
[Federal Register Volume 77, Number 186 (Tuesday, September 25, 2012)]
[Notices]
[Pages 59030-59033]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-23564]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67888; File No. SR-BATS-2012-030]


Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change To Amend BATS Rule 14.11, 
Entitled ``Other Securities''

September 19, 2012.

I. Introduction

    On July 20, 2012, BATS Exchange, Inc. (``Exchange'' or ``BATS'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend BATS Rule 14.11, entitled ``Other 
Securities'' to modify the criteria for certain securities listed on 
BATS as Index Fund Shares. The proposed rule change was published for 
comment in the Federal Register on August 8, 2012.\3\ The Commission 
received no comments on the proposal. This order grants approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 67558 (August 1, 
2012), 77 FR 47444.
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II. Description of the Proposed Rule Change

Proposal To Amend Index Fund Shares Rules

    The Exchange proposes certain changes to Rule 14.11(c) relating to 
Index Fund Shares, commonly referred to as exchange-traded funds, to 
conform the Exchange's listings criteria for Index Fund Shares with the 
analogous criteria in place for NYSE Arca Equities, Inc. (``NYSE 
Arca'') \4\ and to correct a typographical error. Specifically, the 
Exchange proposes to amend Exchange Rule 14.11(c) to: (1) Modify the 
weight and volume requirements for component stocks comprising the 
applicable index or portfolio for any U.S. index or portfolio and any 
international or global index or portfolio upon which Index Fund Shares 
are based; (2) exclude Index Fund Shares, Portfolio Depositary 
Receipts, Trust Issued Receipts, and Managed Fund Shares (collectively, 
``Derivative Securities Products'') \5\ when applying the quantitative 
generic listing criteria in Rule 14.11(c); and (3) modify the minimum 
number of component stocks for any U.S. index or portfolio and any 
international or global index or portfolio upon which Index Fund Shares 
are based to adopt certain exceptions for any index or portfolio that 
is partially or wholly comprised of Index Fund Shares or other 
Derivative Securities Products.
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    \4\ The Exchange notes that NYSE Arca uses the term ``Investment 
Company Units'' to describe the same products that the Exchange 
calls ``Index Fund Shares.''
    \5\ Rule 14.11 includes criteria for derivative securities that 
may be listed or traded on the Exchange, such as Portfolio 
Depositary Receipts, Trust Issued Receipts, and Managed Fund Shares.
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    Rule 14.11(c)(3) provides that the Exchange may approve a series of 
Index Fund Shares for listing and trading pursuant to Rule 19b-4(e) 
under the Act \6\ if such series satisfies the criteria set forth in 
that rule. The Exchange proposes to amend Rule 14.11(c)(3) to amend the 
index weight requirements and adopt notional volume traded per month 
\7\ to the initial listing standards for Index Fund Shares. The 
Exchange proposes to amend the minimum component stock weight 
requirement for monthly trading volumes from 90% to 70% of the weight 
of the underlying index. In addition, the Exchange proposes to adopt an 
alternative notional volume traded per month.
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    \6\ 17 CFR 240.19b-4(e). Rule 19b-4(e) provides that the listing 
and trading of a new derivative securities product by a self-
regulatory organization (``SRO'') shall not be deemed a proposed 
rule change, pursuant to Rule 19b-4(c)(1), if the Commission has 
approved, pursuant to Section 19(b) of the Exchange Act, the SRO's 
trading rules, procedures, and listing standards for the product 
class that would include the new derivatives securities product, and 
the SRO has a surveillance program for the product class.
    \7\ The notional volume traded per month is the number of shares 
traded in a calendar month multiplied by the monthly closing price.
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    Rule 14.11(c)(3)(A)(i)(b) provides that, for U.S. component stock 
indexes, component stocks that in the aggregate account for at least 
90% of the weight of the index or portfolio, each shall have a minimum 
monthly trading volume during each of the last six months of at least 
250,000 shares. The Exchange proposes to reduce the minimum component 
stock weight requirement from 90% to 70% of the weight of the 
underlying index or portfolio. The Exchange is also proposing to adopt 
an average minimum trading volume requirement of 250,000 shares over a 
six-month period instead of in each of the last six months, and to 
adopt a notional volume traded per month of $25,000,000 averaged over 
the last six months as an option for meeting the listing requirements.
    The Exchange is proposing the same modifications for international 
or global indexes. Rule 14.11(c)(3)(A)(ii)(b) provides that, for 
international or global indexes, component stocks that in the aggregate 
account for at least 90% of the weight of the index or portfolio each 
shall have a minimum worldwide monthly trading volume during each of 
the last six months of at least 250,000 shares. The Exchange proposes 
to reduce the minimum component stock weight requirement from 90% to 
70% of the weight of the underlying index or portfolio. Further, the 
Exchange is proposing to adopt an average minimum trading volume 
requirement of 250,000 shares over a six-month period instead of in 
each of the last six months, and to adopt a worldwide notional volume 
traded per month of $25,000,000 averaged over the last six months as an 
option for meeting the listing requirements. Further, the Exchange also 
proposes to clarify that the component stock trading volumes are 
determined on a global basis.
    The Exchange believes that reducing the minimum component stock 
weight requirement for monthly trading volumes from 90% to 70% of the 
weight of the underlying index reasonably ensures that securities with 
substantial monthly trading volumes account for a substantial portion 
of the underlying index and, when applied in conjunction with the other 
applicable listing requirements, remain sufficiently broad-based in 
scope to minimize potential manipulation. The Exchange notes that the 
Commission has previously approved the listing and trading of exchange-
traded funds based upon indices that were composed of stocks that did 
not meet the 90% monthly trading volume weight, but were above the 
proposed 70% monthly trading volume weight criteria.\8\ In addition,

[[Page 59031]]

this standard would conform BATS's listing standards to existing NYSE 
Arca requirements approved by the Commission.\9\
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    \8\ See Securities Exchange Act Release No. 46306 (August 2, 
2002), 67 FR 51916 (August 9, 2002) (SR-NYSE-2002-28) (approving the 
following funds for trading pursuant to unlisted trading privileges 
on NYSE: (1) Vanguard Total Stock Market VIPERs; (2) iShares Russell 
2000 Index Funds; (3) iShares Russell 2000 Value Index Funds; and 
(4) iShares Russell 2000 Growth Index Fund); Securities Exchange Act 
Release No. 55953 (June 25, 2007), 72 FR 36084 (July 2, 2007) (SR-
NYSE-2007-46) (approving listing on NYSE of HealthShares Orthopedic 
Repair Exchange-Traded Fund); and Securities Exchange Act Release 
No. 56695 (October 24, 2007), 72 FR 61413 (October 30, 2007) (SR-
NYSEArca-2007-111) (approving listing on NYSE Arca of HealthShares 
Ophthalmology Exchange-Traded Fund).
    \9\ See NYSE Arca Rule 5.2(j)(3), Commentary .01(a)(A) and (B); 
see also Securities Exchange Act Release No. 61240 (December 24, 
2009), 75 FR 168 (January 4, 2010) (SR-NYSEArca-2009-101) (approving 
proposed rule change to amend NYSE Arca Equities Rule 5.2(j)(3)).
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    With respect to adopting, as an alternative to monthly trading 
volume, the notional volume traded for each of the last six months to 
the initial listing standards for both domestic and international 
indexes, the Exchange believes that notional volume traded averaged per 
month is a better measure of the liquidity of component stocks of the 
underlying index or indexes. Specifically, notional volume nullifies 
the volume discrepancies that generally occur between low priced and 
high priced stocks.\10\
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    \10\ For example, a stock priced at $10 per share that trades 
2,500,000 shares in a month has a notional volume of $25,000,000. 
Conversely, a stock priced at $100 per share that trades 250,000 
shares in a month has a notional volume of $25,000,000.
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    With respect to requiring a six-month average, instead of a minimum 
requirement in each of the last six-months, for volume and notional 
volume, the Exchange believes that an averaged six-month period better 
indicates the current liquidity on an index and helps eliminate 
seasonal volume fluctuations of component securities.
    The Exchange also proposes to exclude Derivative Securities 
Products when applying the quantitative listing requirements of Rule 
14.11(c)(3)(A)(i)(a), (b), and (c) and 14.11(c)(3)(A)(ii)(a), (b), and 
(c) relating to listing of Index Fund Shares based on a U.S. index or 
portfolio or an international or global index or portfolio, 
respectively. Component stocks in the aggregate, excluding Derivative 
Securities Products, would be required to meet the criteria of these 
provisions. Thus, when determining the component weight for the most 
heavily weighted stock and the five most heavily weighted component 
stocks for an underlying index that includes a Derivative Securities 
Product, the weight of any Derivative Securities Products in the 
underlying index or portfolio would not be considered.
    The Exchange proposes to similarly modify the requirement in Rule 
14.11(c)(3)(A)(i)(d) that an index or portfolio shall include a minimum 
of 13 component stocks for an index or portfolio that includes 
Derivative Securities Products. Specifically, the Exchange proposes 
that no minimum number of component stocks is required if (a) one or 
more series of Index Fund Shares or Portfolio Depositary Receipts (as 
defined in Exchange Rule 14.11(b)) constitute, at least in part, 
components underlying a series of Index Fund Shares, or (b) one or more 
series of Derivative Securities Products account for 100% of the weight 
of the index or portfolio. Thus, if the index or portfolio underlying a 
series of Index Fund Shares includes one or more series of Index Fund 
Shares or Portfolio Depositary Receipts, or if it consists entirely of 
other Derivative Securities Products, then there would not be any 
minimum number of component stocks required (i.e., one or more 
components would be acceptable). If, however, the index or portfolio 
consists of Derivative Securities Products other than Index Fund Shares 
or Portfolio Depositary Receipts (e.g., Managed Fund Shares) as well as 
securities that are not Derivative Securities Products (e.g., common 
stocks), then there must be at least 13 components in the underlying 
index or portfolio.
    The Exchange proposes to modify the requirement in 
14.11(c)(3)(A)(ii)(d) that an index or portfolio shall include a 
minimum of 20 component stocks for an international or global index or 
portfolio that includes Derivative Securities Products. Specifically, 
the Exchange proposes that no minimum number of component stocks shall 
be required so long as (a) one or more series of Index Fund Shares or 
Portfolio Depositary Receipts (as defined in Exchange Rule 14.11(b)) 
constitute, at least in part, components underlying a series of Index 
Fund Shares, or (b) one or more series of Derivative Securities 
Products account for 100% of the weight of the index or portfolio. For 
example, if the index or portfolio underlying a series of Index Fund 
Shares includes one or more series of Index Fund Shares or Portfolio 
Depositary Receipts, or if it consists entirely of other Derivative 
Securities Products, then there would not be any minimum number of 
component stocks required (i.e., one or more components would be 
acceptable). If, however, the index or portfolio consists of Derivative 
Securities Products other than Index Fund Shares or Portfolio 
Depositary Receipts (e.g., Managed Fund Shares) as well as securities 
that are not Derivative Securities Products (e.g., common stocks), then 
there must be at least 20 components in the underlying index or 
portfolio.
    The Exchange believes it is appropriate to exclude Derivative 
Securities Products from the generic criteria specified above for Index 
Fund Shares and to adopt the above-described exceptions in so far as 
Derivative Securities Products that may be included in an index or 
portfolio underlying a series of Index Fund Shares are themselves 
subject to specific listing and continued listing requirements of the 
national securities exchange on which they are listed. Such Derivative 
Securities Products would have been listed and traded on a national 
securities exchange pursuant to a filing submitted pursuant to Section 
19(b) of the Act \11\ or would have been listed by a national 
securities exchange pursuant to the requirements of Rule 19b-4(e) under 
the Act.\12\ Finally, Derivative Securities Products are derivatively 
priced, and, therefore, the Exchange believes that it would not be 
necessary to apply the generic quantitative criteria (market 
capitalization, trading volume, index or portfolio component weighting) 
applicable to non-Derivative Securities Products (e.g., common stocks) 
to such products.
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    \11\ 15 U.S.C. 78s(b).
    \12\ 17 CFR 240.19b-4(e).
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    In addition to the changes set forth above, the Exchange proposes 
to correct a typographical error in Rule 14.11(c)(4) where there 
currently are two sub-sections ``(c)(4)(B).'' The Exchange proposes to 
change the second reference to (c)(4)(C).

General Provisions

    To the extent not specifically addressed in the proposed rules 
discussed above, the following general provisions of the Exchange's 
rules will continue to apply to all subject securities affected by the 
proposed rules (``securities'').

Information Circular

    Prior to the commencement of trading, the Exchange will inform its 
Members in an Information Circular of the special characteristics and 
risks associated with trading the securities. Specifically, the 
Information Circular will discuss the following: (1) The procedures for 
purchases and redemptions of the securities (and/or that the securities 
are not individually redeemable); (2) Exchange Rule 3.7, which imposes 
suitability obligations on Exchange Members with respect to

[[Page 59032]]

recommending transactions in the securities to customers; (3) how 
information regarding the Intraday Indicative Value is disseminated; 
(4) the risks involved in trading the securities during the Pre-Opening 
\13\ and After Hours Trading Sessions \14\ when an updated Intraday 
Indicative Value will not be calculated or publicly disseminated; (5) 
the requirement that Members deliver a prospectus to investors 
purchasing newly issued securities prior to or concurrently with the 
confirmation of a transaction; and (6) trading information.
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    \13\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. 
Eastern Time.
    \14\ The After Hours Trading Session is from 4:00 p.m. to 5:00 
p.m. Eastern Time.
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    In addition, the Information Circular will advise Members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the securities. Members purchasing securities for resale 
to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act.
    The Information Circular will also reference that the securities 
are subject to various fees and expenses described in the registration 
statement; disclose the trading hours of the securities and, if 
applicable, the Net Asset Value (``NAV'') calculation time for the 
securities; and state that information about the securities and the 
corresponding indexes, if applicable, will be publicly available on the 
Web site for the securities.

Trading Rules

    The Exchange deems the securities to be equity securities, thus 
rendering trading in the securities subject to the Exchange's existing 
rules governing the trading of equity securities. The securities will 
trade on the Exchange from 8:00 a.m. until 5:00 p.m. Eastern Time. The 
Exchange has appropriate rules to facilitate transactions in the 
securities during all trading sessions. The minimum price increment for 
quoting and entry of orders in equity securities traded on the Exchange 
is $0.01, with the exception of securities that are priced less than 
$1.00 for which the minimum price increment for order entry is $0.0001.

Surveillance

    The Exchange believes that its surveillance procedures are adequate 
to address any concerns about the trading of the securities on the 
Exchange. Trading of the securities on the Exchange will be subject to 
the Exchange's surveillance procedures for derivative products, 
including the securities. The Exchange may obtain information via the 
Intermarket Surveillance Group (``ISG'') from other exchanges who are 
members or affiliates of the ISG \15\ or with which the Exchange has 
entered into a comprehensive surveillance sharing agreement. The 
Exchange has a general policy prohibiting the distribution of material, 
non-public information by its employees.
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    \15\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
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Trading Halts

    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the securities. Trading in the securities may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the securities inadvisable. These may 
include: (1) the extent to which trading in the underlying asset or 
assets is not occurring; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. In addition, trading in the securities will be 
subject to trading halts caused by extraordinary market volatility 
pursuant to Rule 11.18 or by the halt or suspension of the trading of 
the current underlying asset or assets.
    If the applicable Intraday Indicative Value, value of the 
underlying index, or the value of the underlying asset or assets (e.g., 
securities, commodities, currencies, futures contracts, or other 
assets) is not being disseminated as required, the Exchange may halt 
trading during the day in which such interruption to the dissemination 
occurs. If the interruption to the dissemination of the applicable 
Intraday Indicative Value, value of the underlying index, or the value 
of the underlying asset or assets persists past the trading day in 
which it occurred, the Exchange will halt trading no later than the 
beginning of the trading day following the interruption. In addition, 
if the Exchange becomes aware that the NAV with respect to a series of 
the securities is not disseminated to all market participants at the 
same time, it will halt trading in such series until such time as the 
NAV is available to all market participants.

Suitability

    Currently, Exchange Rule 3.7 governs Recommendations to Customers 
(Suitability). Prior to the commencement of trading of any inverse, 
leveraged, or inverse leveraged securities, the Exchange will inform 
its Members of the suitability requirements of the Exchange Rule 3.7 in 
an Information Circular. Specifically, Members will be reminded in the 
Information Circular that, in recommending transactions in these 
securities, they must have a reasonable basis to believe that (1) the 
recommendation is suitable for a customer given reasonable inquiry 
concerning the customer's investment objectives, financial situation, 
needs, and any other information known by such Member, and (2) the 
customer can evaluate the special characteristics, and is able to bear 
the financial risks, of an investment in the securities. In connection 
with the suitability obligation, the Information Circular will also 
provide that Members must make reasonable efforts to obtain the 
following information: (1) The customer's financial status; (2) the 
customer's tax status; (3) the customer's investment objectives; and 
(4) such other information used or considered to be reasonable by such 
Member or registered representative in making recommendations to the 
customer.
    In addition, FINRA has implemented increased sales practice and 
customer margin requirements for FINRA members applicable to inverse, 
leveraged, and inverse leveraged securities and options on such 
securities, as described in FINRA Regulatory Notices 09-31 (June 2009), 
09-53 (August 2009) and 09-65 (November 2009) (``FINRA Regulatory 
Notices''). Members that carry customer accounts will be required to 
follow the FINRA guidance set forth in the FINRA Regulatory Notices. 
The Information Circular will reference the FINRA Regulatory Notices 
regarding sales practice and customer margin requirements for FINRA 
members applicable to inverse, leveraged, and inverse leveraged 
securities and options on such securities.
    The Exchange notes that, for such inverse, leveraged, and inverse 
leveraged securities, the corresponding funds seek leveraged, inverse, 
or leveraged inverse returns on a daily basis, and do not seek to 
achieve their stated investment objective over a period of time greater 
than one day because compounding prevents the funds from perfectly 
achieving such results. Accordingly, results over

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periods of time greater than one day typically will not be a leveraged 
multiple (+200%), the inverse (-100%), or a leveraged inverse multiple 
(-200%) of the period return of the applicable benchmark and may differ 
significantly from these multiples. The Exchange's Information 
Circular, as well as the applicable registration statement, will 
provide information regarding the suitability of an investment in such 
securities.

III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \16\ and the rules and regulations thereunder applicable to a 
national securities exchange.\17\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the Act,\18\ 
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 foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \16\ 15 U.S.C. 78f.
    \17\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal is narrowly tailored to 
conform BATS's listing criteria for Index Fund Shares to the analogous 
criteria of another national securities exchange.\19\ The Commission 
notes that it has previously approved the same criteria in question and 
believes that BATS's proposal will benefit investors by increasing 
competition among markets listing and trading exchange-traded funds, to 
the benefit of investors and other market participants.
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    \19\ See supra notes 4 and 9.
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    In addition, the Commission notes the following with respect to 
Index Fund Shares listed and traded under Exchange Rule 14.11(c), as 
proposed to be amended:
    (1) Prior to the commencement of trading, the Exchange will inform 
Members in an Information Circular of the special characteristics, 
risks, and other information associated with trading Index Fund Shares;
    (2) The Exchange represents that Index Fund Shares are deemed to be 
equity securities and, as such, trading in Index Fund Shares are 
subject to the Exchange's existing rules governing the trading of 
equity securities and that it has appropriate rules to facilitate 
transactions in Index Fund Shares during all trading sessions;
    (3) Trading of Index Fund Shares on the Exchange are subject to the 
Exchange's surveillance procedures for derivative products, and the 
Exchange believes that its surveillance procedures are adequate to 
address any concerns about the trading of Index Fund Shares on the 
Exchange. Further, the Exchange represents that it may obtain 
information via ISG from other exchanges who are members or affiliates 
of the ISG or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement;
    (4) Trading in the securities will be subject to trading halts 
caused by extraordinary market volatility pursuant to Rule 11.18 or by 
the halt or suspension of the trading of the current underlying asset 
or assets. Trading in Index Fund Shares may also be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the securities inadvisable. These may include: (a) The 
extent to which trading in the underlying asset or assets is not 
occurring; or (b) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present. Moreover, if the applicable Intraday Indicative Value, value 
of the underlying index, or the value of the underlying asset or assets 
is not being disseminated as required, the Exchange may halt trading 
during the day in which such interruption to the dissemination occurs. 
If the interruption to the dissemination of the applicable Intraday 
Indicative Value, value of the underlying index, or the value of the 
underlying asset or assets persists past the trading day in which it 
occurred, the Exchange will halt trading no later than the beginning of 
the trading day following the interruption. In addition, if the 
Exchange becomes aware that the NAV with respect to a series of the 
securities is not disseminated to all market participants at the same 
time, it will halt trading in such series until such time as the NAV is 
available to all market participants.
    (5) The Commission also notes that the listing standards applicable 
to Index Fund Shares currently permit the listing and trading of Index 
Fund Shares that seek leveraged, inverse, or inverse leveraged returns 
on a daily basis. Prior to the commencement of trading of any inverse, 
leveraged, or inverse leveraged securities, the Exchange will inform 
its Members of the suitability requirements under Exchange Rule 3.7 in 
the Information Circular, as discussed in more detail above, as well as 
reference the FINRA Regulatory Notices regarding sales practice and 
customer margin requirements for FINRA members applicable to inverse, 
leveraged, and inverse leveraged securities and options on such 
securities.
    The Commission also believes that the Exchange's proposal to 
correct a typographical error in the numbering of its rules is 
consistent with Section 6(b)(5) of the Act as this should allow for 
greater clarity and accuracy of the Exchange's listing rules.
    This approval order is based on all of the Exchange's 
representations.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-BATS-2012-030) be, and it 
hereby is, approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23564 Filed 9-24-12; 8:45 am]
BILLING CODE 8011-01-P


