
[Federal Register Volume 81, Number 38 (Friday, February 26, 2016)]
[Notices]
[Pages 9889-9897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04110]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77202; File No. SR-BATS-2015-100)]


Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of 
Filing of Amendments No. 1, No. 3, and No. 4 to, and Order Instituting 
Proceedings to Determine Whether To Approve or Disapprove, a Proposed 
Rule Change, as Modified by Amendments No. 1, No. 3, and No. 4, To 
Amend BATS Rule 14.11(i) To Adopt Generic Listing Standards for Managed 
Fund Shares

February 22, 2016.

I. Introduction

    On November 18, 2015, BATS Exchange, Inc. (``Exchange'') 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 amend BATS Rule 
14.11(i) by, among other things, adopting generic listing standards for 
Managed Fund Shares (defined below). The proposed rule change was 
published for comment in the Federal Register on November 25, 2015.\3\ 
On January 4, 2016, 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.\4\ On February 9, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change,\5\ which replaced the 
originally filed proposed rule change in its entirety.\6\ On February 
11, 2016, the Exchange both filed and withdrew Amendment No. 2 to the 
proposed rule change. On February 11, 2016, the Exchange filed 
Amendment No. 3 to the proposed rule change.\7\ On February 17, 2016, 
the Exchange filed Amendment No. 4 to the proposed rule change.\8\ The 
Commission has not received any comments on the proposal.
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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. 76478 (Nov. 19, 
2015), 80 FR 73841 (``Notice'').
    \4\ See Securities Exchange Act Release No. 76820, 81 FR 989 
(Jan. 8, 2016). The Commission designated February 23, 2016 as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change. See id.
    \5\ Amendment No. 1: (1) Clarifies the proposed treatment of 
convertible securities under the proposed generic listing criteria; 
(2) modifies the proposed criterion regarding American Depositary 
Receipts (``ADRs'') to provide that no more than 10% of the equity 
weight of the portfolio shall consist of non-exchange traded (rather 
than unsponsored) ADRs; (3) modifies the proposed portfolio limit on 
listed derivatives to require that at least 90% of the weight of 
such holdings invested in futures, exchange-traded options, and 
listed swaps shall, on both an initial and continuing basis, consist 
of futures, options, and swaps for which the Exchange may obtain 
information via the Intermarket Surveillance Group (``ISG'') from 
other members or affiliates of the ISG or for which the principal 
market is a market with which the Exchange has a comprehensive 
surveillance sharing agreement (``CSSA''); (4) provides that a 
portfolio's investments in listed and over-the-counter (``OTC'') 
derivatives will be calculated for purposes the proposed limits on 
such holdings as the total absolute notional value of the 
derivatives; (5) makes certain other conforming and clarifying 
changes. The amendments to the proposed rule change are available 
at: http://www.sec.gov/comments/sr-bats-2015-100/bats2015100.shtml.
    \6\ See Amendment No. 1, supra note 5, at 4.
    \7\ Amendment No. 3 deletes from the proposal the following two 
sentences: (1) ``Such limitation will not apply to listed swaps 
because swaps are listed on swap execution facilities (``SEFs''), 
the majority of which are not members of ISG.'' and (2) ``Such 
limitation would not apply to listed swaps because swaps are listed 
on SEFs, the majority of which are not members of ISG.'' Amendment 
No. 3 also corrects an erroneous statement in Item 11 to indicate 
that an Exhibit 4 was included in Amendment No. 1.
    \8\ Amendment No. 4 deletes from the proposal the following 
sentence: ``Thus, if the limitation applied to swaps, there would 
effectively be a cap of 10% of the portfolio invested in listed 
swaps.'' Amendment No. 3 also amends two representations as follows 
(added language in brackets): The Exchange or FINRA, on behalf of 
the Exchange, will communicate as needed regarding trading in 
Managed Fund Shares [and their underlying components] with other 
markets that are members of the ISG, including all U.S. securities 
exchanges and futures exchanges on which the components are traded[, 
or with which the Exchange has in place a CSSA.] In addition, the 
Exchange or FINRA[,] on behalf of the Exchange[,] may obtain 
information regarding trading in Managed Fund Shares [and their 
underlying components] from other markets that are members of the 
ISG, including all U.S. securities exchanges and futures exchanges 
on which the components are traded, or with which the Exchange has 
in place a CSSA.''
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    Pursuant to Section 19(b)(1) of the Act \9\ and Rule 19b-4 
thereunder,\10\ notice is hereby given that the Exchange filed with the 
Commission Amendments No. 1, No. 3., and No. 4 to the proposed rule 
change on February 9, 2016, February 11, 2016, and February 17, 2016, 
respectively. The proposed rule change, as modified by those 
amendments, is described in Sections I and II below, which Sections 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on Amendments No. 1, No. 3, and No. 4 from 
interested persons.
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    \9\ 15 U.S.C.78s(b)(1).
    \10\ 17 CFR 240.19b-4.
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    Additionally, as discussed in Section III below, the Commission is 
instituting proceedings under Section 19(b)(2)(B) of the Act \11\ to 
determine whether to approve or disapprove the proposed rule change, as 
modified by Amendments No. 1, No. 3, and No. 4 thereto.
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    \11\ 15 U.S.C. 78s(b)(2)(B).

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[[Page 9890]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing a rule change to adopt generic listing 
standards for shares listed under BATS Rule 14.11(i) (``Managed Fund 
Shares'').
    The text of the proposed rule change is available at the Exchange's 
Web site at www.batstrading.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This Amendment No. 1 to SR-BATS-2015-100 amends and replaces in its 
entirety the proposal as originally submitted on November 15, 2015. The 
Exchange submits this Amendment No. 1 in order to clarify certain 
points about the proposal as well as to describe more accurately how 
investments in derivative securities will be treated.
    The Exchange proposes to amend Rule 14.11(i) to adopt generic 
listing standards for Managed Fund Shares. Under the Exchange's current 
rules, a proposed rule change must be filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') for the listing and 
trading of each new series of Managed Fund Shares. The Exchange 
believes that it is appropriate to codify certain rules within Rule 
14.11(i) that would generally eliminate the need for such proposed rule 
changes, which would create greater efficiency and promote uniform 
standards in the listing process.
Background
    Rule 14.11(i) sets forth certain rules related to the listing and 
trading of Managed Fund Shares.\12\ Under Rule 14.11(i)(3)(A), the term 
``Managed Fund Share'' means a security that:
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    \12\ See Securities Exchange Act Release No. 65225 (August 30, 
2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018) (Order 
Approving Proposed Rule Change to Adopt Rules for the Qualification, 
Listing and Delisting of Companies on the Exchange) (the ``Approval 
Order''). The Approval Order approved the rules permitting the 
listing of both Tier I and Tier II securities on the Exchange and 
the requirements associated therewith, which includes the listing 
and trading of Index Fund Shares and Managed Fund Shares, trading 
hours and halts, and listing fees originally applicable to Managed 
Fund Shares.
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    (a) Represents an interest in a registered investment company 
(``Investment Company'') organized as an open-end management investment 
company or similar entity, that invests in a portfolio of securities 
selected by the Investment Company's investment adviser (hereafter 
``Adviser'') consistent with the Investment Company's investment 
objectives and policies;
    (b) is issued in a specified aggregate minimum number in return for 
a deposit of a specified portfolio of securities and/or a cash amount 
with a value equal to the next determined net asset value; and
    (c) when aggregated in the same specified minimum number, may be 
redeemed at a holder's request, which holder will be paid a specified 
portfolio of securities and/or cash with a value equal to the next 
determined net asset value.
    Effectively, Managed Fund Shares are securities issued by an 
actively-managed open-end Investment Company (i.e., an exchange-traded 
fund (``ETF'') that is actively managed). Because Managed Fund Shares 
are actively-managed, they do not seek to replicate the performance of 
a specified passive index of securities. Instead, they generally use an 
active investment strategy to seek to meet their investment objectives. 
In contrast, an open-end Investment Company that issues Index Fund 
Shares, listed and traded on the Exchange pursuant to Rule 14.11(c), 
seeks to provide investment results that generally correspond to the 
price and yield performance of a specific foreign or domestic stock 
index, fixed income securities index, or combination thereof.
    All Managed Fund Shares listed pursuant to Rule 14.11(i) are 
included within the definition of ``security'' or ``securities'' as 
such terms are used in the Rules of the Exchange and, as such, are 
subject to the full panoply of Exchange rules and procedures that 
currently govern the trading of securities on the Exchange.\13\
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    \13\ See Rule 14.11(i)(2).
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    In addition, Rule 14.11(i) currently provides for the criteria that 
Managed Fund Shares must satisfy for initial and continued listing on 
the Exchange, including, for example, that a minimum number of Managed 
Fund Shares are required to be outstanding at the time of commencement 
of trading on the Exchange. However, the current process for listing 
and trading new series of Managed Fund Shares on the Exchange requires 
that the Exchange submit a proposed rule change with the Commission. In 
this regard, Rule 14.11(i)(2)(A) specifies that the Exchange will file 
separate proposals under Section 19(b) of the Act (hereafter, a 
``proposed rule change'') before the listing of Managed Fund Shares, 
which, in conjunction with the proposal to create generic listing 
standards for Managed Fund Shares, the Exchange is proposing to delete.
Proposed Changes to Rule 14.11(i)
    The Exchange is proposing to amend Rule 14.11(i) to specify that 
the Exchange may approve Managed Fund Shares for listing pursuant to 
SEC Rule 19b-4(e) under the Act, which pertains to derivative 
securities products (``SEC Rule 19b-4(e)'').\14\ SEC 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,\15\ 
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. This is 
the current method pursuant to which ``passive'' ETFs are listed under 
Rule 14.11.
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    \14\ 17 CFR 240.19b-4(e). As provided under SEC Rule 19b-4(e), 
the term ``new derivative securities product'' means any type of 
option, warrant, hybrid securities product or any other security, 
other than a single equity option or a security futures product, 
whose value is based, in whole or in part, upon the performance of, 
or interest in, an underlying instrument.
    \15\ 17 CFR 240.19b-4(c)(1). As provided under SEC Rule 19b-
4(c)(1), a stated policy, practice, or interpretation of the SRO 
shall be deemed to be a proposed rule change unless it is reasonably 
and fairly implied by an existing rule of the SRO.
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    The Exchange would also specify within Rule 14.11(i)(4)(C) that 
components of Managed Fund Shares listed pursuant to SEC Rule 19b-4(e) 
must satisfy the requirements of Rule 14.11(i) on an initial and 
continued basis, which includes certain specific criteria that the 
Exchange is proposing to include within Rule 14.11(i)(4)(C), as 
described in greater detail below. As proposed, the Exchange would 
continue to file separate proposed rule changes before the listing and 
trading of Managed Fund Shares with components

[[Page 9891]]

that do not satisfy the additional criteria described below or 
components other than those specified below. For example, if the 
components of a Managed Fund Share exceeded one of the applicable 
thresholds, the Exchange would file a separate proposed rule change 
before listing and trading such Managed Fund Share. Similarly, if the 
components of a Managed Fund Share included a security or asset that is 
not specified below, the Exchange would file a separate proposed rule 
change.
    The Exchange would also amend the definition of the term 
``Disclosed Portfolio'' under Rule 14.11(i)(3)(B) in order to require 
that the Web site for each series of Managed Fund Shares listed on the 
Exchange disclose the following information regarding the Disclosed 
Portfolio, to the extent applicable: ticker symbol, CUSIP or other 
identifier, a description of the holding, identity of the asset upon 
which the derivative is based, the strike price for any options, the 
quantity of each security or other asset held as measured by select 
metrics, maturity date, coupon rate, effective date, market value and 
percentage weight of the holding in the portfolio.\16\
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    \16\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included disclosure requirements 
with respect to each portfolio holding, as applicable to the type of 
holding. See, e.g., Securities Exchange Act Release No. 72666 (July 
3, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-2013-122) (the 
``PIMCO Total Return Use of Derivatives Approval'').
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    The Exchange would also add to Rule 14.11(i)(4)(A) by specifying 
that all Managed Fund Shares must have a stated investment objective, 
which must be adhered to under normal market conditions.\17\
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    \17\ The Exchange would also add a new defined term under Rule 
14.11(i)(3)(E) to specify that the term ``normal market conditions'' 
includes, but is not limited to, the absence of trading halts in the 
applicable financial markets generally; operational issues causing 
dissemination of inaccurate market information; or force majeure 
type events such as systems failure, natural or man-made disaster, 
act of God, armed conflict, act of terrorism, riot or labor 
disruption, or any similar intervening circumstance.
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    Finally, the Exchange would also amend the continued listing 
requirement in Rule 14.11(i)(4)(B) by changing the requirement that an 
Intraday Indicative Value for Managed Fund Shares be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during the time when the Managed Fund Shares trade on the 
Exchange to a requirement that an Intraday Indicative Value be widely 
disseminated by one or more major market data vendors at least every 15 
seconds during Regular Trading Hours, as defined in Exchange Rule 
1.5(w).
Proposed Managed Fund Share Portfolio Standards
    The Exchange is proposing standards that would pertain to Managed 
Fund Shares to qualify for listing and trading pursuant to SEC Rule 
19b-4(e). These standards would be grouped according to security or 
asset type. The Exchange notes that the standards proposed for a 
Managed Fund Share portfolio that holds equity securities, Derivative 
Securities Products, and Linked Securities are based in large part on 
the existing equity security standards applicable to Index Fund Shares 
in Exchange Rule 14.11(c)(3). The standards proposed for a Managed Fund 
Share portfolio that holds fixed income securities are based in large 
part on the existing fixed income security standards applicable to 
Index Fund Shares in Rule 14.11(c)(4). Many of the standards proposed 
for other types of holdings in a Managed Fund Share portfolio are based 
on previous proposed rule changes for specific series of Managed Fund 
Shares.\18\
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    \18\ Securities Exchange Act Release Nos. 74193 (February 3, 
2015), 80 FR 7066 (February 9, 2015) (SR-BATS-2014-054) (the 
``iShares Short Maturity Municipal Bond Approval''); 74297 (February 
18, 2015), 80 FR 9788 (February 24, 2015) (SR-BATS-2014-056) (the 
``iShares U.S. Fixed Income Balanced Risk Approval''); 66321 
(February 3, 2012), 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011-
95) (the ``PIMCO Total Return Approval''); the PIMCO Total Return 
Use of Derivatives Approval; 69244 (March 27, 2013), 78 FR 19766 
(April 2, 2013) (SR-NYSEArca-2013-08) (the ``SPDR Blackstone/GSO 
Senior Loan Approval''); 68870 (February 8, 2013), 78 FR 11245 
(February 15, 2013) (SR-NYSEArca-2012-139) (the ``First Trust 
Preferred Securities and Income Approval''); 69591 (May 16, 2013), 
78 FR 30372 (May 22, 2013) (SR-NYSEArca-2013-33) (the 
``International Bear Approval''); 61697 (March 12, 2010), 75 FR 
13616 (March 22, 2010) (SR-NYSEArca--2010-04) (the ``WisdomTree Real 
Return Approval''); and 67054 (May 24, 2012), 77 FR 32161 (May 31, 
2012) (SR-NYSEArca-2012-25) (the ``WisdomTree Brazil Bond 
Approval''). Certain standards proposed herein for Managed Fund 
Shares are also based on previously proposed rule changes for 
specific index-based series of Index Fund Shares that did not 
satisfy the standards for those products on their respective listing 
exchange and for which Commission approval was required prior to 
listing and trading. See Securities Exchange Act Release Nos. 67985 
(October 4, 2012), 77 FR 61804 (October 11, 2012) (SR-NYSEArca-2012-
92); 63881(February 9, 2011), 76 FR 9065 (February 16, 2011) (SR-
NYSEArca-2010-120); 63176 (October 25, 2010), 75 FR 66815 (October 
29, 2010) (SR-NYSEArca-2010-94); and 69373 (April 15, 2013), 78 FR 
23601 (April 19, 2013) (SR-NYSEArca-2012-108) (the ``NYSE Arca U.S. 
Equity Synthetic Reverse Convertible Index Fund Approval'').
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    Proposed Rule 14.11(i)(4)(C)(i) would describe the standards for a 
Managed Fund Share portfolio that holds equity securities, which are 
defined to be U.S. Component Stocks,\19\ Non-U.S. Component Stocks,\20\ 
Derivative Securities Products,\21\ and Linked Securities \22\ listed 
on a national securities exchange. For Derivative Securities Products 
and Linked Securities, no more than 25% of the equity weight of the 
portfolio could include leveraged and/or inverse leveraged Derivative 
Securities Products or Linked Securities. To the extent that a 
portfolio includes convertible securities, the equity security into 
which such security is converted shall meet the criteria of this Rule 
14.11(i)(4)(C)(i) after converting.
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    \19\ For the purposes of Rule 14.11(i) and this proposal, the 
term ``U.S. Component Stocks'' will have the same meaning as defined 
in Rule 14.11(c)(1)(D).
    \20\ For the purposes of Rule 14.11(i) and this proposal, the 
term ``Non-U.S. Component Stocks'' will have the same meaning as 
defined in Rule 14.11(c)(1)(E).
    \21\ For the purposes of Rule 14.11(i) and this proposal, the 
term ``Derivative Securities Products will have the same meaning as 
defined in Rule 14.11(c)(3)(A)(i)(a).
    \22\ Linked Securities are the securities eligible for listing 
on the Exchange under Rule 14.11(d).
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    As proposed in Rule 14.11(i)(4)(C)(i)(a), the component stocks of 
the equity portion of a portfolio that are U.S. Component Stocks shall 
meet the following criteria initially and on a continuing basis:
    (1) Component stocks (excluding Derivative Securities Products and 
Linked Securities) that in the aggregate account for at least 90% of 
the equity weight of the portfolio (excluding such Derivative 
Securities Products and Linked Securities) each must have a minimum 
market value of at least $75 million; \23\
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    \23\ The proposed text is identical to the corresponding text of 
Rule 14.11(c)(3)(A)(i)(a), except for the omission of the reference 
to ``index,'' which is not applicable, and the addition of the 
reference to Linked Securities.
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    (2) Component stocks (excluding Derivative Securities Products and 
Linked Securities) that in the aggregate account for at least 70% of 
the equity weight of the portfolio (excluding such Derivative 
Securities Products and Linked Securities) each must have a minimum 
monthly trading volume of 250,000 shares, or minimum notional volume 
traded per month of $25,000,000, averaged over the last six months; 
\24\
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    \24\ This proposed text is identical to the corresponding text 
of Rule 14.11(c)(3)(A)(i)(b), except for the omission of the 
reference to ``index,'' which is not applicable, and the addition of 
the reference to Linked Securities.
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    (3) The most heavily weighted component stock (excluding Derivative 
Securities Products and Linked Securities) must not exceed 30% of the 
equity weight of the portfolio, and, to the extent applicable, the five 
most heavily weighted component stocks (excluding Derivative Securities 
Products and Linked Securities) must

[[Page 9892]]

not exceed 65% of the equity weight of the portfolio; \25\
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    \25\ This proposed text is identical to the corresponding text 
of Rule 14.11(c)(3)(A)(i)(c), except for the omission of the 
reference to ``index,'' which is not applicable, and the addition of 
the reference to Linked Securities.
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    (4) Where the equity portion of the portfolio does not include Non-
U.S. Component Stocks, the equity portion of the portfolio shall 
include a minimum of 13 component stocks; provided, however, that there 
would be no minimum number of component stocks if (a) one or more 
series of Derivative Securities Products or Linked Securities 
constitute, at least in part, components underlying a series of Managed 
Fund Shares, or (b) one or more series of Derivative Securities 
Products or Linked Securities account for 100% of the equity weight of 
the portfolio of a series of Managed Fund Shares; \26\
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    \26\ This proposed text is identical to the corresponding text 
of Rule 14.11(c)(3)(A)(i)(d), except for the omission of the 
reference to ``index,'' which is not applicable, the addition of the 
reference to Linked Securities, the reference to the equity portion 
of the portfolio not including Non-U.S. Component Stocks, and the 
reference to the 100% limitation applying to the ``equity weight'' 
of the portfolio--this last difference is included because the 
proposed standards in Rule 14.11(i)(4)(C) permit the inclusion of 
non-equity securities, whereas Rule 14.11(c)(3) applies only to 
equity securities.
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    (5) Except as provided in proposed Rule 14.11(i)(4)(C)(i)(a), 
equity securities in the portfolio must be U.S. Component Stocks listed 
on a national securities exchange and must be NMS Stocks as defined in 
Rule 600 of Regulation NMS; \27\ and
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    \27\ 17 CFR 240.600. This proposed text is identical to the 
corresponding text of Rule 14.11(c)(3)(A)(i)(e), except for the 
addition of ``equity'' to make clear that the standard applies to 
``equity securities'' and the omission of the reference to 
``index,'' which is not applicable.
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    (6) American Depositary Receipts (``ADRs'') may be exchange traded 
or non-exchange traded. However no more than 10% of the equity weight 
of the portfolio shall consist of non-exchange traded ADRs.
    As proposed in Rule 14.11(i)(4)(C)(i)(b), the component stocks of 
the equity portion of a portfolio that are Non-U.S. Component Stocks 
shall meet the following criteria initially and on a continuing basis:
    (1) Non-U.S. Component Stocks each shall have a minimum market 
value of at least $100 million; \28\
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    \28\ The proposed text is identical to the corresponding 
representation from the Non-U.S. Components Release, as defined in 
footnote 24, below. The proposed text is also identical to the 
corresponding text of Rule 14.11(c)(3)(A)(ii)(a), except for the 
omission of the reference to ``index,'' which is not applicable, and 
that each Non-U.S. Component Stock must have a minimum market value 
of at least $100 million instead of the 70% required under Rule 
14.11(c)(3)(A)(ii)(a).
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    (2) Non-U.S. Component Stocks each shall have a minimum global 
monthly trading volume of 250,000 shares, or minimum global notional 
volume traded per month of $25,000,000, averaged over the last six 
months; \29\
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    \29\ The proposed text is identical to the corresponding 
representation from the Non-U.S. Components Release, as defined in 
footnote 24, below. This proposed text is identical to the 
corresponding text of Rule 14.11(c)(3)(A)(ii)(b), except for the 
omission of the reference to ``index,'' which is not applicable, and 
the addition of the reference to Linked Securities.
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    (3) The most heavily weighted Non-U.S. Component Stock shall not 
exceed 25% of the equity weight of the portfolio, and, to the extent 
applicable, the five most heavily weighted Non-U.S. Component Stocks 
shall not exceed 60% of the equity weight of the portfolio; \30\
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    \30\ This proposed text is identical to the corresponding text 
of Rule 14.11(c)(3)(A)(ii)(c), except for the omission of the 
reference to ``index,'' which is not applicable, and the addition of 
the reference to Linked Securities.
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    (4) Where the equity portion of the portfolio includes Non-U.S. 
Component Stocks, the equity portion of the portfolio shall include a 
minimum of 20 component stocks; provided, however, that there shall be 
no minimum number of component stocks if (a) one or more series of 
Derivative Securities Products or Linked Securities constitute, at 
least in part, components underlying a series of Managed Fund Shares, 
or (b) one or more series of Derivative Securities Products or Linked 
Securities account for 100% of the equity weight of the portfolio of a 
series of Managed Fund Shares; \31\ and
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    \31\ This proposed text is identical to the corresponding text 
of Rule 14.11(c)(3)(A)(ii)(d), except for the omission of the 
reference to ``index,'' which is not applicable, the addition of the 
reference to Linked Securities, the reference to the equity portion 
of the portfolio including Non-U.S. Component Stocks, and the 
reference to the 100% limitation applying to the ``equity weight'' 
of the portfolio--this last difference is included because the 
proposed standards in Rule 14.11(i)(4)(C) permit the inclusion of 
non-equity securities, whereas Rule 14.11(c)(3) applies only to 
equity securities.
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    (5) Each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting.\32\
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    \32\ 17 CFR 240.600. This proposed text is identical to the 
corresponding text of Rule 14.11(c)(3)(A)(ii)(e), except for the 
addition of ``equity'' to make clear that the standard applies to 
``equity securities'' and the omission of the reference to 
``index,'' which is not applicable.
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    The Exchange notes that, as approved by the Commission for certain 
Managed Fund Shares \33\ and also not required under corresponding Rule 
14.11(c)(3)(A)(ii) related to Index Fund Shares,\34\ it is not 
proposing to require that any of the equity portion of the equity 
portfolio composed of Non-U.S. Component Stocks be listed on markets 
that are either a member of the Intermarket Surveillance Group 
(``ISG'') or a market with which the Exchange has a comprehensive 
surveillance sharing agreement (``CSSA'').\35\ However, as further 
detailed below, the Exchange or the Financial Industry Regulatory 
Authority, Inc. (``FINRA''), on behalf of the Exchange, will 
communicate as needed regarding trading in Managed Fund Shares with 
other markets that are members of the ISG, including all U.S. 
securities exchanges and futures exchanges on which the components are 
traded.
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    \33\ See Securities Exchange Act Release No. 75023 (May 21, 
2015), 80 FR 30519 (May 28, 2015) (SR-NYSEArca-2014-100) (the ``Non-
U.S. Components Release'').
    \34\ Under Rule 14.11(c)(3)(A)(ii), index fund shares with 
components that include Non-U.S. Component Stocks can hold a 
portfolio that is entirely composed of Non-U.S. Component Stocks 
that are listed on markets that are neither members of ISG, nor with 
which the Exchange has in place a CSSA.
    \35\ ISG is comprised of an international group of exchanges, 
market centers, and market regulators that perform front-line market 
surveillance in their respective jurisdictions. See https://www.isgportal.org/home.html.
---------------------------------------------------------------------------

    Proposed Rule 14.11(i)(4)(C)(ii) would describe the standards for a 
Managed Fund Share portfolio that holds fixed income securities, which 
are debt securities \36\ that are notes, bonds, debentures or evidence 
of indebtedness that include, but are not limited to, U.S. Department 
of Treasury securities (``Treasury Securities''), government-sponsored 
entity securities (``GSE Securities''), municipal securities, trust 
preferred securities, supranational debt and debt of a foreign country 
or a subdivision thereof, investment grade and high yield corporate 
debt, bank loans, mortgage and asset backed securities, and commercial 
paper. To the extent that a portfolio includes convertible securities, 
the fixed income security into which such security is converted shall 
meet the criteria of proposed Rule 14.11(i)(4)(C)(ii) after converting. 
The components of the fixed income portion of a portfolio shall meet 
the following criteria initially and on a continuing basis:
---------------------------------------------------------------------------

    \36\ Debt securities include a variety of fixed income 
obligations, including, but not limited to, corporate debt 
securities, government securities, municipal securities, convertible 
securities, and mortgage-backed securities. Debt securities include 
investment-grade securities, non-investment-grade securities, and 
unrated securities. Debt securities also include variable and 
floating rate securities.
---------------------------------------------------------------------------

    (1) Components that in the aggregate account for at least 75% of 
the fixed income weight of the portfolio shall each have a minimum 
original principal

[[Page 9893]]

amount outstanding of $100 million or more; \37\
---------------------------------------------------------------------------

    \37\ This proposed text of 14.11(i)(4)(C)(ii)(a)(1) is based on 
the corresponding text of 14.11(c)(4)(B)(i)(b).
---------------------------------------------------------------------------

    (2) No component fixed-income security (excluding Treasury 
Securities and GSE Securities) could represent more than 30% of the 
fixed income weight of the portfolio, and the five most heavily 
weighted fixed income securities in the portfolio shall not in the 
aggregate account for more than 65% of the fixed income weight of the 
portfolio; \38\
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    \38\ This proposed rule text is identical to the corresponding 
text of Rule 14.11(c)(4)(B)(i)(d), except for the omission of the 
reference to ``index,'' which is not applicable, and the exclusion 
of ``GSE Securities,'' which is consistent with the corresponding 
text of NYSE Arca, Inc. (``Arca'') Commentary .02(a)(4) to Rule 
5.2(j)(3).
---------------------------------------------------------------------------

    (3) An underlying portfolio (excluding exempted securities) that 
includes fixed income securities shall include a minimum of 13 non-
affiliated issuers, provided, however, that there shall be no minimum 
number of non-affiliated issuers required for fixed income securities 
if at least 70% of the weight of the portfolio consists of equity 
securities as described in Rule 14.11(i)(4)(C)(i); \39\
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    \39\ This proposed text is similar to the corresponding text of 
Rule 14.11(c)(4)(B)(i)(e), except for the omission of the reference 
to ``index,'' which is not applicable and the provision that there 
shall be no minimum number of non-affiliated issuers required for 
fixed income securities if at least 70% of the weight of the 
portfolio consists of equity securities as described in proposed 
Rule 14.11(i)(4)(C)(i).
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    (4) Component securities that in aggregate account for at least 90% 
of the fixed income weight of the portfolio must be either: (a) From 
issuers that are required to file reports pursuant to Sections 13 and 
15(d) of the Act; (b) from issuers that have a worldwide market value 
of its outstanding common equity held by non-affiliates of $700 million 
or more; (c) from issuers that have outstanding securities that are 
notes, bonds, debentures, or evidence of indebtedness having a total 
remaining principal amount of at least $1 billion; (d) exempted 
securities as defined in Section 3(a)(12) of the Act; or (e) from 
issuers that are a government of a foreign country or a political 
subdivision of a foreign country; and
    (5) Non-agency, non-GSE and privately-issued mortgage-related and 
other asset-backed securities components of a portfolio shall not 
account, in the aggregate, for more than 20% of the weight of the fixed 
income portion of the portfolio.
    Proposed Rule 14.11(i)(4)(C)(iii) describes the standards for a 
Managed Fund Share portfolio that holds cash and cash equivalents.\40\ 
Specifically, the portfolio may hold short-term instruments with 
maturities of less than 3 months. There would be no limitation to the 
percentage of the portfolio invested in such holdings. Short-term 
instruments would include the following: \41\ (1) U.S. Government 
securities, including bills, notes and bonds differing as to maturity 
and rates of interest, which are either issued or guaranteed by the 
U.S. Treasury or by U.S. Government agencies or instrumentalities; (2) 
certificates of deposit issued against funds deposited in a bank or 
savings and loan association; (3) bankers' acceptances, which are 
short-term credit instruments used to finance commercial transactions; 
(4) repurchase agreements and reverse repurchase agreements; (5) bank 
time deposits, which are monies kept on deposit with banks or savings 
and loan associations for a stated period of time at a fixed rate of 
interest; (6) commercial paper, which are short-term unsecured 
promissory notes; and (7) money market funds.
---------------------------------------------------------------------------

    \40\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included the ability for such 
Managed Fund Share holdings to include cash and cash equivalents. 
See, e.g., iShares U.S. Fixed Income Balanced Risk Approval at 9789, 
SPDR Blackstone/GSO Senior Loan Approval at 19768-69, and First 
Trust Preferred Securities and Income Approval at 76150.
    \41\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly specified short-term instruments 
with respect to their inclusion in Managed Fund Share holdings. See, 
e.g., First Trust Preferred Securities and Income Approval at 76150-
51.
---------------------------------------------------------------------------

    Proposed Rule 14.11(i)(4)(C)(iv) describes the standards for a 
Managed Fund Share portfolio that holds listed derivatives, including 
futures, options and swaps on commodities, currencies and financial 
instruments (e.g., stocks, fixed income, interest rates, and 
volatility) or a basket or index of any of the foregoing.\42\ There 
would be no limitation to the percentage of the portfolio invested in 
such holdings; provided, however, that, in the aggregate, at least 90% 
of the weight of such holdings invested in futures, exchange-traded 
options, and listed swaps shall, on both an initial and continuing 
basis, consist of futures, options, and swaps for which the Exchange 
may obtain information via the ISG from other members or affiliates or 
for which the principal market is a market with which the Exchange has 
a comprehensive surveillance sharing agreement CSSA.\43\ The Exchange 
notes that, for purposes of calculating this limitation, a portfolio's 
investment in listed derivatives will be calculated as the total 
absolute notional value of the listed derivatives.
---------------------------------------------------------------------------

    \42\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included the ability for such 
Managed Fund Share holdings to include listed derivatives. See, 
e.g., Securities Exchange Act Release Nos. 75 FR 13616 (March 22, 
2010) (SR-NYSEArca-2010-04) at 13617; and 67054 (May 24, 2012), 77 
FR 32161 (May 31, 2012) (SR-NYSEArca-2012-25) at 32163.
    \43\ See supra note 35. The Commission notes that, pursuant to 
Amendment No. 3, supra note 7, a sentence that followed the 
reference to this footnote in the text above has been deleted from 
the text of the proposal as amended by Amendment No. 1.
---------------------------------------------------------------------------

    Proposed Rule 14.11(i)(4)(C)(v) describes the standards for a 
Managed Fund Share portfolio that holds over the counter (``OTC'') 
derivatives, including forwards, options and swaps on commodities, 
currencies and financial instruments (e.g., stocks, fixed income, 
interest rates, and volatility) or a basket or index of any of the 
foregoing.\44\ Proposed Rule 14.11(i)(4)(C)(v) also provides that no 
more than 20% of the assets in the portfolio may be invested in OTC 
derivatives.
---------------------------------------------------------------------------

    \44\ Proposed rule changes for previously-listed series of 
Managed Fund Shares have similarly included the ability for such 
Managed Fund Shares to include OTC derivatives, specifically OTC 
down-and-in put options, which are not NMS Stocks as defined in Rule 
600 of Regulation NMS and therefore would not satisfy the 
requirements of Rule 14.11(c)(3)(A)(i) or the analogous rule on 
another listing exchange. See, e.g., Securities Exchange Act Release 
No. 69373 (April 15, 2013), 78 FR 23601 (April 19, 2013) (SR-
NYSEArca-2012-108) at 23602.
---------------------------------------------------------------------------

    Proposed Rule 14.11(i)(4)(C)(vi) provides that, to the extent that 
listed or OTC derivatives are used to gain exposure to individual 
equities and/or fixed income securities, or to indexes of equities and/
or fixed income securities, such equities and/or fixed income 
securities, as applicable, shall meet the criteria set forth in Rule 
14.11(i)(4)(C)(i) and 14.11(i)(4)(C)(ii), respectively. The Exchange 
notes that, for purposes of this proposal, a portfolio's investment in 
OTC derivatives will be calculated as the total absolute notional value 
of the OTC derivatives.
    The Exchange believes that the proposed standards would continue to 
ensure transparency surrounding the listing process for Managed Fund 
Shares. Additionally, the Exchange believes that the proposed portfolio 
standards for listing and trading Managed Fund Shares, many of which 
track existing Exchange rules relating to Index Fund Shares, are 
reasonably designed to promote a fair and orderly market for such 
Managed Fund Shares. These proposed standards would also work in 
conjunction with the existing initial and continued listing criteria 
related to surveillance procedures and trading guidelines.
    In support of this proposal, the Exchange represents that: (1)

[[Page 9894]]

Generically listed Managed Fund Shares will conform to the initial and 
continued listing criteria under Rule 14.11(i)(4)(A) and (B); (2) the 
Exchange's surveillance procedures are adequate to continue to properly 
monitor the trading of the Managed Fund 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 will include Managed Fund 
Shares, to monitor trading in the Managed Fund Shares; (3) prior to the 
commencement of trading of a particular series of Managed Fund Shares, 
the Exchange will inform its Members in an information circular of the 
special characteristics and risks associated with trading the Managed 
Fund Shares, including procedures for purchases and redemptions of 
Managed Fund Shares, suitability requirements under Rule 3.7, the risks 
involved in trading the Managed Fund Shares during the Pre-Opening and 
After Hours Trading Sessions when an updated Intraday Indicative Value 
will not be calculated or publicly disseminated, how information 
regarding the Intraday Indicative Value and Disclosed Portfolio is 
disseminated, prospectus delivery requirements, and other trading 
information. In addition, the information circular will disclose that 
the Managed Fund Shares are subject to various fees and expenses, as 
described in the registration statement, and will discuss any 
exemptive, no-action, and interpretive relief granted by the Commission 
from any rules under the Act. Finally, the Bulletin will disclose that 
the net asset value for the Managed Fund Shares will be calculated 
after 4 p.m. ET each trading day; and (4) the issuer of a series of 
Managed Fund Shares will be required to comply with Rule 10A-3 under 
the Act for the initial and continued listing of Managed Fund Shares, 
as provided under Rule 14.10(c)(3).
    The Exchange notes that the proposed change is not otherwise 
intended to address any other issues and that the Exchange is not aware 
of any problems that Members or issuers would have in complying with 
the proposed change.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \45\ in general and Section 6(b)(5) of the Act \46\ 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.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78f.
    \46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 because it would facilitate the listing and trading of 
additional Managed Fund Shares, which would enhance competition among 
market participants, to the benefit of investors and the marketplace. 
Specifically, after more than six years under the current process, 
whereby an exchange is required to file a proposed rule change with the 
Commission for the listing and trading of each new series of Managed 
Fund Shares, the Exchange believes that it is appropriate to codify 
certain rules within Rule 14.11(i) that would generally eliminate the 
need for separate proposed rule changes. The Exchange believes that 
this would facilitate the listing and trading of additional types of 
Managed Fund Shares that have investment portfolios that are similar to 
investment portfolios for Index Fund Shares, which have been approved 
for listing and trading, thereby creating greater efficiencies in the 
listing process for the Exchange and the Commission. In this regard, 
the Exchange notes that the standards proposed for Managed Fund Share 
portfolios that include equity securities, Derivative Securities 
Products, and Linked Securities are based in large part on the existing 
equity security standards applicable to Index Fund Shares based on 
either a U.S. index or portfolio or an international or global index or 
portfolio found in Rule 14.11(c)(3)(A)(i) \47\ and (ii),\48\ 
respectively, and that the standards proposed for Managed Fund Share 
portfolios that include fixed income securities are based in large part 
on the existing fixed income standards applicable to Index Fund Shares 
in 14.11(c)(4). Additionally, many of the standards proposed for other 
types of holdings of series of Managed Fund Shares are based on 
previous proposed rule changes for specific series of Managed Fund 
Shares.\49\
---------------------------------------------------------------------------

    \47\ See supra notes 23 through 27.
    \48\ See supra notes 28 through 35.
    \49\ See supra note 18.
---------------------------------------------------------------------------

    With respect to the proposed addition to the criteria of Rule 
14.11(i)(3)(B) to provide that the Web site for each series of Managed 
Fund Shares shall disclose certain information regarding the Disclosed 
Portfolio, to the extent applicable, the Exchange notes that proposed 
rule changes approved by the Commission for previously-listed series of 
Managed Fund Shares have similarly included disclosure requirements 
with respect to each portfolio holding, as applicable to the type of 
holding.\50\ With respect to the proposed exclusion of Derivative 
Securities Products and Linked Securities from the requirements of 
proposed Rule 14.11(i)(4)(C)(i)(a) and (b), the Exchange believes it is 
appropriate to exclude Linked Securities as well as Derivative 
Securities Products from certain component stock eligibility criteria 
for Managed Fund Shares in so far as Derivative Securities Products and 
Linked Securities are themselves subject to specific quantitative 
listing and continued listing requirements of a national securities 
exchange on which such securities are listed. Derivative Securities 
Products and Linked Securities that are components of a fund's 
portfolio would have been listed and traded on a national securities 
exchange pursuant to a proposed rule change approved by the Commission 
pursuant to Section 19(b)(2) of the Act \51\ or submitted by a national 
securities exchange pursuant to Section 19(b)(3)(A) of the Act \52\ or 
would have been listed by a national securities exchange pursuant to 
the requirements of Rule 19b-4(e) under the Act.\53\ The Exchange also 
notes that Derivative Securities Products and Linked Securities are 
derivatively priced, and, therefore, the Exchange believes that it 
would not be necessary to apply the proposed generic quantitative 
criteria (e.g., market capitalization, trading volume, or portfolio 
component weighting) applicable to equity securities other than 
Derivative Securities Products or Linked Securities (e.g., common 
stocks) to such products.
---------------------------------------------------------------------------

    \50\ See supra note 16.
    \51\ 15 U.S.C. 78s(b)(2).
    \52\ 15 U.S.C. 78s(b)(3)(A).
    \53\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------

    With respect to the proposed amendment to the continued listing 
requirement in Rule 14.11(i)(4)(B)(i) to require dissemination of an 
Intraday Indicative Value at least every 15 seconds during Regular 
Trading Hours, such requirement conforms to the requirement applicable 
to the dissemination of the Intraday Indicative Value for Index Fund 
Shares in Rule 14.11(c)(3)(C) and 14.11(c)(6)(A). In addition, such 
dissemination is consistent with representations made in proposed rule 
changes for issues of Managed Fund Shares previously approved by the 
Commission.\54\
---------------------------------------------------------------------------

    \54\ See supra note 18.

---------------------------------------------------------------------------

[[Page 9895]]

    As proposed, pursuant to Rule 14.11(i)(4)(C)(ii)(c) an underlying 
portfolio (excluding exempted securities) that includes fixed income 
securities must include a minimum of 13 non-affiliated issuers, 
provided, however, that there would be no minimum number of non-
affiliated issuers required for fixed income securities if at least 70% 
of the weight of the portfolio consists of equity securities. The 
Exchange notes that when evaluated in conjunction with proposed Rule 
14.11(i)(4)(C)(ii)(b), the proposed rule is consistent with current 
Rules 14.11(c)(4)(B)(i)(d) and (e) in that it provides for a maximum 
weighting of a fixed income security in the fixed income portion of the 
portfolio of a fund that is comparable to the existing rules applicable 
to Index Fund Shares based on fixed income indexes.
    With respect to the proposed amendment to Rule 14.11(i)(4)(C)(iii) 
relating to cash and cash equivalents, while there is no limitation on 
the amount of cash and cash equivalents can make up of the portfolio, 
such instruments are short-term, highly liquid, and of high credit 
quality, making them less susceptible than other asset classes both to 
price manipulation and volatility. Further, the requirement is 
consistent with representations made in proposed rule changes for 
issues of Managed Fund Shares previously approved by the 
Commission.\55\
---------------------------------------------------------------------------

    \55\ See supra note 40.
---------------------------------------------------------------------------

    With respect to proposed Rule 14.11(i)(4)(C)(iv) relating to listed 
derivatives, the Exchange believes that it is appropriate that there be 
no limit to the percentage of a portfolio invested in such holdings, 
provided that, in the aggregate, at least 90% of the weight of such 
holdings invested in futures, exchange-traded options, and listed swaps 
would consist of futures, options, and swaps for which the Exchange may 
obtain information via ISG from other members or affiliates or for 
which the principal market is a market with which the Exchange has a 
CSSA. Such a requirement would facilitate information sharing among 
market participants trading shares of a series of Managed Fund Shares 
as well as futures and options that such series may hold.\56\ In 
addition, listed swaps would be centrally cleared, reducing 
counterparty risk and thereby furthering investor protection.\57\
---------------------------------------------------------------------------

    \56\ The Commission notes that, pursuant to Amendments No. 3, 
supra note 7, and No. 4, supra note 8, two sentences that followed 
the reference to this footnote in the text above has been deleted 
from the text of the proposal as amended by Amendment No. 1.
    \57\ The Commission has noted that ``[c]entral clearing 
mitigates counterparty risk among dealers and other institutions by 
shifting that risk from individual counterparties to [central 
counterparties (``CCPs'')], thereby protecting CCPs from each 
other's potential failures.'' See Securities Exchange Act Release 
No. 67286 (June 28, 2012) (File No. S7-44-10) (Process for 
Submissions for Review of Security-Based Swaps for Mandatory 
Clearing and Notice Filing Requirements for Clearing Agencies).
---------------------------------------------------------------------------

    With respect to proposed Rule 14.11(i)(4)(C)(v) relating to OTC 
derivatives, the Exchange believes that the limitation to 20% of a 
fund's assets would assure that, to the extent that a fund holds 
derivatives, the preponderance of fund investments would not be in 
derivatives that are not listed and centrally cleared. The Exchange 
believes that such a limitation is sufficient to mitigate the risks 
associated with price manipulation because a 20% cap on OTC derivatives 
will ensure that any series of Managed Fund Shares will be sufficiently 
broad-based in scope to minimize potential manipulation associated with 
OTC derivatives because the remaining 80% of the portfolio will consist 
of instruments subject to numerous restrictions designed to prevent 
manipulation, including equity securities (which, as proposed, would be 
subject to market cap, trading volume, and diversity requirements, 
among others), fixed income securities (which, as proposed, would be 
subject to principal amount outstanding, diversity, and issuer 
requirements, among others), cash and cash equivalents (which, as 
proposed, would be limited to short-term, highly liquid, and high 
credit quality instruments), and/or listed derivatives (which, as 
proposed, 90% of the weight of futures and options will be futures and 
options whose principal market is a member of ISG). With respect to 
proposed Rule 14.11(i)(4)(C)(vi) related to a fund's use of listed or 
OTC derivatives to gain exposure to individual equities and/or fixed 
income securities, or to indexes of equities and/or indexes of fixed 
income securities, the Exchange notes that such exposure would be 
required to meet the numerical and other criteria set forth in proposed 
Rule 14.11(i)(4)(C)(i) and 14.11(i)(4)(C)(ii), respectively.
    Quotation and other market information relating to listed futures 
and options is available from the exchanges listing such instruments as 
well as from market data vendors. With respect to centrally-cleared 
swaps \58\ and non-centrally-cleared swaps regulated by the Commodity 
Futures Trading Commission (the ``CFTC''),\59\ the Dodd-Frank Act 
mandates that swap information be reported to swap data repositories 
(``SDRs'').\60\ SDRs provide a central facility for swap data reporting 
and recordkeeping and are required to comply with data standards set by 
the CFTC, including real-time public reporting of swap transaction data 
to a derivatives clearing organization or SEF.\61\ SDRs require real-
time reporting of all OTC and centrally cleared derivatives, including 
public reporting of the swap price and size. The parties responsible 
for reporting swaps information are CFTC-registered swap dealers 
(``RSDs''), major swap participants, and SEFs. If swap counterparties 
do not fall into the above categories, then one of the parties to the 
swap must report the trade to the SDR. Cleared swaps regulated by the 
CFTC must be executed on a Designated Contract Market (``DCM'') or SEF. 
Such cleared swaps have the same reporting requirements as futures, 
including end-of-day price, volume, and open interest. CFTC swaps 
reporting requirements require public dissemination of, among other 
items, product ID (if available); asset class; underlying reference 
asset, reference issuer, or reference index; termination date; date and 
time of execution; price, including currency; notional amounts, 
including currency; whether direct or indirect counterparties include 
an RSD; whether cleared or un-cleared; and platform ID of where the 
contract was executed (if applicable).
---------------------------------------------------------------------------

    \58\ There are currently five categories of swaps eligible for 
central clearing: Interest rate swaps; credit default swaps; foreign 
exchange swaps; equity swaps; and commodity swaps. The following 
entities provide central clearing for OTC derivatives: ICE Clear 
Credit (U.S.); ICE Clear (E.U.); CME Group; LCH.Clearnet; and Eurex.
    \59\ Pursuant to the Dodd-Frank Act, OTC and centrally-cleared 
swaps are regulated by the CFTC with the exception of security-based 
swaps, which are regulated by the Commission.
    \60\ The following entities are provisionally registered with 
the CFTC as SDRs: BSDR LLC. Chicago Mercantile Exchange, Inc., DTCC 
Data Repository, and ICE Trade Vault.
    \61\ Approximately 21 entities are currently temporarily 
registered with the CFTC as SEFs.
---------------------------------------------------------------------------

    With respect to security-based swaps regulated by the Commission, 
the Commission has adopted Regulation SBSR under the Act implementing 
requirements for regulatory reporting and public dissemination of 
security-based swap transactions set forth in Title VII of the Dodd-
Frank Act. Regulation SBSR provides for the reporting of security-based 
swap information to registered security-based swap data repositories 
(``Registered SDRs'') or the Commission, and the public dissemination 
of security-based

[[Page 9896]]

swap transaction, volume, and pricing information by Registered 
SDRs.\62\
---------------------------------------------------------------------------

    \62\ See Securities Exchange Act Release No. 74244 (February 11, 
2015), 80 FR 14564 (March 19, 2015) (Regulation SBSR--Reporting and 
Dissemination of Security-Based Swap Information).
---------------------------------------------------------------------------

    Price information relating to forwards and OTC options will be 
available from major market data vendors.
    The Exchange notes that a fund's investments in derivative 
instruments would be subject to limits on leverage imposed by the 1940 
Act. Section 18(f) of the 1940 Act and related Commission guidance 
limit the amount of leverage an investment company can obtain. A fund's 
investments would be consistent with its investment objective and would 
not be used to enhance leverage. To limit the potential risk associated 
with a fund's use of derivatives, a fund will segregate or ``earmark'' 
assets determined to be liquid by a fund in accordance with the 1940 
Act (or, as permitted by applicable regulation, enter into certain 
offsetting positions) to cover its obligations under derivative 
instruments. A fund's investments will not be used to seek performance 
that is the multiple or inverse multiple (i.e., 2xs or 3xs) of a fund's 
broad-based securities market index (as defined in Form N-1A).\63\
---------------------------------------------------------------------------

    \63\ See, e.g., Securities Exchange Act Release No. 7482 [sic] 
(April 29, 2015), 86 [sic] FR 25723 (May 5, 2015) (SR-NYSEArca-2014-
89) (order approving listing and trading of shares of eight PIMCO 
exchange-traded funds).
---------------------------------------------------------------------------

    The proposed rule change is also designed to protect investors and 
the public interest because Managed Fund Shares listed and traded 
pursuant to Rule 14.11(i), including pursuant to the proposed new 
portfolio standards, would continue to be subject to the full panoply 
of Exchange rules and procedures that currently govern the trading of 
equity securities on the Exchange, as further described in the Approval 
Order.
    The proposed rule change is also designed to protect investors and 
the public interest as well as to promote just and equitable principles 
of trade in that any Non-U.S. Component Stocks will each meet the 
following criteria initially and on a continuing basis: (1) Have a 
minimum market value of at least $100 million; (2) have a minimum 
global monthly trading volume of 250,000 shares, or minimum global 
notional volume traded per month of $25,000,000, averaged over the last 
six months; (3) most heavily weighted Non-U.S. Component Stock shall 
not exceed 25% of the equity weight of the portfolio, and, to the 
extent applicable, the five most heavily weighted Non-U.S. Component 
Stocks shall not exceed 60% of the equity weight of the portfolio; and 
(4) each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting. The Exchange believes that such 
quantitative criteria are sufficient to mitigate any concerns that may 
arise on the basis of a series of Managed Fund Shares potentially 
holding 100% of its assets in Non-U.S. Component Stocks that are 
neither listed on members of ISG nor exchanges with which the Exchange 
has in place a CSSA because, as stated above, such criteria are either 
the same or more stringent than the portfolio requirements for Index 
Fund Shares that hold Non-U.S. Component Stocks and there are no such 
requirements related to such securities being listed on an exchange 
that is a member of ISG or with which the Exchange has in place a CSSA. 
Further, the Exchange has not encountered and is not aware of any 
instances of manipulation or other negative impact in any series of 
Index Fund Shares that has occurred by virtue of the Index Fund Shares 
holding such Non-U.S. Component Stocks. As such, the Exchange believes 
that there should be no difference in the portfolio requirements for 
Managed Fund Shares and Index Fund Shares as it relates to holding Non-
U.S. Component Stocks that are not listed on an exchange that is a 
member of ISG or with which the Exchange has in place a CSSA.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices because the 
Managed Fund Shares will be listed and traded on the Exchange pursuant 
to the initial and continued listing criteria in Rule 14.11(i). The 
Exchange has in place surveillance procedures that are adequate to 
properly monitor trading in the Managed Fund Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws. The Exchange or FINRA, on behalf of 
the Exchange, will communicate as needed regarding trading in Managed 
Fund Shares and their underlying components with other markets that are 
members of the ISG, including all U.S. securities exchanges and futures 
exchanges on which the components are traded, or with which the 
Exchange has in place a CSSA.\64\ In addition, the Exchange or FINRA, 
on behalf of the Exchange, may obtain information regarding trading in 
Managed Fund Shares and their underlying components from other markets 
that are members of the ISG, including all U.S. securities exchanges 
and futures exchanges on which the components are traded, or with which 
the Exchange has in place a CSSA.\65\
---------------------------------------------------------------------------

    \64\ See Amendment No. 4, supra note 8.
    \65\ See id.
---------------------------------------------------------------------------

    The Exchange also believes that the proposed rule change would 
fulfill the intended objective of Rule 19b-4(e) under the Act by 
allowing Managed Fund Shares that satisfy the proposed listing 
standards to be listed and traded without separate Commission approval. 
However, as proposed, the Exchange would continue to file separate 
proposed rule changes before the listing and trading of Managed Fund 
Shares that do not satisfy the additional criteria described above.
    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. Instead, the Exchange 
believes that the proposed rule change would facilitate the listing and 
trading of additional types of Managed Fund Shares and result in a 
significantly more efficient process surrounding the listing and 
trading of Managed Fund Shares, which will enhance competition among 
market participants, to the benefit of investors and the marketplace. 
The Exchange believes that this would reduce the time frame for 
bringing Managed Fund Shares to market, thereby reducing the burdens on 
issuers and other market participants and promoting competition. In 
turn, the Exchange believes that the proposed change would make the 
process for listing Managed Fund Shares more competitive by applying 
uniform listing standards with respect to Managed Fund Shares.

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. Proceedings To Determine Whether To Approve or Disapprove SR-BATS-
2015-100 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \66\ to determine

[[Page 9897]]

whether the proposed rule change, as modified by Amendments No. 1, No. 
3, and No. 4 thereto, should be approved or disapproved. Institution of 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change, as discussed below. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described below, the Commission seeks and encourages 
interested persons to provide comments on the proposed rule change.
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    \66\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\67\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \68\
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    \67\ Id.
    \68\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal, as modified by Amendments No. 1, No. 3, and No. 4 
thereto. In particular, the Commission invites the written views of 
interested persons concerning whether the proposal, as modified by 
Amendments No. 1, No. 3, and No. 4 thereto, is consistent with Section 
6(b)(5) or any other provision of the Act, or the rules and regulations 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval which would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4, any request for an opportunity to 
make an oral presentation.\69\
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    \69\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    In addition, interested persons are invited to submit written data, 
views, and arguments regarding whether the proposal, as modified by 
Amendments No. 1, No. 3, and No. 4 thereto, should be approved or 
disapproved by March 18, 2016. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by April 1, 
2016.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, in addition to any 
other comments they may wish to submit about the proposed rule change. 
Specifically, the Commission seeks comment on the statements of the 
Exchange contained in the Notice,\70\ as modified by Amendments No. 1, 
No. 3, and No. 4 thereto,\71\ and any other issues raised by the 
proposed amendments to BATS Rule 14.11(i) related to the listing and 
trading of Managed Fund Shares on the Exchange. In particular, the 
Commission seeks comment on the following:
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    \70\ Supra note 3.
    \71\ See supra notes 5, 7, and 8, respectively.
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    1. As described above, the Exchange has proposed listing standards 
with respect to certain asset classes held by actively managed 
exchange-traded funds that are substantively the same as the standards 
applied to those asset classes when held by an index-based fund. Do 
commenters believe that these standards are appropriate for both types 
of funds?
    2. Do commenters believe that the limitations and standards 
proposed for specific assets classes are appropriate?
    3. In general, do commenters believe that the proposed listing 
requirements are adequate to deter manipulation with respect to 
generically listed Managed Fund Shares?
    4. With respect to the proposed generic listing standards, which 
set forth requirements for the listing and trading of Managed Fund 
Shares on an initial and continuing basis, do commenters have views on 
how or whether the Exchange would be able to monitor compliance with 
respect to these continuing listing standards? Do commenters have views 
on what actions, if any, should be taken by the Exchange if a series of 
Managed Fund Shares listed and trading on the Exchange falls out of 
compliance with any of the proposed generic criteria? Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BATS-2015-100 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Numbers SR-BATS-2015-100. 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 Web site (http://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 Web site 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 these filings also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BATS-2015-100 and should be 
submitted on or before March 18, 2016. Rebuttal comments should be 
submitted by April 1, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\72\
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    \72\ 17 CFR 200.30-3(a)(31).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04110 Filed 2-25-16; 8:45 am]
 BILLING CODE 8011-01-P


