regulatory framework for ETFs and facilitating greater
competition and innovation among ETFs.'' Rule 6c-11 Release, at
57163. The Commission also stated the following regarding the rule's
impact: ``We believe rule 6c-11 will establish a regulatory
framework that: (1) Reduces the expense and delay currently
associated with forming and operating certain ETFs unable to rely on
existing orders; and (2) creates a level playing field for ETFs that
can rely on the rule. As such, the rule will enable increased
product competition among certain ETF providers, which can lead to
lower fees for investors, encourage financial innovation, and
increase investor choice in the ETF market.'' Rule 6c-11 Release, at
57204
\14\ The Exchange deems ETF Shares to be equity securities, thus
rendering trading in any series of ETF Shares subject to the
Exchange's existing rules governing the trading of equity
securities. With respect to trading in ETF Shares, all of the BZX
Member obligations relating to product description and prospectus
delivery requirements will continue to apply in accordance with
Exchange rules and federal securities laws, and the Exchange will
continue to monitor its Members for compliance with such
requirements, which are not changing as a result of Rule 6c-11 under
the 1940 Act.
---------------------------------------------------------------------------
Consistent with Index Fund Shares and Managed Fund Shares listed
under the generic listing standards in Rules 14.11(c) and 14.11(i),
respectively, series of Exchange-Traded Fund Shares that are permitted
to operate in reliance on Rule 6c-11 would be permitted to be listed
and traded on the Exchange without a prior Commission approval order or
notice of effectiveness pursuant to Section 19(b) of the Act.\15\
---------------------------------------------------------------------------
\15\ Rule 19b-4(e)(1) provides that the listing and trading of a
new derivative securities product by a self-regulatory organization
(``SRO'') is not deemed a proposed rule change, pursuant to
paragraph (c)(1) of Rule 19b-4, if the Commission has approved,
pursuant to Section 19(b) of the Act, the SRO's trading rules,
procedures and listing standards for the product class that would
include the new derivative securities product and the SRO has a
surveillance program for the product class. As contemplated by this
Rule 14.11(l), the Exchange proposes new Rule 14.11(l) to establish
generic listing standards for ETFs that are permitted to operate in
reliance on Rule 6c-11. An ETF listed under proposed Rule 14.11(l)
would therefore not need a separate proposed rule change pursuant to
Rule 19b-4 before it can be listed and traded on the Exchange.
---------------------------------------------------------------------------
[[Page 20314]]
Proposed Listing Rules
Proposed Rule 14.11(l)(1) provides that the Exchange will consider
for trading, whether by listing or pursuant to unlisted trading
privileges, the shares of Exchange-Traded Funds (``ETF Shares'') that
meet the criteria of this Rule 14.11(l).\16\
---------------------------------------------------------------------------
\16\ To the extent that a series of ETF Shares does not satisfy
one or more of the criteria in proposed Rule 14.11(l), the Exchange
may file a separate proposal under Section 19(b) of the Act in order
to list such series on the Exchange. Consistent with Rule 14.11(a),
any of the statements or representations in that proposal regarding
the index composition, the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and
intraday indicative values (as applicable), or the applicability of
Exchange listing rules specified in any filing to list such series
of ETF Shares shall constitute continued listing requirements for
the series of ETF Shares. Further, in the event that a series of ETF
Shares becomes listed under proposed Rule 14.11(l) and subsequently
can no longer rely on Rule 6c-11, so long as the series of ETF
Shares may otherwise rely on exemptive relief issued by the
Commission, such series of ETF Shares may be listed as a series of
Index Fund Shares under Rule 14.11(c) or Managed Fund Shares under
Rule 14.11(i), as applicable, as long as the series of ETF Shares
meets all listing requirements applicable under the applicable rule.
---------------------------------------------------------------------------
Proposed Rule 14.11(l)(2) provides that the proposed rule would be
applicable only to ETF Shares. Except to the extent inconsistent with
this Rule 14.11(l), 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. ETF 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(l)(2) further provides that: (A) Transactions
in ETF Shares will occur throughout the Exchange's trading hours; (B)
the minimum price variation for quoting and entry of orders in ETF
Shares is $0.01; \17\ and (C) the Exchange will implement and maintain
written surveillance procedures for ETF Shares.
---------------------------------------------------------------------------
\17\ Consistent with Exchange Rules 11.11(a)(1) and
14.11(i)(2)(B), the Exchange notes that the proposed minimum price
variation is identical to the minimum price variation for Index Fund
Shares and Managed Fund Shares.
---------------------------------------------------------------------------
Proposed Rule 14.11(l)(3)(A) provides that the term ``ETF Shares''
shall mean shares of stock issued by an Exchange-Traded Fund.
Proposed Rule 14.11(l)(3)(B) provides that the term ``Exchange-
Traded Fund'' has the same meaning as the term ``exchange-traded fund''
as defined in Rule 6c-11 under the Investment Company Act of 1940.
Proposed Rule 14.11(l)(3)(C) provides that the term ``Reporting
Authority'' in respect of a particular series of ETF Shares means the
Exchange, an institution, or a reporting service designated by the
Exchange or by the exchange that lists a particular series of ETF
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 amount of any dividend equivalent payment or cash
distribution to holders of ETF Shares, net asset value, index or
portfolio value, the current value of the portfolio of securities
required in connection with issuance of ETF Shares, or other
information relating to the issuance, redemption or trading of ETF
Shares. A series of ETF Shares may have more than one Reporting
Authority, each having different functions.\18\
---------------------------------------------------------------------------
\18\ The Exchange notes that the definition of Reporting
Authority is based on the definitions provided under Rule
14.11(c)(1)(C) and 14.11(i)(3)(D) related to Index Fund Shares and
Managed Fund Shares, respectively.
---------------------------------------------------------------------------
Proposed Rule 14.11(l)(4) provides that the Exchange may approve a
series of ETF Shares for listing and/or trading (including pursuant to
unlisted trading privileges) on the Exchange pursuant to Rule 19b-4(e)
under the Act, provided such series of ETF Shares is eligible to
operate in reliance on Rule 6c-11 under the Investment Company Act of
1940 and must satisfy the requirements of this Rule 14.11(l) on an
initial and continued listing basis.
Proposed Rule 14.11(l)(4)(A) provides that the requirements of Rule
6c-11 must be satisfied by a series of ETF Shares on an initial and
continued listing basis. Such securities must also satisfy the
following criteria on an initial and, except for paragraph (i) below,
continued, listing basis. Further, proposed Rule 14.11(l)(4)(A)
provides that: (i) For each series, the Exchange will establish a
minimum number of ETF Shares required to be outstanding at the time of
commencement of trading on the Exchange; (ii) if an index underlying a
series of ETF Shares is maintained by a broker-dealer or fund adviser,
the broker-dealer or fund adviser shall erect and maintain a ``fire
wall'' around the personnel who have access to information concerning
changes and adjustments to the index and the index shall be calculated
by a third party who is not a broker-dealer or fund adviser. If the
investment adviser to the investment company issuing an actively
managed series of ETF 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 Exchange-
Traded Fund's portfolio; and (iii) any advisory committee, supervisory
board, or similar entity that advises a Reporting Authority or that
makes decisions on the composition, methodology, and related matters of
an index underlying a series of ETF Shares, must implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the
applicable index. For actively managed Exchange-Traded Funds, personnel
who make decisions on the portfolio composition must be subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the applicable portfolio.\19\
---------------------------------------------------------------------------
\19\ The proposed requirements under proposed Rule
14.11(l)(4)(A) are substantively identical to the equivalent
provisions for Index Fund Shares and Managed Fund Shares under Rules
14.11(c)(3)(B)(i) and (iii), 14.11(c)(4)(C)(i) and (iii),
14.11(c)(5)(A)(i) and (iii), and 14.11(i)(7).
---------------------------------------------------------------------------
Proposed Rule 14.11(l)(4)(B) provides that each series of ETF
Shares will be listed and traded on the Exchange subject to application
of Proposed Rule 14.11(l)(4)(B)(i) and (ii). Proposed Rule
14.11(l)(4)(B)(i) provides that the Exchange will consider the
suspension of trading in, and will commence delisting proceedings under
Rule 14.12 for, a series of ETF Shares under any of the following
circumstances: (a) If the Exchange becomes aware that the issuer of the
ETF Shares is no longer eligible to operate in reliance on Rule 6c-11
under the Investment Company Act of 1940; (b) if any of the other
listing requirements set forth in this Rule 14.11(l) are not
continuously maintained; (c) if, following the initial twelve month
period after commencement of trading on the Exchange of a series of ETF
Shares, there are fewer than 50 beneficial holders of the series of ETF
Shares for 30 or more consecutive trading days; or (d) 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(l)(4)(B)(ii) provides that upon termination of an investment
company, the Exchange requires that ETF Shares issued in connection
with
[[Page 20315]]
such entity be removed from Exchange listing.
Proposed Rule 14.11(l)(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 index
or portfolio value; the current value of the portfolio of securities
required to be deposited in connection with issuance of ETF Shares; the
amount of any dividend equivalent payment or cash distribution to
holders of ETF Shares; net asset value; or other information relating
to the purchase, redemption, or trading of ETF 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.\20\
---------------------------------------------------------------------------
\20\ The Exchange notes that proposed Rule 14.11(l)(5) is
substantively identical to the equivalent Rules for Index Fund
Shares and Managed Fund Shares under Rule 14.11(c)(10) and
14.11(i)(5).
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Proposed Rule 14.11(l)(6) provides that a security that has
previously been approved for listing on the Exchange pursuant to the
generic listing requirements specified in Rule 14.11(c) or Rule
14.11(i), or pursuant to the approval of a proposed rule change or
subject to a notice of effectiveness by the Commission, may be
considered for listing solely under this Rule 14.11(l) if such security
is eligible to operate in reliance on Rule 6c-11 under the 1940 Act. At
the time of listing of such security under this Rule 14.11(l), the
continued listing requirements applicable to such previously-listed
security will be those specified in paragraph (b) of this Rule
14.11(l). Any requirements for listing as specified in Rule 14.11(c) or
Rule 14.11(i), or an approval order or notice of effectiveness of a
separate proposed rule change, that differ from the requirements of
this Rule 14.11(l) will no longer be applicable to such security.
The Exchange is also proposing to make two corresponding amendments
to include ETF Shares in other Exchange rules. Specifically, the
Exchange is also proposing: (i) To amend Rule 14.10(e)(1)(E) and
Interpretation and Policy .13 to Rule 14.10 in order to add ETF Shares
to a list of product types listed on the Exchange, including Index Fund
Shares, Managed Fund Shares, and Managed Portfolio Shares, that are
exempted from the Audit Committee requirements set forth in Rule
14.10(c)(3), except for the applicable requirements of SEC Rule 10A-3;
\21\ and (ii) to amend Rule 14.11(c)(3)(A)(i)(a) in order to include
ETF Shares in the definition of Derivative Securities Products.
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\21\ The Exchange notes that these proposed changes would
subject ETF Shares to the same corporate governance requirements as
other open-end management investment companies listed on the
Exchange.
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Discussion
Proposed Rule 14.11(l) is based in large part on Rules 14.11(c) and
(i) related to the listing and trading of Index Fund Shares and Managed
Fund Shares on the Exchange, respectively, both of which are issued
under the 1940 Act and would qualify as ETF Shares after Rule 6c-11 is
effective. Rule 14.11(c) and 14.11(i) are very similar, their primary
difference being that Index Fund Shares are designed to track an
underlying index and Managed Fund Shares are based on an actively
managed portfolio that is not designed to track an index. As such, the
Exchange believes that using Rules 14.11(c) and (i) (collectively, the
``Current ETF Standards'') as the basis for proposed Rule 14.11(l) is
appropriate because they are generally designed to address the issues
associated with ETF Shares. The only substantial differences between
proposed Rule 14.11(l) and the Current ETF Standards that are not
otherwise required under Rule 6c-11 are as follows: (i) Proposed Rule
14.11(l) does not include the quantitative standards applicable to a
fund or an index that are included in the Current ETF Standards; and
(ii) proposed Rule 14.11(l) does not include any requirements related
to the dissemination of a fund's Intraday Indicative Value.\22\ These
differences are discussed below.
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\22\ For purposes of this filing, the term ``Intraday Indicative
Value'' or ``IIV'' shall mean an intraday estimate of the value of a
share of each series of either Index Fund Shares or Managed Fund
Shares.
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Quantitative Standards
The Exchange believes that the proposal is designed to prevent
fraudulent and manipulative acts and practices because the Exchange
will perform ongoing surveillance of ETF Shares listed on the Exchange
in order to ensure compliance with Rule 6c-11 and the 1940 Act on an
ongoing basis. While proposed Rule 14.11(l) does not include the
quantitative requirements applicable to an ETF or an ETF's holdings or
underlying index that are included in Rules 14.(c) and 14.11(i),\23\
the Exchange believes that the manipulation concerns that such
standards are intended to address are otherwise mitigated by a
combination of the Exchange's surveillance procedures, the Exchange's
ability to halt trading under the proposed Rule 14.11(l)(4)(B)(ii), and
the Exchange's ability to suspend trading and commence delisting
proceedings under proposed Rule 14.11(l)(4)(B)(i). The Exchange will
also halt trading in ETF Shares under the conditions specified in Rule
11.18, ``Trading Halts Due to Extraordinary Market Volatility.'' The
Exchange also believes that such concerns are further mitigated by
enhancements to the arbitrage mechanism that will come from Rule 6c-11,
specifically the additional flexibility provided to issuers of ETF
Shares through the use of custom baskets for creations and redemptions
and the additional information made available to the public through the
additional daily website disclosure obligations applicable under Rule
6c-11.\24\ The Exchange believes that the combination of these factors
will act to keep ETF Shares trading near the value of their underlying
holdings and further mitigate concerns around manipulation of ETF
Shares on the Exchange without the inclusion of quantitative
standards.\25\ The Exchange will monitor for compliance with Rule 6c-11
in order to ensure that the continued listing standards are being
met.\26\ Specifically, the Exchange will review the website of each
series of ETF Shares listed on the Exchange in order to ensure that the
[[Page 20316]]
requirements of Rule 6c-11 are being met. The Exchange will also employ
numerous intraday alerts that will notify Exchange personnel of trading
activity throughout the day that is potentially indicative of certain
disclosures not being made accurately or the presence of other unusual
conditions or circumstances that could be detrimental to the
maintenance of a fair and orderly market. As a backstop to the
surveillances described above, the Exchange also notes that Rule
14.11(a) would require an issuer of ETF Shares to notify the Exchange
of any failure to comply with Rule 6c-11 or the 1940 Act.
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\23\ The Exchange notes that Rules 14.11(c) and (i) include
certain quantitative standards related to the size, trading volume,
concentration, and diversity of the holdings of a series of Index
Fund Shares or Managed Fund Shares (the ``Holdings Standards'') as
well as related to the minimum number of beneficial holders of a
fund (the ``Distribution Standards''). The Exchange believes that to
the extent that manipulation concerns are mitigated based on the
factors described herein, such concerns are mitigated both as it
relates to the Holdings Standards and the Distribution Standards.
\24\ The Exchange notes that the Commission came to a similar
conclusion in several places in the Rule 6c-11 Release. See Rule 6c-
11 Release at 15-18; 60-61; 69-70; 78-79; 82-84; and 95-96.
\25\ The Exchange believes that this applies to all quantitative
standards, whether applicable to the portfolio holdings of a series
of ETF Shares or the distribution of the ETF Shares.
\26\ As noted throughout, proposed Rule 14.11(l), unlike Rule
14.11(c) and 14.11(i), does not include Holdings Standards and, as
such, there will be no quantitative standards applicable by the
Exchange to the portfolio holdings of a series of ETF Shares on an
initial or continued listing basis.
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The Exchange may suspend trading in and commence delisting
proceedings for a series of ETF Shares where such series is not in
compliance with the applicable listing standards or where the Exchange
believes that further dealings on the Exchange are inadvisable.\27\ The
Exchange also notes that Rule 14.11(a) requires any issuer to provide
the Exchange with prompt notification after it becomes aware of any
non-compliance with proposed Rule 14.11(l), which would include any
failure of the issuer to comply with Rule 6c-11 or the 1940 Act.\28\
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\27\ Specifically, proposed Rule 14.11(l)(4)(B) provides that
each series of ETF Shares will be listed and traded on the Exchange
subject to application of Proposed Rule 14.11(l)(4)(B)(i) and (ii).
Proposed Rule 14.11(l)(4)(B)(i) provides that the Exchange will
consider the suspension of trading in, and will commence delisting
proceedings under Rule 14.12 for, a series of ETF Shares under any
of the following circumstances: (a) If the Exchange becomes aware
that the issuer of the ETF Shares is no longer eligible to operate
in reliance on Rule 6c-11 under the Investment Company Act of 1940;
(b) if any of the other listing requirements set forth in this Rule
14.11(l) are not continuously maintained; (c) if, following the
initial twelve month period after commencement of trading on the
Exchange of a series of ETF Shares, there are fewer than 50
beneficial holders of the series of ETF Shares for 30 or more
consecutive trading days; or (d) 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(l)(4)(B)(ii) provides that upon termination of an investment
company, the Exchange requires that ETF Shares issued in connection
with such entity be removed from Exchange listing.
\28\ The Exchange notes that failure by an issuer to notify the
Exchange of non-compliance pursuant to Rule 14.11(a) would itself be
considered non-compliance with the requirements of Rule 14.11 and
would subject the series of ETF Shares to potential trading halts
and the delisting process under Rule 14.12.
---------------------------------------------------------------------------
Further, the Exchange also represents that its surveillance
procedures are adequate to properly monitor the trading of the ETF
Shares in all trading sessions and to deter and detect violations of
Exchange rules and applicable federal securities laws. Specifically,
the Exchange intends to utilize its existing surveillance procedures
applicable to derivative products, which are currently applicable to
Index Fund Shares and Managed Fund Shares, among other product types,
to monitor trading in ETF Shares. The Exchange or the Financial
Industry Regulatory Authority, Inc. (``FINRA''), on behalf of the
Exchange, will communicate as needed regarding trading in ETF Shares
and certain of their applicable underlying components with other
markets that are members of the Intermarket Surveillance Group
(``ISG'') or with which the Exchange has in place a comprehensive
surveillance sharing agreement. In addition, the Exchange may obtain
information regarding trading in ETF Shares and certain of their
applicable underlying components from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. Additionally, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities that may be held by a series of ETF
Shares reported to FINRA's Trade Reporting and Compliance Engine
(``TRACE''). FINRA also can access data obtained from the Municipal
Securities Rulemaking Board's (``MSRB'') Electronic Municipal Market
Access (``EMMA'') system relating to municipal bond trading activity
for surveillance purposes in connection with trading in a series of ETF
Shares, to the extent that a series of ETF Shares holds municipal
securities. Finally, as noted above, the issuer of a series of ETF
Shares will be required to comply with Rule 10A-3 under the Act for the
initial and continued listing of Exchange-Traded Fund Shares, as
provided under Rule 14.10(e)(1)(E) and Interpretation and Policy .13 to
Rule 14.10.\29\
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\29\ The Exchange notes that these proposed changes would
subject ETF Shares to the same corporate governance requirements as
other open-end management investment companies listed on the
Exchange.
---------------------------------------------------------------------------
The Exchange notes that it may consider all relevant factors in
exercising its discretion to halt or suspend trading in a series of ETF
Shares. Trading may be halted if the circuit breaker parameters in Rule
11.18 have been reached, because of other market conditions, or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) The extent to which certain
information about the ETF Shares that is required to be disclosed under
Rule 6c-11 of the Investment Company Act of 1940 is not being made
available, including specifically where the Exchange becomes aware that
the net asset value with respect to a series of ETF Shares is not
disseminated to all market participants at the same time, it will halt
trading in such series until such time as the net asset value is
available to all market participants; \30\ (2) if an interruption to
the dissemination to the value of the index or reference asset on which
a series of ETF Shares is based persists past the trading day in which
it occurred or is no longer calculated or available; (3) trading in the
securities comprising the underlying index or portfolio has been halted
in the primary market(s); or (4) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.
---------------------------------------------------------------------------
\30\ The Exchange will obtain a representation from the issuer
of ETF Shares that the net asset value per share for the series will
be calculated daily and made available to all market participants at
the same time.
---------------------------------------------------------------------------
Intraday Indicative Value
As described above, proposed Rule 14.11(l) does not include any
requirements related to the dissemination of an Intraday Indicative
Value. Both Rule 14.11(c) and Rule 14.11(i) include the requirement
that a series of Index Fund Shares and Managed Fund Shares,
respectively, disseminate and update an Intraday Indicative Value at
least every 15 seconds.\31\ The Exchange believes that it is consistent
with the Act to not require the calculation and dissemination of the
Intraday Indicative Value for the same reasons enumerated in the Rule
6c-11 Release, which specifically discusses and describes why Rule 6c-
11 does not require ETFs to publicly calculate and disseminate the
Intraday Indicative Value,\32\ and a separate Exchange proposal to
eliminate the requirement to calculate and disseminate the Intraday
Indicative Value for certain series of Index Fund Shares and Managed
Fund Shares.\33\
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\31\ See Rules 14.11(c)(3)(C), 14.11(c)(6)(A), and
14.11(c)(9)(B)(e) related to Index Fund Shares and Rules
14.11(i)(3)(C), 14.11(i)(4)(B)(i), 14.11(i)(4)(B)(iii)(b), and
14.11(i)(4)(B)(iv) related to Managed Fund Shares.
\32\ See Rule 6c-11 Release at 61-66.
\33\ See Securities Exchange Act Release No. 88259 (February 21,
2020), 85 FR 11419 (February 27, 2020) (SR-CboeBZX-2020-007).
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As such, the Exchange believes that it is appropriate and
consistent with the Act to not include a requirement for the
dissemination of an IIV for a series of ETF Shares to be listed on the
Exchange.
[[Page 20317]]
Discontinuing Quarterly Reporting for Managed Fund Shares
Finally, the Exchange is proposing to eliminate certain quarterly
reporting obligations related to the listing and trading of Managed
Fund Shares on the Exchange. In the order approving the Exchange's
proposal to adopt generic listing standards for Managed Fund
Shares,\34\ the Commission noted that the Exchange had represented that
``on a quarterly basis, the Exchange will provide a report to the
Commission staff that contains, for each ETF whose shares are
generically listed and traded under BATS Rule 14.11(i): (a) Symbol and
date of listing; (b) the number of active authorized participants
(``APs'') and a description of any failure by either a fund or an AP to
deliver promised baskets of shares, cash, or cash and instruments in
connection with creation or redemption orders; and (c) a description of
any failure by an ETF to comply with BATS Rule 14.11(i).'' \35\ This
reporting requirement is not specifically enumerated in Rule 14.11(i).
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\34\ See Securities Exchange Act Release No. 78396 (July 22,
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100) (the ``MFS
Approval Order'').
\35\ See MFS Approval Order at footnote 14.
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The Exchange has provided such information to the Commission on a
quarterly basis since the MFS Approval Order was issued in 2016. The
type of information provided in the reports was created to provide a
window into the creation and redemption process for Managed Fund Shares
in order to ensure that the arbitrage mechanism would work as expected
for products that were listed pursuant to the newly approved generic
listing standards. The approval of the Rule 6c-11 collapses the
distinction between index funds and active funds, which the Exchange
believes represents that the Commission is generally comfortable with
actively managed funds, rendering the reports unnecessary. Further,
because the same general types of information provided in those reports
will be made available under Rule 6c-11 directly from the issuers of
such securities the Exchange also believes that it is consistent with
the Act to remove this reporting obligation because it will be
duplicative and no longer necessary.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \36\ in general and Section 6(b)(5) of the Act \37\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.
---------------------------------------------------------------------------
\36\ 15 U.S.C. 78f.
\37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that proposed Rule 14.11(l) is designed to
prevent fraudulent and manipulative acts and practices in that the
proposed rules relating to listing and trading ETF Shares on the
Exchange provide specific initial and continued listing criteria
required to be met by such securities. Proposed Rule 14.11(l)(4) sets
forth initial and continued listing criteria applicable to ETF Shares,
specifically providing that the Exchange may approve a series of ETF
Shares for listing and/or trading (including pursuant to unlisted
trading privileges) on the Exchange pursuant to Rule 19b-4(e) under the
Act, provided such series of ETF Shares is eligible to operate in
reliance on Rule 6c-11 under the Investment Company Act of 1940 and
must satisfy the requirements of this Rule 14.11(l) on an initial and
continued listing basis.\38\ The Exchange will submit a Form 19b-4(e)
for all series of ETF Shares upon being listed pursuant to Rule
14.11(l), including those series of ETF Shares that are listed under
Rule 14.11(l) pursuant to proposed Rule 14.11(l)(6) and such Form 19b-
4(e) will specifically note that such series of ETF Shares are being
listed on the Exchange pursuant to Rule 14.11(l).
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\38\ The Exchange notes that eligibility to operate in reliance
on Rule 6c-11 does not necessarily mean that an investment company
would be listed on the Exchange pursuant to proposed Rule 14.11(l).
To this point, an investment company that operates in reliance on
6c-11 could also be listed as a series of Index Fund Shares or
Managed Fund Shares pursuant to Rule 14.11(c) or 14.11(i),
respectively, and would be subject to all requirements under each of
those rules. Further to this point, in the event that a series of
ETF Shares listed on the Exchange preferred to be listed as a series
of Index Fund Shares or Managed Fund Shares (as applicable), nothing
would preclude such a series from changing to be listed as a series
of Index Fund Shares or Managed Fund Shares (as applicable), as long
as the series met each of the initial and continued listing
obligations under the applicable rules.
---------------------------------------------------------------------------
Proposed Rule 14.11(l)(4)(B) provides that each series of ETF
Shares will be listed and traded on the Exchange subject to application
of Proposed Rule 14.11(l)(4)(B)(i) and (ii). Proposed Rule
14.11(l)(4)(B)(i) provides that the Exchange will consider the
suspension of trading in, and will commence delisting proceedings under
Rule 14.12 for, a series of ETF Shares under any of the following
circumstances: (a) If the Exchange becomes aware that the issuer of the
ETF Shares is no longer eligible to operate in reliance on Rule 6c-11
under the Investment Company Act of 1940; (b) if any of the other
listing requirements set forth in this Rule 14.11(l) are not
continuously maintained; (c) if, following the initial twelve month
period after commencement of trading on the Exchange of a series of ETF
Shares, there are fewer than 50 beneficial holders of the series of ETF
Shares for 30 or more consecutive trading days; or (d) if such other
event shall occur or condition exists which, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. The
Exchange notes that it may become aware that the issuer is no longer
eligible to operate in reliance on Rule 6c-11, as described in proposed
Rule 14.11(l)(4)(B)(i)(a), as a result of either the Exchange
identifying non-compliance through its own monitoring process or
through notification by the issuer. Proposed Rule 14.11(l)(4)(B)(ii)
provides that upon termination of an investment company, the Exchange
requires that ETF Shares issued in connection with such entity be
removed from Exchange listing. The Exchange also notes that it will
obtain a representation from the issuer of each series of ETF Shares
stating that the requirements of Rule 6c-11 will be continuously
satisfied and that the issuer will notify the Exchange of any failure
to do so.
The Exchange further believes that proposed Rule 14.11(l) is
designed to prevent fraudulent and manipulative acts and practices
because of the robust surveillances in place on the Exchange as
required under proposed Rule 14.11(l)(2)(C) along with the similarities
of proposed Rule 14.11(l) to the rules related to other securities that
are already listed and traded on the Exchange and which would qualify
as ETF Shares. Proposed Rule 14.11(l) is based in large part on Rules
14.11(c) and (i) related to the listing and trading of Index Fund
Shares and Managed Fund Shares on the Exchange, respectively, both of
which are issued under the 1940 Act and would qualify as ETF Shares
after Rule 6c-11 is effective. Rule 14.11(c) and 14.11(i) are very
similar, their primary difference being that Index Fund Shares are
designed to track an underlying index and Managed Fund Shares are based
on an actively managed portfolio that is not designed to track an
index. As such, the Exchange believes that using the Current ETF
Standards as the basis for proposed Rule 14.11(l) is appropriate
because they are generally designed to address the issues
[[Page 20318]]
associated with ETF Shares. The only substantial differences between
proposed Rule 14.11(l) and the Current ETF Standards that are not
otherwise required under Rule 6c-11 are as follows: (i) Proposed Rule
14.11(l) does not include the quantitative standards applicable to a
fund or an index that are included in the Current ETF Standards; and
(ii) proposed Rule 14.11(l) does not include any requirements related
to the dissemination of a fund's Intraday Indicative Value.
Quantitative Standards
The Exchange believes that the proposal is consistent with Section
6(b)(1) of the Act \39\ in that, in addition to being designed to
prevent fraudulent and manipulative acts and practices, the Exchange
has the capacity to enforce proposed Rule 14.11(l) by performing
ongoing surveillance of ETF Shares listed on the Exchange in order to
ensure compliance with Rule 6c-11 and the 1940 Act on an ongoing basis.
While proposed Rule 14.11(l) does not include the quantitative
requirements applicable to a fund and a fund's holdings or underlying
index that are included in Rules 14.(c) and 14.11(i),\40\ the Exchange
believes that the manipulation concerns that such standards are
intended to address are otherwise mitigated by a combination of the
Exchange's surveillance procedures, the Exchange's ability to halt
trading under the proposed Rule 14.11(l)(4)(B)(ii), and the Exchange's
ability to suspend trading and commence delisting proceedings under
proposed Rule 14.11(l)(4)(B)(i). The Exchange also believes that such
concerns are further mitigated by enhancements to the arbitrage
mechanism that will come from compliance with Rule 6c-11, specifically
the additional flexibility provided to issuers of ETF Shares through
the use of custom baskets for creations and redemptions and the
additional information made available to the public through the
additional daily website disclosure obligations applicable under Rule
6c-11.\41\ The Exchange believes that the combination of these factors
will act to keep ETF Shares trading near the value of their underlying
holdings and further mitigate concerns around manipulation of ETF
Shares on the Exchange without the inclusion of quantitative
standards.\42\ The Exchange will monitor for compliance with Rule 6c-11
in order to ensure that the continued listing standards are being met.
Specifically, the Exchange plans to review the website of series of ETF
Shares in order to ensure that the requirements of Rule 6c-11 are being
met. The Exchange will also employ numerous intraday alerts that will
notify Exchange personnel of trading activity throughout the day that
is potentially indicative of certain disclosures not being made
accurately or the presence of other unusual conditions or circumstances
that could be detrimental to the maintenance of a fair and orderly
market. As a backstop to the surveillances described above, the
Exchange also notes that Rule 14.11(a) would require an issuer of ETF
Shares to notify the Exchange of any failure to comply with Rule 6c-11
or the 1940 Act.
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\39\ 15 U.S.C. 78f(b)(1).
\40\ The Exchange notes that Rules 14.11(c) and (i) include
certain Holdings Standards and Distribution Standards. The Exchange
believes that to the extent that manipulation concerns are mitigated
based on the factors described herein, such concerns are mitigated
both as it relates to the Holdings Standards and the Distribution
Standards.
\41\ The Exchange notes that the Commission came to a similar
conclusion in several places in the Rule 6c-11 Release. See Rule 6c-
11 Release at 15-18; 60-61; 69-70; 78-79; 82-84; and 95-96.
\42\ The Exchange believes that this applies to all quantitative
standards, whether applicable to the portfolio holdings of a series
of ETF Shares or the distribution of the ETF Shares.
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To the extent that any of the requirements under Rule 6c-11 or the
1940 Act are not being met, the Exchange may halt trading in a series
of ETF Shares as provided in proposed Rule 14.11(l)(4)(B)(ii). Further,
the Exchange may also suspend trading in and commence delisting
proceedings for a series of ETF Shares where such series is not in
compliance with the applicable listing standards or where the Exchange
believes that further dealings on the Exchange are inadvisable.\43\ The
Exchange also notes that Rule 14.11(a) requires any issuer to provide
the Exchange with prompt notification after it becomes aware of any
non-compliance with proposed Rule 14.11(l), which would include any
failure of the issuer to comply with Rule 6c-11 or the 1940 Act.\44\
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\43\ Specifically, proposed Rule 14.11(l)(4)(B) provides that
each series of ETF Shares will be listed and traded on the Exchange
subject to application of Proposed Rule 14.11(l)(4)(B)(i) and (ii).
Proposed Rule 14.11(l)(4)(B)(i) provides that the Exchange will
consider the suspension of trading in, and will commence delisting
proceedings under Rule 14.12 for, a series of ETF Shares under any
of the following circumstances: (a) If the Exchange becomes aware
that the issuer of the ETF Shares is no longer eligible to operate
in reliance on Rule 6c-11 under the Investment Company Act of 1940;
(b) if any of the other listing requirements set forth in this Rule
14.11(l) are not continuously maintained; (c) if, following the
initial twelve month period after commencement of trading on the
Exchange of a series of ETF Shares, there are fewer than 50
beneficial holders of the series of ETF Shares for 30 or more
consecutive trading days; or (d) 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(l)(4)(B)(ii) provides that upon termination of an investment
company, the Exchange requires that ETF Shares issued in connection
with such entity be removed from Exchange listing.
\44\ The Exchange notes that failure by an issuer to notify the
Exchange of non-compliance pursuant to Rule 14.11(a) would itself be
considered non-compliance with the requirements of Rule 14.11 and
would subject the series of ETF Shares to potential trading halts
and the delisting process under Rule 14.12.
---------------------------------------------------------------------------
Further, the Exchange also represents that its surveillance
procedures are adequate to properly monitor the trading of the ETF
Shares in all trading sessions and to deter and detect violations of
Exchange rules. Specifically, the Exchange intends to utilize its
existing surveillance procedures applicable to derivative products,
which are currently applicable to Index Fund Shares and Managed Fund
Shares, among other product types, to monitor trading in ETF Shares.
The Exchange or FINRA, on behalf of the Exchange, will communicate as
needed regarding trading in ETF Shares and certain of their applicable
underlying components with other markets that are members of the ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement. In addition, the Exchange may obtain information
regarding trading in ETF Shares and certain of their applicable
underlying components from markets and other entities that are members
of ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. Additionally, FINRA, on behalf of the
Exchange, is able to access, as needed, trade information for certain
fixed income securities that may be held by a series of ETF Shares
reported to FINRA's TRACE. FINRA also can access data obtained from the
MSRB's EMMA system relating to municipal bond trading activity for
surveillance purposes in connection with trading in a series of ETF
Shares, to the extent that a series of ETF Shares holds municipal
securities. Finally, as noted above, the issuer of a series of ETF
Shares will be required to comply with Rule 10A-3 under the Act for the
initial and continued listing of Exchange-Traded Fund Shares, as
provided under Rule 14.10(e)(1)(E) and Interpretation and Policy .13 to
Rule 14.10.\45\
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\45\ The Exchange notes that these proposed changes would
subject ETF Shares to the same corporate governance requirements as
other open-end management investment companies listed on the
Exchange.
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Intraday Indicative Value
As described above, proposed Rule 14.11(l) does not include any
requirements related to the
[[Page 20319]]
dissemination of an Intraday Indicative Value. Both Rule 14.11(c) and
Rule 14.11(i) include the requirement that a series of Index Fund
Shares and Managed Fund Shares, respectively, disseminate and update an
Intraday Indicative Value at least every 15 seconds.\46\ The Exchange
believes that it is consistent with the Act to not require the
calculation and dissemination of the Intraday Indicative Value for the
same reasons enumerated in the Rule 6c-11 Release, which specifically
discusses and describes why Rule 6c-11 does not require ETFs to
publicly calculate and disseminate the Intraday Indicative Value,\47\
and a separate Exchange proposal to eliminate the requirement to
calculate and disseminate the Intraday Indicative Value for certain
series of Index Fund Shares and Managed Fund Shares.\48\
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\46\ See Rules 14.11(c)(3)(C), 14.11(c)(6)(A), and
14.11(c)(9)(B)(e) related to Index Fund Shares and Rules
14.11(i)(3)(C), 14.11(i)(4)(B)(i), 14.11(i)(4)(B)(iii)(b), and
14.11(i)(4)(B)(iv) related to Managed Fund Shares.
\47\ See Rule 6c-11 Release at 61-66.
\48\ See Securities Exchange Act Release No. 88259 (February 21,
2020), 85 FR 11419 (February 27, 2020) (SR-CboeBZX-2020-007).
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As such, the Exchange believes that it is appropriate and
consistent with the Act to not include a requirement for the
dissemination of an IIV for a series of ETF Shares to be listed on the
Exchange.
The Exchange also believes that the proposed rule change is
designed to promote just and equitable principles of trade and to
protect investors and the public interest in that a large amount of
information will be publicly available regarding the Funds and the
Shares, thereby promoting market transparency. Quotation and last sale
information for ETF Shares will be available via the CTA high-speed
line. The website for each series of ETF Shares will include a form of
the prospectus for the Fund that may be downloaded, and additional data
relating to NAV and other applicable quantitative information, updated
on a daily basis. Moreover, prior to the commencement of trading, the
Exchange will inform its members in a circular of the special
characteristics and risks associated with trading in the series of ETF
Shares. As noted above, series of ETF Shares will not be required to
publicly disseminate an IIV. The Exchange continues to believe that
this proposal is consistent with the Act and is designed to promote
just and equitable principles of trade and to protect investors and the
public interest because the transparency that comes from daily
portfolio holdings disclosure as required under Rule 6c-11 provides
market participants with sufficient information to facilitate the
intraday valuation of ETF Shares, rendering the dissemination of the
IIV unnecessary.
The Exchange notes that it is not proposing to prohibit the
dissemination of an IIV for a series of ETF Shares and believes that
there could be certain instances in which the dissemination of an IIV
could provide valuable information to the investing public. The
Exchange proposes to leave that decision to an issuer of ETF Shares and
is simply not proposing to require the dissemination of an IIV.
Based on the foregoing discussion regarding proposed Rule 14.11(l)
and its similarities to and differences between the Current ETF
Standards, the Exchange believes that the proposal is consistent with
the Act and is designed to prevent fraudulent and manipulative
transactions and that the manipulation concerns that the quantitative
standards and the IIV requirements are designed to address are
otherwise mitigated by the proposal and the new daily website
disclosure obligations and flexibility under Rule 6c-11.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
ETF Shares in a manner that will enhance competition among market
participants, to the benefit of investors and the marketplace. The
Exchange believes that approval of this proposal will streamline
current procedures, reduce the costs and timeline associated with
bringing ETFs to market, and provide significantly greater regulatory
certainty to potential issuers considering bringing ETF Shares to
market, thereby enhancing competition among ETF issuers and reducing
costs for investors.\49\
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\49\ In approving the rule, the Commission stated that the
``rule will modernize the regulatory framework for ETFs to reflect
our more than two decades of experience with these investment
products. The rule is designed to further important Commission
objectives, including establishing a consistent, transparent, and
efficient regulatory framework for ETFs and facilitating greater
competition and innovation among ETFs.'' Rule 6c-11 Release, at
57163. The Commission also stated the following regarding the rule's
impact: ``We believe rule 6c-11 will establish a regulatory
framework that: (1) Reduces the expense and delay currently
associated with forming and operating certain ETFs unable to rely on
existing orders; and (2) creates a level playing field for ETFs that
can rely on the rule. As such, the rule will enable increased
product competition among certain ETF providers, which can lead to
lower fees for investors, encourage financial innovation, and
increase investor choice in the ETF market.'' Rule 6c-11 Release, at
57204.
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The Exchange also believes that the corresponding change to amend
Rule 14.10(e)(1)(E) and Interpretation and Policy .13 to Rule 14.10 in
order to add ETF Shares to a list of product types listed on the
Exchange, including Index Fund Shares, Managed Fund Shares, and Managed
Portfolio Shares, that are exempted from the Audit Committee
requirements set forth in Rule 14.10(c)(3), except for the applicable
requirements of SEC Rule 10A-3 because it is a non-substantive change
meant only to subject ETF Shares to the same corporate governance
requirements currently applicable to Index Fund Shares and Managed Fund
Shares. All other corporate governance requirements that ETF Shares are
not specifically exempted from will otherwise apply. The Exchange also
believes that the non-substantive change to amend Rule
14.11(c)(3)(A)(i)(a) in order to include ETF Shares in the definition
of Derivative Securities Products is also a non-substantive change
because it is just intended to add ETF Shares to a definition that
includes Index Fund Shares and Managed Fund Shares in order to make
sure that ETF Shares are treated consistently with Index Fund Shares
and Managed Fund Shares throughout the Exchange's rules.
Finally, the Exchange believes that eliminating the quarterly
reporting requirement for Managed Fund Shares is designed to prevent
fraudulent and manipulative acts and practices and, in general, to
protect investors and the public interest because the report no longer
serves the purpose for which it was originally intended. The type of
information provided in the reports was created to provide a window
into the creation and redemption process for Managed Fund Shares in
order to ensure that the arbitrage mechanism would work as expected for
products that were listed pursuant to the newly approved generic
listing standards. The Exchange and Commission have had several years
of this reporting process and no significant issues have arisen. The
Exchange believes that this speaks further to the maturity of the
marketplace for ETFs and, further, Rule 6c-11 collapsing the difference
between Index Fund Shares and Managed Fund Shares indicates a general
comfort with Managed Fund Shares that further justifies eliminating
this reporting obligation. In the Rule 6c-11 Release, the Commission
concluded that ``the arbitrage mechanism for existing actively managed
ETFs has worked effectively with small deviations between market price
and NAV per share.'' \50\ The Exchange generally agrees with this
conclusion and, while such quarterly reports were useful when
[[Page 20320]]
Managed Fund Shares were first able to be listed pursuant to generic
listing standards, the Exchange believes that such a window into the
creation and redemption process for Managed Fund Shares no longer
provides useful information related to the prevention of manipulation
or protection of investors which it was originally designed to provide.
Further, because the same general types of information provided in
those reports will be made available under Rule 6c-11 directly from the
issuers of such securities the Exchange also believes that it is
consistent with the Act to remove this reporting obligation because it
will be duplicative and no longer necessary.
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\50\ See Rule 6c-11 Release at 23.
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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. To the contrary, the Exchange
believes that the proposed rule change would enhance competition by
streamlining current procedures, reducing the costs and timeline
associated with bringing ETFs to market, and providing significantly
greater regulatory certainty to potential issuers considering bringing
ETF Shares to market, all of which the Exchange believes would enhance
competition among ETF issuers and reduce costs for investors. The
Exchange also believes that the proposed change would enhance
competition among ETF Shares by ensuring the application of uniform
listing standards.
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. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 2, is consistent with the Act and
rules and regulations thereunder applicable to a national securities
exchange.\51\ In particular, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with Section
6(b)(5) of the Act,\52\ which requires, among other things, that the
Exchange's rules be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\51\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\52\ 15 U.S.C. 78f(b)(5).
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A. Proposed BZX Rule 14.11(l)
As an initial matter, the Commission notes that the Exchange
currently has generic listing standards for Index Fund Shares, Managed
Fund Shares, and Portfolio Depositary Receipts,\53\ and therefore
proposed Rule 14.11(l) would not permit the Exchange to generically
list any novel product types. The Commission also notes that a number
of the provisions of proposed Rule 14.11(l) are substantively identical
to provisions of other BZX listing rules.\54\
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\53\ See BZX Rules.
\54\ See supra notes 17, 19, and 20 and accompanying text,
respectively. Additionally, the proposed definition of ``Reporting
Authority'' is based on the definitions in BZX Rules 14.11(c)(1)(C)
and 14.11(i)(3)(D). See supra note 18.
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The Commission believes that proposed BZX Rule 14.11(l) is
reasonably designed to help prevent fraudulent and manipulative acts
and practices. A central qualification for listing under the proposed
rule is ongoing compliance with Rule 6c-11 under the 1940 Act, which
requires, among other things, ETFs to prominently disclose the
portfolio holdings that will form the basis for each calculation of net
asset value per share.\55\ Because initial and ongoing compliance with
Rule 6c-11 of the 1940 Act is a condition for listing and trading on
the Exchange, the proposed rule would permit Nasdaq to list and trade
shares of an investment company with a fully transparent portfolio,\56\
and the Commission believes that portfolio transparency should help
prevent manipulation of the price of ETF Shares.\57\ Additionally,
proposed BZX Rule 14.11(l) includes requirements relating to fire walls
and procedures to prevent the use and dissemination of material, non-
public information regarding the applicable ETF index and
portfolio,\58\ all such requirements of which are designed to prevent
fraudulent and manipulative acts and practices.\59\ The Commission
specifically notes that certain of these requirements relating to such
fire walls and procedures, which are substantively identical to BZX's
rules governing the listing and trading of index-based and actively
managed ETFs, apply in addition to what is already required under the
Act and the 1940 Act and respective rules and regulations thereunder,
and the Commission believes that such requirements collectively provide
additional protections against the potential misuse of material, non-
public information. Therefore, the Commission concludes that the
proposed requirements relating to such fire walls and procedures,
combined with ETF portfolio transparency and the existing requirements
under the Act and 1940 Act, should help to protect against fraudulent
and manipulative acts and practices under Section 6(b)(5) of the Act.
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\55\ See Rule 6c-11 Release, supra note 12, at 57180-81.
\56\ See supra note 9. The Commission also noted that, with
respect to ETF portfolio transparency, the disclosures are designed
to promote an effective arbitrage mechanism and inform investors
about the risks of deviation between market price and net asset
value when deciding whether to invest in ETFs generally or in a
particular ETF. See Rule 6c-11 Release, supra note 12, at 57166.
\57\ See id. at 57169 (concluding that portfolio transparency
combined with existing requirements should be sufficient to protect
against certain abuses).
\58\ For example, proposed BZX Rule 14.11(l)(4)(A)(ii) provides
that if the index underlying a series of ETF Shares is maintained by
a broker-dealer or fund adviser, the broker-dealer or fund adviser
shall erect and maintain a ``fire wall'' around the personnel who
have access to information concerning changes and adjustments to the
index and the index will be calculated by a third party who is not a
broker-dealer or fund adviser. Proposed BZX Rule 14.11(l)(4)(A)(ii)
further states that if the investment adviser to an ETF is
affiliated with a broker-dealer, such investment adviser will 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 the underlying portfolio. Proposed BZX
Rule 14.11(l)(4)(A)(iii) requires that any advisory committee,
supervisory board, or similar entity that advises a Reporting
Authority or that makes decisions on the composition, methodology
and related matters, of an index underlying a series of ETF Shares
must implement and maintain, or be subject to, procedures designed
to prevent the use and dissemination of material non-public
information regarding the applicable index. In addition, for
actively managed ETFs, personnel who make decisions on the portfolio
composition must be subject to procedures designed to prevent the
use and dissemination of material non-public information regarding
the applicable portfolio. See generally proposed BZX Rule
14.11(l)(4)(A).
\59\ In adopting Rule 6c-11, the Commission determined that the
safeguards in the existing regulatory regime adequately address
``special concerns that self-indexed ETFs present, including the
potential ability of an affiliated index provider to manipulate an
underlying index to the benefit or detriment of a self-indexed
ETF.'' Rule 6c-11 Release, supra note 12, 84 FR at 57168.
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Proposed BZX Rule 14.11(l)(2)(C) requires that the Exchange
implement and maintain written surveillance
[[Page 20321]]
procedures for ETF Shares. The Exchange will employ its existing
surveillance procedures applicable to derivative products, which are
currently applicable to Index Fund Shares and Managed Fund Shares, to
trading in ETF Shares, and represents that its surveillance procedures
are adequate to (a) properly monitor the trading of such securities
during all trading sessions and (b) deter and detect violations of
Exchange rules and the applicable federal securities laws. The Exchange
represents that, consistent with Section 6(b)(1) of the Act, it has the
capacity to enforce proposed BZX Rule 14.11(l) by performing ongoing
surveillance of ETF Shares listed on the Exchange in order to ensure
compliance with Rule 6c-11 and the 1940 Act on an ongoing basis.\60\
Further, the Exchange represents that it, or FINRA on behalf of the
Exchange, will communicate as needed regarding trading in ETF Shares
and certain of their applicable underlying components with other
markets that are members of the ISG or with which BZX has in place a
comprehensive surveillance sharing agreement. The Exchange represents
that it will perform ongoing surveillance of ETF Shares listed on the
Exchange in order to ensure compliance with Rule 6c-11 under the 1940
Act on an ongoing basis. The Exchange also notes that BZX Rule 14.11(a)
requires any issuer to provide the Exchange with prompt notification
after it becomes aware of any non-compliance with proposed Rule
14.11(l), which would include any failure of the issuer to comply with
Rule 6c-11 or the 1940 Act.\61\ Additionally, BZX plans to review the
website of series of ETF Shares in order to ensure that the
requirements of Rule 6c-11 are being met. Finally, proposed BZX Rule
14.11(l)(4)(B)(i)(c) requires that the Exchange commence delisting
proceedings for a series of ETF Shares if, following the initial 12-
month period after commencement of trading on the Exchange, there are
fewer than 50 beneficial holders of such series of ETF Shares for 30 or
more consecutive trading days.
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\60\ The Commission also finds that the proposed rule change, as
modified by Amendment No. 2, is consistent with Section 6(b)(1) of
the Act (15 U.S.C. 78f(b)(1)), which requires (among other things)
that a national securities exchange be organized and have the
capacity to comply with its own rules. The Exchange represents that
it will: (1) Monitor for compliance with Rule 6c-11 under the 1940
Act to ensure that the continued listing standards are being met;
(2) review the website of series of ETF Shares to ensure that the
requirements of Rule 6c-11 under the 1940 Act are being met; and (3)
obtain a representation from the issuer of each series of ETF Shares
that the requirements of proposed BZX Rule 14.11(l) will be
satisfied and that the issuer will notify the Exchange of any
failure to do so.
\61\ The Exchange further represents that failure by an issuer
to notify the Exchange of non-compliance pursuant to Rule 14.11(a)
would itself be considered non-compliance with the requirements of
BZX Rule 14.11 and would subject the series of ETF Shares to
potential trading halts and the delisting process under BZX Rule
14.12.
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Consistent with the requirement of Section 6(b)(5) of the Act \62\
that the Exchange's rules be designed to remove impediments to and
perfect the mechanism of a free and open market, the Exchange's rules
regarding trading halts will help to ensure the maintenance of fair and
orderly markets for ETF Shares. Specifically, as discussed above, the
Exchange may consider all relevant factors in exercising its discretion
to halt or suspend trading in a series of ETF Shares. BZX states that
trading in ETF Shares will be halted if the circuit breaker parameters
in BZX Rule 11.18 have been reached or when the Exchange becomes aware
that the net asset value for a series of ETF Shares is not being
disseminated to all market participants at the same time.\63\
Additionally, trading may be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in ETF Shares
inadvisable. As BZX represents in the proposal, examples of such market
conditions or reasons may be: (1) The extent to which certain
information about the ETF Shares that is required to be disclosed under
Rule 6c-11 of the 1940 Act is not being made available; (2) if an
interruption to the dissemination to the value of the index or
reference asset on which a series of ETF Shares is based persists past
the trading day in which it occurred or is no longer calculated or
available; (3) trading in the securities comprising the underlying
index or portfolio has been halted in the primary market(s); or (4) in
the presence of other unusual conditions or circumstances detrimental
to the maintenance of a fair and orderly market. Further, BZX will
employ numerous intraday alerts that will notify Exchange personnel of
trading activity throughout the day that is potentially indicative of
certain disclosures not being made accurately or the presence of other
unusual conditions or circumstances that could be detrimental to the
maintenance of a fair and orderly market.\64\ The Exchange also may
suspend trading in and commence delisting proceedings for a series of
ETF Shares where such series is not in compliance with the applicable
listing standards or where the Exchange believes that further dealings
on the Exchange are inadvisable.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78f(b)(5).
\63\ See supra note 30 and accompanying text.
\64\ See Amendment No. 2, supra note 8, at 15.
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B. Discontinuance of Quarterly Reports of Generically Listed Managed
Fund Shares
In support of its proposal to adopt generic listing standards for
Managed Fund Shares, the Exchange proposed to submit quarterly reports
to the Commission disclosing certain information.\65\ These reports
were designed to identify problems associated with generically listed
Managed Fund Shares. In adopting Rule 6c-11 under the 1940 Act, the
Commission largely eliminated prior distinctions between actively
managed and index-based ETFs, and BZX does not submit quarterly reports
regarding the shares of index-based ETFs that it generically lists. In
addition, the Commission recognizes that, since the adoption of the
Managed Fund Shares generic listing standards, the marketplace for ETFs
has matured and developed, an increased number of actively managed ETFs
have been listed and are trading on national securities exchanges, and
market participants have become more familiar with such securities.
Moreover, proposed BZX Rule 14.11(l)(2)(C) requires that the Exchange
implement and maintain written surveillance procedures for ETF
Shares.\66\ The Exchange represents that it intends to utilize its
existing surveillance procedures applicable to derivative products,
which will include ETF Shares, to monitor trading in the ETF Shares,
and will perform ongoing surveillance of ETF Shares listed on the
Exchange to ensure compliance with Rule 6c-11 and the 1940 Act on an
ongoing basis. The Commission notes that manipulation concerns are
mitigated by a combination of the Exchange's surveillance procedures,
BZX's ability to halt trading under proposed BZX Rule 14.11(l),\67\ and
the Exchange's ability to commence
[[Page 20322]]
delisting proceedings under proposed BZX Rule 14.11(l)(4)(i). In light
of these reasons, as well as the Commission's experience with the
quarterly reports, the Commission believes that this proposal is
consistent with Section 6(b)(5) of the Act, and it therefore finds that
it is no longer necessary for BZX to continue to submit such quarterly
reports.
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\65\ The information included in these reports is summarized
above. See supra note 35 and accompanying text.
\66\ Moreover, BZX Rule 14.11(i)(2)(C) requires that the
Exchange implement and maintain written surveillance procedures for
Managed Fund Shares.
\67\ The Exchange states that it may consider all relevant
factors in exercising its discretion to halt or suspend trading in a
series of ETF Shares, and that it may halt trading due to market
conditions that make trading in the ETF Shares inadvisable,
including the following circumstances: (1) Where the Exchange
becomes aware that the net asset value with respect to a series of
ETF Shares is not disseminated to all market participants at the
same time; and (2) if an interruption to the dissemination to the
value of the index or reference asset on which a series of ETF
Shares is based persists past the trading day in which it occurred
or is no longer calculated or available.
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C. Other Related Rule Changes
The Exchange proposes to: (1) Expand the definition of ``Derivative
Securities Products'' in BZX Rule 14.11(c)(3)(A)(i)(a) to include ETF
Shares; and (2) exempt ETF Shares from certain corporate governance
requirements by including ETF Shares among the product types enumerated
in BZX Rules 14.10(e)(1)(E) and Interpretations and Policies .13 to BZX
Rule 14.10.\68\ The Exchange states that these changes will subject ETF
Shares to the same corporate governance requirements currently
applicable to Index Fund Shares and Managed Fund Shares. The Commission
believes that these proposed changes simply incorporate proposed BZX
Rule 14.11(l) into the existing framework of BZX's rules, and therefore
finds that such changes are consistent with Section 6(b)(5) of the Act.
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\68\ Under the current version of these rules, Index Fund Shares
and Managed Fund Shares are exempted from the specified corporate
governance requirements.
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D. Exchange Representations
In support of this proposal, the Exchange has made the following
representations:
(1) BZX deems ETF Shares to be equity securities, thus rendering
trading in ETF Shares subject to the Exchange's existing rules
governing the trading of equity securities.\69\ The Exchange notes that
ETF Shares will be subject to rules governing Exchange member
disclosure obligations in connection with equities trading, and that
Rule 6c-11 does not change the applicability of these Exchange rules
with respect to these securities.\70\
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\69\ See supra note 14.
\70\ With respect to trading in ETF Shares, the Exchange
represents that all of the BZX member obligations relating to
product description and prospectus delivery requirements will
continue to apply in accordance with the Exchange rules and federal
securities laws, and BZX will continue to monitor its members for
compliance with such requirements, which are not changing as a
result of Rule 6c-11 under the 1940 Act. See supra note 14.
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(2) BZX will (a) monitor for compliance with Rule 6c-11 to ensure
that the continued listing standards are being met; (b) review the
website of series of ETF Shares to ensure that the requirements of Rule
6c-11 are being met; and (c) employ numerous intraday alerts that will
notify Exchange personnel of unusual trading activity throughout the
day that could be indicative of unusual conditions or circumstances
that could be detrimental to the maintenance of a fair and orderly
market.\71\
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\71\ See Amendment No. 2, supra note 8, at 15. The Exchange also
notes that BZX Rule 14.11(a) would require an issuer of ETF Shares
to notify BZX of any failure to comply with Rule 6c-11 or the 1940
Act. See id. The Exchange notes that failure by an issuer to notify
the Exchange of non-compliance pursuant to Rule 14.11(a) would
itself be considered non-compliance with the requirements of Rule
14.11 and would subject the series of ETF Shares to potential
trading halts and the delisting process under Rule 14.12. See id. at
16, n.22.
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(3) BZX will obtain a representation from the issuer of ETF Shares
that the net asset value for the series will be calculated daily and
will be made available to all market participants at the same time.\72\
BZX will also obtain a representation from the issuer of each series of
ETF Shares that the requirements of Rule 6c-11 will be continuously
satisfied and that the issuer will notify the Exchange of any failure
to do so.\73\
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\72\ See id. at 18, n.24.
\73\ See id. at 22.
---------------------------------------------------------------------------
(4) BZX's surveillance procedures are adequate to properly monitor
the trading of the ETF Shares in all trading sessions and to deter and
detect violations of Exchange rules and applicable federal securities
laws.\74\
---------------------------------------------------------------------------
\74\ See id. at 16.
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(5) The Exchange, or FINRA on behalf of the Exchange, will
communicate as needed regarding trading in ETF Shares and certain of
their applicable underlying components with other markets that are
members of the ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. Additionally, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities that may be held by a series of ETF
Shares reported to TRACE. FINRA also can access data obtained from the
EMMA system relating to municipal bond trading activity for
surveillance purposes in connection with trading in a series of ETF
Shares, to the extent that a series of ETF Shares holds municipal
securities.\75\
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\75\ See id. at 16-17.
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(6) The issuer of a series of ETF Shares will be required to comply
with Rule 10A-3 under the Act for the initial and continued listing of
ETF Shares, as provided under BZX Rule 14.10(e)(1)(E) and
Interpretation and Policy .13 to BZX Rule 14.10.\76\
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\76\ The Exchange also notes that these proposed changes would
subject ETF Shares to the same corporate governance requirements as
other open-end management investment companies listed on the
Exchange. See id. at 17.
---------------------------------------------------------------------------
This approval order is based on all of the Exchange's
representations, including those set forth above and in Amendment No.
2. For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 2, is consistent with
Sections 6(b)(1) and 6(b)(5) of the Act \77\ and the rules and
regulations thereunder applicable to a national securities exchange.
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\77\ 15 U.S.C. 78f(b)(1) and 15 U.S.C. 78f(b)(5), respectively.
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IV. Solicitation of Comments to the Proposed Rule Change, as Modified
by Amendment No. 2
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 2 to 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-2019-097 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-2019-097. 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,
[[Page 20323]]
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-2019-097, and should
be submitted on or before May 1, 2020.
V. Accelerated Approval of Proposed Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to approve the proposed rule
change, as modified by Amendment No. 2, prior to the thirtieth day
after the date of publication of notice of the filing of Amendment No.
2 in the Federal Register. In Amendment No. 2, the Exchange (among
other things): (1) Modified the circumstances in which it will consider
suspending trading in a series of ETF Shares; (2) broadened its
undertakings with respect to ensuring compliance with the proposed
generic listing standard; (3) clarified that ETF Shares would be
subject to all Exchange rules applicable to equities trading, including
rules governing Exchange member disclosure obligations; and (4)
clarified the applicability of certain current listing rules in light
of proposed BZX Rule 14.11(l). Amendment No. 2 also provides other
clarifications and additional information in support of the proposed
rule change. These changes, as well as additional information in
Amendment No. 2, assisted the Commission in finding that the proposal
is consistent with the Act. Accordingly, the Commission finds good
cause, pursuant to Section 19(b)(2) of the Exchange Act,\78\ to approve
the proposed rule change, as modified by Amendment No. 2, on an
accelerated basis.
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\78\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\79\ that the proposed rule change (SR-CboeBZX-2019-097), as modified
by Amendment No. 2, be, and it hereby is, approved on an accelerated
basis.
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\79\ Id.
\80\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-07550 Filed 4-9-20; 8:45 am]
BILLING CODE 8011-01-P
