
[Federal Register Volume 82, Number 116 (Monday, June 19, 2017)]
[Notices]
[Pages 27925-27938]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12583]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80911; File No. SR-BatsBZX-2017-30]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Permit the Listing and Trading of 
Managed Portfolio Shares; and To List and Trade Shares of the Following 
Under Proposed Rule 14.11(k): ClearBridge Appreciation ETF; ClearBridge 
Large Cap ETF; ClearBridge MidCap Growth ETF; ClearBridge Select ETF; 
and ClearBridge All Cap Value ETF

June 13, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 1, 2017, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt new Rule 14.11(k) to permit the 
listing and trading of Managed Portfolio Shares, which are shares of 
actively managed exchange-traded funds for which the portfolio is 
disclosed in accordance with standard mutual fund disclosure rules. In 
addition, the Exchange proposes to list and trade shares of the 
following under proposed Rule 14.11(k): ClearBridge Appreciation ETF; 
ClearBridge Large Cap ETF; ClearBridge MidCap Growth ETF; ClearBridge 
Select ETF; and ClearBridge All Cap Value ETF.
    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.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
    The Exchange proposes to add new Rule 14.11(k) for the purpose of 
permitting the listing and trading, or trading pursuant to unlisted 
trading privileges (``UTP''), of Managed Portfolio Shares, which are 
securities issued by an actively managed open-end investment management 
company.\3\ In addition, the Exchange proposes to list and trade shares 
(``Shares'') of the following under proposed Rule 14.11(k): ClearBridge 
Appreciation ETF; ClearBridge Large Cap ETF; ClearBridge MidCap Growth 
ETF; ClearBridge Select ETF; and ClearBridge All Cap Value ETF (each, a 
``Fund'' and, collectively, the ``Funds'').
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    \3\ A Managed Portfolio Share is a security that represents an 
interest in an investment company registered under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1) (``1940 Act'') organized as an 
open-end investment company or similar entity that invests in a 
portfolio of securities selected by its investment adviser 
consistent with its investment objectives and policies. In contrast, 
an open-end investment company that issues Index Fund Shares, listed 
and traded on the Exchange under Rule 14.11(c) (``Index ETFs''), 
seeks to provide investment results that correspond generally to the 
price and yield performance of a specific foreign or domestic stock 
index, fixed income securities index or combination thereof.
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Proposed Listing Rules
    Proposed Rule 14.11(k)(1) provides that the Exchange will consider 
for trading, whether by listing or pursuant to UTP, Managed Portfolio 
Shares that meet the criteria of Rule 14.11(k).
    Proposed Rule 14.11(k)(2) provides that Rule 14.11(k) is applicable 
only to Managed Portfolio Shares and that, except to the extent 
inconsistent with Rule 14.11(k), or unless the context otherwise 
requires, the rules and procedures of the Exchange's Board of Directors 
shall be applicable to the trading on the Exchange of such securities. 
Proposed Rule 14.11(k)(2) provides further that Managed Portfolio 
Shares are included within the definition of ``security'' or 
``securities'' as such terms are used in the Rules of the Exchange.
    Proposed Rule 14.11(k)(2)(A) provides that the Exchange will file 
separate proposals under Section 19(b) of the Act before the listing 
and trading of Managed Portfolio Shares. All statements or 
representations contained in such rule filing regarding (a) the 
description of the portfolio or reference asset, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange listing rules specified in such rule filing will constitute 
continued listing requirements. An issuer of such securities must 
notify the Exchange of any failure to comply with such continued 
listing requirements.
    Proposed Rule 14.11(k)(2)(B) provides that transactions in Managed 
Portfolio Shares will occur only during Regular Trading Hours.\4\
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    \4\ As defined in Rule 1.5(w), the term ``Regular Trading 
Hours'' means the time between 9:30 a.m. and 4:00 p.m. Eastern Time.
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    Proposed Rule 14.11(k)(2)(C) provides that the Exchange will 
implement written surveillance procedures for Managed Portfolio Shares.
    Proposed Rule 14.11(k)(2)(D) provides that Authorized Participants 
(as defined in the Investment Company's Form N-1A filed with the SEC) 
redeeming Managed Portfolio Shares will sign an agreement with an agent 
(``Trusted Agent'') to establish a confidential account for the benefit 
of such Authorized Participant that will receive all consideration from 
the issuer in a redemption. A Trusted Agent may not disclose the 
consideration received in a redemption except as required by law or as 
provided in the Investment Company's Form N-1A, as applicable.
    Proposed Rule 14.11(k)(2)(E) provides that, if the investment 
adviser to the

[[Page 27926]]

Investment Company issuing Managed Portfolio Shares is affiliated with 
a broker-dealer, or if any Trusted Agent is registered as a broker-
dealer or is affiliated with a broker-dealer, such investment adviser 
or Trusted Agent will erect and maintain a ``fire wall'' between the 
investment adviser or Trusted Agent and (i) personnel of the broker-
dealer or broker-dealer affiliate, as applicable, or (ii) the 
Authorized Participant or non-Authorized Participant market maker, as 
applicable, with respect to access to information concerning the 
composition and/or changes to such Investment Company portfolio. 
Personnel who make decisions on the Investment Company's portfolio 
composition must be subject to procedures designed to prevent the use 
and dissemination of material nonpublic information regarding the 
applicable Investment Company portfolio.
    Proposed Rule 14.11(k)(3)(A) defines the term ``Managed Portfolio 
Share'' as a security that (a) is issued by 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 
consistent with the Investment Company's investment objectives and 
policies; and (b) when aggregated in a number of shares equal to a 
Redemption Unit or multiples thereof, may be redeemed at the request of 
an Authorized Participant (as defined in the Investment Company's Form 
N-1A filed with the SEC), which Authorized Participant will be paid, 
through its own separate confidential account established for its 
benefit, a portfolio of securities and/or cash with a value equal to 
the next determined net asset value (``NAV'').
    Proposed Rule 14.11(k)(3)(B) defines the term ``Verified Intraday 
Indicative Value (``VIIV'') as the estimated indicative value of a 
Managed Portfolio Share based on all of the issuer's holdings as of the 
close of business on the prior business day, priced and disseminated in 
at least one second intervals, and subject to validation by a pricing 
verification agent of the Investment Company that is responsible for 
comparing multiple independent pricing sources to establish the 
accuracy of the VIIV.
    Proposed Rule 14.11(k)(3)(C) defines the term ``Redemption Unit'' 
as a specified number of Managed Portfolio Shares.
    Proposed Rule 14.11(k)(3)(D) defines the term ``Reporting 
Authority'' in respect of a particular series of Managed Portfolio 
Shares as a reporting service designated by the issuer as the official 
source for calculating and reporting information relating to such 
series, including, but not limited to, the VIIV, NAV, or other 
information relating to the issuance, redemption or trading of Managed 
Portfolio Shares. A series of Managed Portfolio Shares may have more 
than one Reporting Authority, each having different functions.
    Proposed Rule 14.11(k)(4) sets forth initial and continued listing 
criteria applicable to Managed Portfolio Shares. Proposed Rule 
14.11(k)(4)(A)(i) provides that, for each series of Managed Portfolio 
Shares, the Exchange will establish a minimum number of Managed 
Portfolio Shares required to be outstanding at the time of commencement 
of trading on the Exchange. In addition, proposed Rule 
14.11(k)(4)(A)(ii) provides that the Exchange will obtain a 
representation from the issuer of each series of Managed Portfolio 
Shares that the NAV per share for the series will be calculated daily 
and that the NAV will be made available to all market participants at 
the same time.\5\
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    \5\ Proposed Rule 14.11(k)(4) provides that if the Exchange 
becomes aware that the net asset value with respect to a series of 
Managed Portfolio Shares is not disseminated to all market 
participants at the same time, it will halt trading in such series 
until such time as the net asset value is available to all market 
participants.
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    Proposed Rule 14.11(k)(4)(B) provides that each series of Managed 
Portfolio Shares will be listed and traded subject to application of 
the following continued listing criteria. Proposed Rule 
14.11(k)(4)(B)(i) provides that the VIIV for Managed Portfolio Shares 
will be widely disseminated by one or more major market data vendors at 
least every second during Regular Trading Hours. Proposed Rule 
14.11(k)(4)(B)(ii) provides that the Exchange will maintain 
surveillance procedures for securities listed under Rule 14.11(k) and 
will consider the suspension of trading in, and will commence delisting 
proceedings under Rule 14.12 of, a series of Managed Portfolio Shares 
under any of the following circumstances: (a) If, following the initial 
twelve-month period after commencement of trading on the Exchange of a 
series of Managed Portfolio Shares, there are fewer than 50 beneficial 
holders of the series of Managed Portfolio Shares; (b) if the value of 
the VIIV is no longer calculated or made available to all market 
participants at the same time; (c) if the Investment Company issuing 
the Managed Portfolio Shares has failed to file any filings required by 
the Commission or if the Exchange is aware that the Investment Company 
is not in compliance with the conditions of any exemptive order or no-
action relief granted by the Securities and Exchange Commission to the 
Investment Company with respect to the series of Managed Portfolio 
Shares; (d) if any of the continued listing requirements set forth in 
Rule 14.11(k) are not continuously maintained; (e) if any of the 
statements or representations in the rule filing submitted by the 
Exchange pursuant to Section 19(b) of the Act to permit the listing and 
trading of a series of Managed Portfolio Shares regarding (i) the 
description of the portfolio or reference asset, (ii) limitations on 
portfolio holdings or reference assets, or (iii) the applicability of 
Exchange listing rules specified in such rule filing are not 
continuously maintained; or (f) if such other event shall occur or 
condition exists which, in the opinion of the Exchange, makes further 
dealings on the Exchange inadvisable.
    Proposed Rule 14.11(k)(4)(B)(iii) provides that, upon notification 
to the Exchange by the Investment Company or its agent that (i) the 
prices from the multiple independent pricing sources to be validated by 
the Investment Company's pricing verification agent differ by more than 
25 basis points for 60 seconds in connection with pricing of the VIIV, 
or (ii) that the VIIV of a series of Managed Portfolio Shares is not 
being priced and disseminated in at least one-second intervals, as 
required, the Exchange shall halt trading in the Managed Portfolio 
Shares as soon as practicable. Such halt in trading shall continue 
until the Investment Company or its agent notifies the Exchange that 
the prices from the independent pricing sources no longer differ by 
more than 25 basis points for 60 seconds or that the VIIV is being 
priced and disseminated as required. The Investment Company or its 
agent shall be responsible for monitoring that the VIIV is being priced 
and disseminated as required and whether the prices to be validated 
from multiple independent pricing sources differ by more than 25 basis 
points for 60 seconds. With respect to series of Managed Portfolio 
Shares trading on the Exchange pursuant to unlisted trading privileges, 
if a temporary interruption occurs in the pricing or dissemination of 
the applicable Verified Intraday Indicative Value and the listing 
market halts trading in such series, the Exchange, upon notification by 
the listing market of such halt due to such temporary interruption, 
will halt trading in such series. In addition, if the Exchange becomes 
aware that the NAV

[[Page 27927]]

with respect to a series of Managed Portfolio Shares 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.
    Proposed Rule 14.11(k)(4)(B)(iv) provides that, upon termination of 
an Investment Company, the Exchange requires that Managed Portfolio 
Shares issued in connection with such entity be removed from listing on 
the Exchange.
    Proposed Rule 14.11(k)(4)(B)(v) provides that voting rights shall 
be as set forth in the applicable Investment Company prospectus.
    Proposed Rule 14.11(k)(4)(B)(vi), which relates to limitation of 
Exchange liability, provides that neither the Exchange, the Reporting 
Authority, nor any agent of the Exchange shall have any liability for 
damages, claims, losses or expenses caused by any errors, omissions, or 
delays in calculating or disseminating any current portfolio value; the 
VIIV; the current value of the portfolio of securities required to be 
deposited to the open-end management investment company in connection 
with issuance of Managed Portfolio Shares; the amount of any dividend 
equivalent payment or cash distribution to holders of Managed Portfolio 
Shares; NAV; or other information relating to the purchase, redemption, 
or trading of Managed Portfolio Shares, resulting from any negligent 
act or omission by the Exchange, the Reporting Authority or any agent 
of the Exchange, or any act, condition, or cause beyond the reasonable 
control of the Exchange, its agent, or the Reporting Authority, 
including, but not limited to, an act of God; fire; flood; 
extraordinary weather conditions; war; insurrection; riot; strike; 
accident; action of government; communications or power failure; 
equipment or software malfunction; or any error, omission, or delay in 
the reports of transactions in one or more underlying securities.
Key Features of Managed Portfolio Shares
    While funds issuing Managed Portfolio Shares will be actively-
managed and, to that extent, will be similar to Managed Fund Shares, 
Managed Portfolio Shares differ from Managed Fund Shares in the 
following important respects. First, in contrast to Managed Fund 
Shares, which are actively-managed funds listed and traded under Rule 
14.11(i) \6\ and for which a ``Disclosed Portfolio'' is required to be 
disseminated at least once daily,\7\ the portfolio for an issue of 
Managed Portfolio Shares will be disclosed quarterly in accordance with 
normal disclosure requirements otherwise applicable to open-end 
investment companies registered under the 1940 Act.\8\ Second, in 
connection with the redemption of shares in ``Redemption Unit'' size 
(as described below), the delivery of any portfolio securities in kind 
will generally be effected through a ``Confidential Account'' (as 
described below) for the benefit of the redeeming ``Authorized 
Participant'' (as described below in ``Creation and Redemption of 
Shares'') without disclosing the identity of such securities to the 
Authorized Participant.
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    \6\ The Commission has previously approved listing and trading 
on the Exchange of a number of issues of Managed Fund Shares under 
Rule 14.11(i). See, e.g., Securities Exchange Act Release Nos. 74193 
(February 3, 2015), 80 FR 7066 (February 9, 2015) (SR-BATS-2014-054) 
(order approving the listing and trading of the iShares Short 
Maturity Municipal Bond Fund); 74297 (February 18, 2015), 80 FR 9788 
(February 24, 2015) (SR-BATS-2014-056) (order approving the listing 
and trading of iShares U.S. Fixed Income Balanced Risk Fund). More 
recently, the Commission approved a proposed rule change to adopt 
generic listing standards for Managed Fund Shares. See Securities 
Exchange Act Release No. 78396 (July 22, 2016), 81 FR 49698 (July 
28, 2016 (SR-BATS-2015-100) (order approving proposed rule change to 
amend Rule 14.11(i) to adopt generic listing standards for Managed 
Fund Shares).
    \7\ BZX Rule 14.11(i)(3)(B) defines the term ``Disclosed 
Portfolio'' as the identities and quantities of the securities and 
other assets held by the Investment Company that will form the basis 
for the Investment Company's calculation of net asset value at the 
end of the business day. Rule 14.11(i)(4)(B)(ii)(a) requires that 
the Disclosed Portfolio will be disseminated at least once daily and 
will be made available to all market participants at the same time.
    \8\ A mutual fund is required to file with the Commission its 
complete portfolio schedules for the second and fourth fiscal 
quarters on Form N-CSR under the 1940 Act, and is required to file 
its complete portfolio schedules for the first and third fiscal 
quarters on Form N-Q under the 1940 Act, within 60 days of the end 
of the quarter. Form N-Q requires funds to file the same schedules 
of investments that are required in annual and semi-annual reports 
to shareholders. These forms are available to the public on the 
Commission's Web site at www.sec.gov.
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    For each series of Managed Portfolio Shares, an estimated value--
the VIIV--that reflects an estimated intraday value of a fund's 
portfolio will be disseminated.
    With respect to the Funds, the VIIV will be based upon all of a 
Fund's holdings as of the close of the prior business day and will be 
widely disseminated by one or more major market data vendors at least 
every second during Regular Trading Hours. The dissemination of the 
VIIV will allow investors to determine the estimated intra- day value 
of the underlying portfolio of a series of Managed Portfolio Shares and 
will provide a close estimate of that value throughout the trading day. 
The VIIV should not be viewed as a ``real-time'' update of the NAV per 
Share of each Fund because the VIIV may not be calculated in the same 
manner as the NAV, which will be computed once a day, generally at the 
end of the business day. Unlike the VIIV, which will be based on 
consolidated midpoint of the bid ask spread, the NAV per Share will be 
based on the closing price on the primary market for each portfolio 
security. If there is no closing price for a particular portfolio 
security, such as when it is the subject of a trading halt, a Fund will 
use fair value pricing. That fair value pricing will be carried over to 
the next day's VIIV until the first trade in that stock is reported 
unless the ``Adviser'' (defined below) deems a particular portfolio 
security to be illiquid and/or the available ongoing pricing 
information unlikely to be reliable. In such case, that fact will be 
immediately disclosed on each Fund's Web site, including the identity 
and weighting of that security in a Fund's portfolio, and the impact of 
that security on VIIV calculation, including the fair value price for 
that security being used for the calculation of that day's VIIV.
    The Exchange, after consulting with various Lead Market Makers that 
trade exchange-traded funds (``ETFs'') on the Exchange, believes that 
market makers will be able to make efficient and liquid markets priced 
near the VIIV as long as a VIIV is disseminated at least every second, 
market makers have knowledge of a Fund's means of achieving its 
investment objective, and market makers are permitted to engage in 
``Bona Fide Arbitrage,'' as described below. The Exchange believes that 
market makers will employ Bona Fide Arbitrage in addition to risk-
management techniques such as ``statistical arbitrage,'' which is 
currently used throughout the financial services industry, to make 
efficient markets in exchange-traded products.\9\ This ability should 
permit market makers to make

[[Page 27928]]

efficient markets in an issue of Managed Portfolio Shares without 
precise knowledge of a Fund's underlying portfolio.\10\
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    \9\ Statistical arbitrage enables a trader to construct an 
accurate proxy for another instrument, allowing it to hedge the 
other instrument or buy or sell the instrument when it is cheap or 
expensive in relation to the proxy. Statistical analysis permits 
traders to discover correlations based purely on trading data 
without regard to other fundamental drivers. These correlations are 
a function of differentials, over time, between one instrument or 
group of instruments and one or more other instruments. Once the 
nature of these price deviations have been quantified, a universe of 
securities is searched in an effort to, in the case of a hedging 
strategy, minimize the differential. Once a suitable hedging proxy 
has been identified, a trader can minimize portfolio risk by 
executing the hedging basket. The trader then can monitor the 
performance of this hedge throughout the trade period making 
correction where warranted.
    \10\ Authorized Participants and other broker-dealers that enter 
into their own separate Confidential Accounts shall have enough 
information to ensure that they are able to comply with applicable 
regulatory requirements. For example, for purposes of net capital 
requirements, the maximum Securities Haircut applicable to the 
securities in a Creation Basket, as determined under Rule 15c3-1, 
will be disclosed daily on each Fund's Web site.
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    To enable market makers to engage in Bona Fide Arbitrage, on each 
``Business Day'' (as defined below), before commencement of trading in 
Shares on the Exchange, the Funds will provide to a ``Trusted Agent'' 
(as described below) of each Authorized Participant or ``Non-Authorized 
Participant Market Maker'' \11\ the identities and quantities of 
portfolio securities that will form the basis for a Fund's calculation 
of NAV per Share at the end of the Business Day, as well as the names 
and quantities of the instruments comprising a ``Creation Basket'' and 
the estimated ``Balancing Amount'' (if any) (as described below), for 
that day. This information will permit Authorized Participants to 
purchase ``Creation Units'' through an in-kind transaction with a Fund, 
as described below.
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    \11\ A Non-Authorized Participant Market Maker is a market 
participant that makes a market in Shares, but is not an Authorized 
Participant.
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    In addition, Authorized Participants will be able to instruct the 
Trusted Agent to buy or sell portfolio securities during the day and 
thereby engage in Bona Fide Arbitrage throughout the trading day. For 
example, if an Authorized Participant believes that Shares of a Fund 
are trading at a price that is higher than the value of its underlying 
portfolio based on the VIIV, the Authorized Participant may sell Shares 
short and instruct the Trusted Agent to buy portfolio securities for 
its Confidential Account. When the market price of a Fund's Shares 
falls in line with the value of the portfolio, the Authorized 
Participant can then close out its positions in both the Shares and the 
portfolio securities. The Authorized Participant's purchase of the 
portfolio securities into its Confidential Account, combined with the 
sale of Shares, may also create downward pressure on the price of 
Shares and/or upward pressure on the price of the portfolio securities, 
bringing the market price of Shares and the value of a Fund's portfolio 
securities closer together. Similarly, an Authorized Participant could 
buy Shares and instruct the Trusted Agent to sell the underlying 
portfolio securities from its Confidential Account in an attempt to 
profit when a Fund's Shares are trading at a discount to its portfolio. 
The Authorized Participant's purchase of a Fund's Shares in the 
secondary market, combined with the sale of the portfolio securities 
from its Confidential Account, may also create upward pressure on the 
price of Shares and/or downward pressure on the price of portfolio 
securities, driving the market price of Shares and the value of a 
Fund's portfolio securities closer together. The Adviser represents 
that it understands that, other than the confidential nature of the 
account, this process is identical to how many Authorized Participants 
currently arbitrage existing traditional ETFs.
    Because other market participants can also engage in arbitrage 
activity without using the creation or redemption processes described 
above, the Confidential Account structure will be made available to any 
Non-Authorized Participant Market Maker that is willing to establish a 
Confidential Account. In that case, if a market participant believes 
that a Fund is overvalued relative to its underlying assets, the market 
participant may sell short Shares and instruct its Trusted Agent to buy 
portfolio securities in its Confidential Account, wait for the trading 
prices to move toward parity, and then close out the positions in both 
the Shares and the portfolio securities to realize a profit from the 
relative movement of their trading prices. Similarly, a market 
participant could buy Shares and instruct the Trusted Agent to sell the 
underlying portfolio securities in an attempt to profit when a Fund's 
Shares are trading at a discount to a Fund's underlying or reference 
assets. Any investor that is willing to transact through a broker-
dealer that has established a Confidential Account with a Trusted Agent 
will have the same opportunity to engage in arbitrage activity. As 
discussed above, the trading of a Fund's Shares and the Fund's 
portfolio securities may bring the prices of a Fund's Shares and its 
portfolio assets closer together through market pressure. This type of 
arbitrage is referred to herein as ``Bona Fide Arbitrage.''
    The Exchange understands that traders use statistical analysis to 
derive correlations between different sets of instruments to identify 
opportunities to buy or sell one set of instruments when it is 
mispriced relative to the others. For Managed Portfolio Shares, market 
makers, in addition to employing Bona Fide Arbitrage, may use the 
knowledge of a Fund's means of achieving its investment objective, as 
described in the applicable Fund registration statement, to construct a 
hedging proxy for a Fund to manage a market maker's quoting risk in 
connection with trading Fund Shares. Market makers can then conduct 
statistical arbitrage between their hedging proxy (for example, the 
Russell 1000 Index) and Shares of a Fund, buying and selling one 
against the other over the course of the trading day. They will 
evaluate how their proxy performed in comparison to the price of a 
Fund's Shares, and use that analysis as well as knowledge of risk 
metrics, such as volatility and turnover, to enhance their proxy 
calculation to make it a more efficient hedge.
    Market makers not intending to utilize Bona Fide Arbitrage have 
indicated to the Exchange that there will be sufficient data to run a 
statistical analysis which will lead to spreads being tightened 
substantially around the VIIV. This is similar to certain other 
existing exchange traded products (for example, ETFs that invest in 
foreign securities that do not trade during U.S. trading hours), in 
which spreads may be generally wider in the early days of trading and 
then narrow as market makers gain more confidence in their real-time 
hedges.
Description of the Funds and the Trust
    The Shares of each Fund will be issued by Precidian ETF Trust II 
(``Trust''), a statutory trust organized under the laws of the State of 
Delaware and registered with the Commission as an open-end management 
investment company.\12\ The investment adviser to the Trust will be 
Precidian Funds LLC (the ``Adviser''). The Sub-Adviser to each of the 
Funds will be ClearBridge Investments, LLC (the ``Sub-Adviser'' or 
``ClearBridge'') Legg Mason Investor Services, LLC (the 
``Distributor'') will serve as the distributor of each of the Fund's 
Shares. All statements and representations made in this filing 
regarding (a) the description of the portfolio or reference asset, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange listing rules shall constitute continued 
listing requirements for listing the Shares on the Exchange.
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    \12\ The Trust will be registered under the 1940 Act. On April 
4, 2017, the Trust filed a registration statement on Form N-1A 
relating to the Funds (File No. 811-23246) (the ``Registration 
Statement''). The Shares will not be listed on the Exchange until an 
order (``Exemptive Order'') under the 1940 Act has been issued by 
the Commission with respect to the Exemptive Application. 
Investments made by the Funds will comply with the conditions set 
forth in the Exemptive Order. The description of the operation of 
the Trust and the Funds herein is based, in part, on the 
Registration Statement.
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    As noted above, proposed Rule 14.11(k)(2)(E) provides that, if the

[[Page 27929]]

investment adviser to the Investment Company issuing Managed Portfolio 
Shares is affiliated with a broker-dealer, or if any Trusted Agent is 
registered as a broker-dealer or is affiliated with a broker-dealer, 
such investment adviser or Trusted Agent will erect and maintain a 
``fire wall'' between the investment adviser or Trusted Agent and (i) 
personnel of the broker-dealer or broker-dealer affiliate, as 
applicable, or (ii) the Authorized Participant or non-Authorized 
Participant market maker, as applicable, with respect to access to 
information concerning the composition and/or changes to such 
Investment Company portfolio. Personnel who make decisions on the 
Investment Company's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of material 
nonpublic information regarding the applicable Investment Company 
portfolio.\13\ In addition, proposed Rule 14.11(k)(2)(E) further 
requires that personnel who make decisions on the Investment Company's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material nonpublic information regarding 
the open-end fund's portfolio. Proposed Rule 14.11(k)(2)(E) is nearly 
identical to Rule 14.11(i)(7), related to Managed Fund Shares, and 
similar to Rule 14.11(c)(5)(A)(i), related to Index Fund Shares, except 
that proposed Rule 14.11(k)(2)(E) relates to the establishment of a 
``fire wall'' between the investment adviser and the broker-dealer as 
applicable to an Investment Company's portfolio, not an underlying 
benchmark index, as is the case with index-based funds. The Adviser is 
not registered as a broker-dealer or affiliated with a broker-dealer. 
The Sub-Adviser is not registered as a broker-dealer, but is affiliated 
with a broker-dealer and has implemented a ``fire wall'' with respect 
to such broker-dealer regarding access to information concerning the 
composition and/or changes to a Fund's portfolio.
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    \13\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). As a result, the Adviser and the Sub-Adviser and their 
respective related personnel will be subject to the provisions of 
Rule 204A-1 under the Advisers Act relating to codes of ethics. This 
Rule requires investment advisers to adopt a code of ethics that 
reflects the fiduciary nature of the relationship to clients as well 
as compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violations, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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    In the event (a) the Adviser or Sub-Adviser becomes registered as a 
broker-dealer or becomes newly affiliated with a broker-dealer, or (b) 
any new adviser or sub-adviser is a registered broker-dealer or becomes 
affiliated with a broker-dealer, it will implement a fire wall with 
respect to its relevant personnel or its broker-dealer affiliate 
regarding access to information concerning the composition and/or 
changes to the portfolio, and will be subject to procedures designed to 
prevent the use and dissemination of material non-public information 
regarding such portfolio.
    The portfolio for each Fund will consist primarily of long and/or 
short positions in U.S. exchange-listed securities and shares issued by 
other U.S. exchange-listed ETFs.\14\ All exchange-listed equity 
securities in which the Funds will invest will be listed and traded on 
U.S. national securities exchanges.
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    \14\ For purposes of describing the holdings of the Funds, ETFs 
include Portfolio Depository Receipts (as described in Rule 
14.11(b)); Index Fund Shares (as described in Rule 14.11(c)); and 
Managed Fund Shares (as described in Rule 14.11(i)). The ETFs in 
which a Fund will invest all will be listed and traded on national 
securities exchanges. While the Funds may invest in inverse ETFs, 
the Funds will not invest in leveraged (e.g., 2X, -2X, 3X or -3X) 
ETFs
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Description of the Funds
ClearBridge Appreciation ETF
    The ClearBridge Appreciation ETF will seek to provide long-term 
appreciation of shareholders' capital. The Fund will seek to achieve 
its investment objective by investing primarily in U.S. exchange-listed 
equity securities. The fund will typically invest in medium and large 
capitalization companies, but may also invest in small capitalization 
companies.
ClearBridge Large Cap ETF
    The ClearBridge Large Cap ETF will seek long-term capital 
appreciation. The Fund will seek to achieve its investment objective by 
taking long and possibly short positions in equity securities or groups 
of equities that the portfolio managers believe will provide long term 
capital appreciation. The Fund normally invests at least 80% of its net 
assets (plus borrowings for investment purposes) in stocks included in 
the Russell 1000 Index and ETFs that primarily invest in stocks in the 
Russell 1000 Index. The Fund purchases securities that the Sub-Adviser 
believes are undervalued, and sells short securities that it believes 
are overvalued.
ClearBridge Mid Cap Growth ETF
    The ClearBridge Mid Cap Growth ETF will seek long-term growth of 
capital. The Fund will seek to achieve its investment objective by 
investing primarily in U.S. exchange-listed, publicly traded equity and 
equity-related securities of U.S. companies or other instruments with 
similar economic characteristics. The fund may invest in securities of 
issuers of any market capitalization.
ClearBridge Select ETF
    The ClearBridge Select ETF will seek to provide long-term growth of 
capital. The Fund will seek to achieve its investment objective by 
investing primarily in U.S. exchange-listed, publicly traded equity and 
equity-related securities of U.S. companies or other instruments with 
similar economic characteristics. The fund may invest in securities of 
issuers of any market capitalization.
ClearBridge All Cap Value ETF
    The ClearBridge All Cap Value ETF will seeks long-term capital 
growth with current income as a secondary consideration. The Fund will 
seek to achieve its investment objective by investing primarily in 
common stocks and common stock equivalents, such as preferred stocks 
and securities convertible into common stocks, of companies the Sub-
Adviser believes are undervalued in the marketplace. The Fund may 
invest up to 25% of its net assets in equity securities of foreign 
issuers through U.S. exchange-listed depositary receipts.
Other Investments
    While each Fund, under normal market conditions, will invest 
primarily in U.S. exchange-listed securities, as described above, each 
Fund may invest its remaining assets in other securities and financial 
instruments, as described below.
    According to the Registration Statement, each Fund may enter into 
repurchase agreements. It will be the policy of the Trust to enter into 
repurchase agreements only with recognized securities dealers, banks 
and Fixed Income Clearing Corporation, a securities clearing agency 
registered with the Commission.

[[Page 27930]]

    Each Fund may invest up to 5% of its total assets in warrants, 
rights and options.
    Each Fund may invest a portion of its assets in cash or cash 
equivalents.\15\
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    \15\ For purposes of this filing, cash equivalents include 
short-term instruments (instruments with maturities of less than 3 
months) of the following types: (i) U.S. Government securities, 
including bills, notes and bonds differing as to maturity and rates 
of interest, which are either issued or guaranteed by the U.S. 
Treasury or by U.S. Government agencies or instrumentalities; (ii) 
certificates of deposit issued against funds deposited in a bank or 
savings and loan association; (iii) bankers' acceptances, which are 
short-term credit instruments used to finance commercial 
transactions; (iv) repurchase agreements and reverse repurchase 
agreements; (v) bank time deposits, which are monies kept on deposit 
with banks or savings and loan associations for a stated period of 
time at a fixed rate of interest; (vi) commercial paper, which are 
short-term unsecured promissory notes; and (vii) money market funds.
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    Each Fund may invest in the securities of other investment 
companies (including money market funds) to the extent allowed by law.
Investment Restrictions
    Each Fund may invest up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment),\16\ 
consistent with Commission guidance. Each Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of a Fund's net assets are 
invested in illiquid assets. Illiquid assets include securities subject 
to contractual or other restrictions on resale and other instruments 
that lack readily available markets as determined in accordance with 
Commission staff guidance.\17\
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    \16\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers and the mechanics of transfer).
    \17\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act of 1933). The 
Commission recently codified this long standing position in Rule 
22e-4. See Investment Company Act Release No. 32315 (October 13, 
2016), 81 FR 82142 (November 18, 2016) (adopting requirements for 
investment company liquidity risk management programs).
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    According to the Registration Statement, each Fund will seek to 
qualify for treatment as a Regulated Investment Company (``RIC'') under 
the Internal Revenue Code.\18\
---------------------------------------------------------------------------

    \18\ 26 U.S.C. 851.
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    The Funds will not invest in securities listed on non-U.S. 
exchanges.
    The Shares of each Fund will conform to the initial and continued 
listing criteria under proposed Rule 14.11(k). The Funds will not 
invest in futures, forwards or swaps.
    Each Fund's investments will be consistent with its investment 
objective and will not be used to enhance leverage. While a Fund may 
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X, 
-2X, 3X or -3X) ETFs.
Creations and Redemptions of Shares
    In connection with the creation and redemption of Creation Units 
(defined below), the delivery or receipt of any portfolio securities 
in-kind will be required to be effected through a separate confidential 
brokerage account (i.e., a Confidential Account) with a Trusted 
Agent,\19\ which will be a bank or broker-dealer such as JP Morgan 
Chase, State Street Bank and Trust, or Bank of New York Mellon, for the 
benefit of an Authorized Participant.\20\ An Authorized Participant 
will generally be a Depository Trust Company (``DTC'') Participant that 
has executed a ``Participant Agreement'' with the Distributor with 
respect to the creation and redemption of Creation Units and formed a 
Confidential Account for its benefit in accordance with the terms of 
the Participant Agreement. For purposes of creations or redemptions, 
all transactions will be effected through the respective Authorized 
Participant's Confidential Account, for the benefit of the Authorized 
Participant without disclosing the identity of such securities to the 
Authorized Participant.
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    \19\ Each Authorized Participant shall enter into its own 
separate Confidential Account with a Trusted Agent.
    \20\ In the event that a Trusted Agent is a bank, the bank will 
be required to have an affiliated broker-dealer to accommodate the 
execution of hedging transactions on behalf of the holder of a 
Confidential Account.
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    Each Trusted Agent will be given, before the commencement of 
trading each Business Day (defined below), both the holdings of a Fund 
and their relative weightings for that day. This information will 
permit an Authorized Participant, or other market participant that has 
established a Confidential Account with a Trusted Agent, to instruct 
the Trusted Agent to buy and sell positions in the portfolio securities 
to permit Bona Fide Arbitrage, as defined above.
    Shares of each Fund will be issued in Creation Units of 25,000 or 
more Shares. The Funds will offer and sell Creation Units through the 
Distributor on a continuous basis at the NAV per Share next determined 
after receipt of an order in proper form. The NAV per Share of each 
Fund will be determined as of the close of regular trading on the New 
York Stock Exchange (``NYSE'') on each day that the NYSE is open. A 
``Business Day'' is defined as any day that the Trust is open for 
business. The Funds will sell and redeem Creation Units only on 
Business Days. Applicants anticipate that the initial price of a Share 
will range from $20 to $30, and that the price of a Creation Unit will 
initially range from $1,000,000 to $5,000,000.
    In order to keep costs low and permit each Fund to be as fully 
invested as possible, Shares will be purchased and redeemed in Creation 
Units and generally on an in-kind basis. Accordingly, except where the 
purchase or redemption will include cash under the circumstances 
described in the Registration Statement, purchasers will be required to 
purchase Creation Units by making an in-kind deposit of specified 
instruments (``Deposit Instruments''), and shareholders redeeming their 
Shares will receive an in-kind transfer of specified instruments 
(``Redemption Instruments'').\21\ On any given Business Day, the names 
and quantities of the instruments that constitute the Deposit 
Instruments and the names and quantities of the instruments that 
constitute the Redemption Instruments will be identical, and these 
instruments may be referred to, in the case of either a purchase or a 
redemption, as the ``Creation Basket.'' \22\
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    \21\ The Funds must comply with the federal securities laws in 
accepting Deposit Instruments and satisfying redemptions with 
Redemption Instruments, including that the Deposit Instruments and 
Redemption Instruments are sold in transactions that would be exempt 
from registration under the 1933 Act.
    \22\ In determining whether a particular Fund will sell or 
redeem Creation Units entirely on a cash or in-kind basis, whether 
for a given day or a given order, the key consideration will be the 
benefit that would accrue to a Fund and its investors. The Adviser 
represents that the Funds do not currently anticipate the need to 
sell or redeem Creation Units entirely on a cash basis.

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[[Page 27931]]

    As noted above, each Authorized Participant will be required to 
establish a Confidential Account with a Trusted Agent and transact with 
each Fund through that Confidential Account.\23\
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    \23\ The Adviser represents that transacting through a 
Confidential Account is similar to transacting through any broker-
dealer account, except that the Trusted Agent will be bound to keep 
the names and weights of the portfolio securities confidential. To 
comply with certain recordkeeping requirements applicable to 
Authorized Participants, the Trusted Agent will maintain and 
preserve, and make available to the Commission, certain required 
records related to the securities held in the Confidential Account.
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    Therefore, before the commencement of trading on each Business Day, 
the Trusted Agent of each Authorized Participant will be provided, on a 
confidential basis, with a list of the names and quantities of the 
instruments comprising a Creation Basket, as well as the estimated 
Balancing Amount (if any), for that day. The published Creation Basket 
will apply until a new Creation Basket is announced on the following 
Business Day, and there will be no intra-day changes to the Creation 
Basket except to correct errors in the published Creation Basket. The 
instruments and cash that the purchaser is required to deliver in 
exchange for the Creation Units it is purchasing are referred to as the 
``Portfolio Deposit.''
Placement of Purchase Orders
    Each Fund will issue Shares through the Distributor on a continuous 
basis at NAV. The Exchange represents that the issuance of Shares will 
operate in a manner substantially similar to that of other ETFs.
    Each Fund will issue Shares only at the NAV per Share next 
determined after an order in proper form is received. The Trust will 
sell and redeem Shares on each such day and will not suspend the right 
of redemption or postpone the date of payment or satisfaction upon 
redemption for more than seven days, other than as provided by Section 
22(d) of the 1940 Act.
    Shares may be purchased from a Fund by an Authorized Participant 
for its own account or for the benefit of a customer. The Distributor 
will furnish acknowledgements to those placing such orders that the 
orders have been accepted, but the Distributor may reject any order 
which is not submitted in proper form, as described in a Fund's 
prospectus or Statement of Additional Information (``SAI''). Purchases 
of Shares will be settled in-kind or cash for an amount equal to the 
applicable NAV per Share purchased plus applicable ``Transaction 
Fees,'' as discussed below.
    The NAV of each Fund is expected to be determined once each 
Business Day at a time determined by the Trust's Board of Directors 
(``Board''), currently anticipated to be as of the close of the regular 
trading session on the NYSE (ordinarily 4:00 p.m. E.T.) (the 
``Valuation Time''). Each Fund will establish a cut-off time (``Order 
Cut-Off Time'') for purchase orders in proper form. To initiate a 
purchase of Shares, an Authorized Participant must submit to the 
Distributor an irrevocable order to purchase such Shares after the most 
recent prior Valuation Time but not later than the Order Cut-Off Time. 
The Order Cut-Off Time for a Fund may be its Valuation Time, or may be 
prior to the Valuation Time if the Board determines that an earlier 
Order Cut-Off Time for purchase of Shares is necessary and is in the 
best interests of Fund shareholders.
    All orders to purchase Creation Units must be received by the 
Distributor no later than the scheduled closing time of the regular 
trading session on the NYSE (ordinarily 4:00 p.m. E.T.) in each case on 
the date such order is placed (``Transmittal Date'') in order for the 
purchaser to receive the NAV per Share determined on the Transmittal 
Date. In the case of custom orders, the order must be received by the 
Distributor, no later than 3:00 p.m. E.T., or such earlier time as may 
be designated by the Funds and disclosed to Authorized 
Participants.\24\ The Distributor will maintain a record of Creation 
Unit purchases and will send out confirmations of such purchases.\25\
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    \24\ A ``custom order'' is any purchase or redemption of Shares 
made in whole or in part on a cash basis, as provided in the 
Registration Statement.
    \25\ A Trusted Agent will provide information related to 
creations and redemption of Creation Units to the Financial Industry 
Regulatory Authority (``FINRA'') upon request.
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Transaction Fees
    The Trust may impose purchase or redemption transaction fees 
(``Transaction Fees'') in connection with the purchase or redemption of 
Shares from the Funds. The exact amounts of any such Transaction Fees 
will be determined by the Adviser. The purpose of the Transaction Fees 
is to protect the continuing shareholders against possible dilutive 
transactional expenses, including operational processing and brokerage 
costs, associated with establishing and liquidating portfolio 
positions, including short positions, in connection with the purchase 
and redemption of Shares.
Purchases of Shares--Secondary Market
    Only Authorized Participants and their customers will be able to 
acquire Shares at NAV directly from a Fund through the Distributor. The 
required payment must be transferred in the manner set forth in a 
Fund's SAI by the specified time on the third DTC settlement day 
following the day it is transmitted (the ``Transmittal Date''). These 
investors and others will also be able to purchase Shares in secondary 
market transactions at prevailing market prices. Each Fund will reserve 
the right to reject any purchase order at any time.
Redemption
    Beneficial Owners may sell their Shares in the secondary market. 
Alternatively, investors that own enough Shares to constitute a 
Redemption Unit (currently, 25,000 Shares) or multiples thereof may 
redeem those Shares through the Distributor, which will act as the 
Trust's representative for redemption. The size of a Redemption Unit 
will be subject to change. Redemption orders for Redemption Units or 
multiples thereof must be placed by or through an Authorized 
Participant.
Authorized Participant Redemption
    The Shares may be redeemed to a Fund in Redemption Unit size or 
multiples thereof as described below. Redemption orders of Redemption 
Units must be placed by or through an Authorized Participant (``AP 
Redemption Order''). Each Fund will establish an Order Cut-Off Time for 
redemption orders of Redemption Units in proper form. Redemption Units 
of the Fund will be redeemable at their NAV per Share next determined 
after receipt of a request for redemption by the Trust in the manner 
specified below before the Order Cut-Off Time. To initiate an AP 
Redemption Order, an Authorized Participant must submit to the 
Distributor an irrevocable order to redeem such Redemption Unit after 
the most recent prior Valuation Time but not later than the Order Cut-
Off Time. The Order Cut-Off Time for a Fund may be its Valuation Time, 
or may be prior to the Valuation Time if the Board determines that an 
earlier Order Cut-Off Time for redemption of Redemption Units is 
necessary and is in the best interests of Fund shareholders.
    Consistent with the provisions of Section 22(e) of the 1940 Act and 
Rule 22e-2 thereunder, the right to redeem will not be suspended, nor 
payment upon redemption delayed, except for: (1) Any period during 
which the NYSE is closed other than customary weekend

[[Page 27932]]

and holiday closings, (2) any period during which trading on the NYSE 
is restricted, (3) any period during which an emergency exists as a 
result of which disposal by a Fund of securities owned by it is not 
reasonably practicable or it is not reasonably practicable for a Fund 
to determine its NAV, and (4) for such other periods as the Commission 
may by order permit for the protection of shareholders.
    Redemptions will occur primarily in-kind, although redemption 
payments may also be made partly or wholly in cash.\26\ The Participant 
Agreement signed by each Authorized Participant will require 
establishment of a Confidential Account to receive distributions of 
securities in-kind upon redemption.\27\ Each Authorized Participant 
will be required to open a Confidential Account with a Trusted Agent in 
order to facilitate orderly processing of redemptions. While a Fund 
will generally distribute securities in-kind, the Adviser may determine 
from time to time that it is not in a Fund's best interests to 
distribute securities in-kind, but rather to sell securities and/or 
distribute cash. For example, the Adviser may distribute cash to 
facilitate orderly portfolio management in connection with rebalancing 
or transitioning a portfolio in line with its investment objective, or 
if there is substantially more creation than redemption activity during 
the period immediately preceding a redemption request, or as necessary 
or appropriate in accordance with applicable laws and regulations. In 
this manner, a Fund can use in-kind redemptions to reduce the 
unrealized capital gains that may, at times, exist in a Fund by 
distributing low cost lots of each security that a Fund needs to 
dispose of to maintain its desired portfolio exposures. Shareholders of 
a Fund would benefit from the in-kind redemptions through the reduction 
of the unrealized capital gains in a Fund that would otherwise have to 
be realized and, eventually, distributed to shareholders.
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    \26\ It is anticipated that any portion of a Fund's NAV 
attributable to appreciated short positions will be paid in cash, as 
securities sold short are not susceptible to in-kind settlement. The 
value of other positions not susceptible to in-kind settlement may 
also be paid in cash.
    \27\ The terms of each Confidential Account will be set forth as 
an exhibit to the applicable Participant Agreement, which will be 
signed by each Authorized Participant. The terms of the Confidential 
Account will provide that the trust be formed under applicable state 
laws; the Custodian may act as Trusted Agent of the Confidential 
Account; and the Trusted Agent will be paid by the Authorized 
Participant a fee negotiated directly between the Authorized 
Participants and the Trusted Agent(s).
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    The redemption basket will consist of the same securities for all 
Authorized Participants on any given day subject to the Adviser's 
ability to make minor adjustments to address odd lots, fractional 
shares, tradeable sizes or other situations.
    After receipt of a Redemption Order, a Fund's custodian 
(``Custodian'') will typically deliver securities to the Confidential 
Account on a pro rata basis (which securities are determined by the 
Adviser) with a value approximately equal to the value of the Shares 
\28\ tendered for redemption at the Cut-Off time. The Custodian will 
make delivery of the securities by appropriate entries on its books and 
records transferring ownership of the securities to the Authorized 
Participant's Confidential Account, subject to delivery of the Shares 
redeemed. The Trusted Agent of the Confidential Account will in turn 
liquidate, hedge or otherwise manage the securities based on 
instructions from the Authorized Participant.\29\ If the Trusted Agent 
is instructed to sell all securities received at the close on the 
redemption date, the Trusted Agent will pay the liquidation proceeds 
net of expenses plus or minus any cash balancing amount to the 
Authorized Participant through DTC.\30\ The redemption securities that 
the Confidential Account receives is expected to mirror the portfolio 
holdings of a Fund pro rata. To the extent a Fund distributes portfolio 
securities through an in-kind distribution to more than one 
Confidential Account for the benefit of that account's Authorized 
Participant, each Fund expects to distribute a pro rata portion of the 
portfolio securities selected for distribution to each redeeming 
Authorized Participant.
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    \28\ If the NAV of the Shares redeemed differs from the value of 
the securities delivered to the applicable Confidential Account, the 
Fund will pay a cash balancing amount to compensate for the 
difference between the value of the securities delivered and the 
NAV.
    \29\ An Authorized Participant will issue execution instructions 
to the Trusted Agent and be responsible for all associated profit or 
losses. Like a traditional ETF, the Authorized Participant has the 
ability to sell the basket securities at any point during normal 
trading hours.
    \30\ Under applicable provisions of the Internal Revenue Code, 
the Authorized Participant is expected to be deemed a ``substantial 
owner'' of the Confidential Account because it receives 
distributions from the Confidential Account. As a result, all 
income, gain or loss realized by the Confidential Account will be 
directly attributed to the Authorized Participant. In a redemption, 
the Authorized Participant will have a basis in the distributed 
securities equal to the fair market value at the time of the 
distribution and any gain or loss realized on the sale of those 
Shares will be taxable income to the Authorized Participant.
---------------------------------------------------------------------------

    If the Authorized Participant would receive a security that it is 
restricted from receiving, a Fund will deliver cash equal to the value 
of that security.
    To address odd lots, fractional shares, tradeable sizes or other 
situations where dividing securities is not practical or possible, the 
Adviser may make minor adjustments to the pro rata portion of portfolio 
securities selected for distribution to each redeeming Authorized 
Participant on such Business Day.
    The Trust will accept a Redemption Order in proper form. A 
Redemption Order is subject to acceptance by the Trust and must be 
preceded or accompanied by an irrevocable commitment to deliver the 
requisite number of Shares. At the time of settlement, an Authorized 
Participant will initiate a delivery of the Shares versus subsequent 
payment against the proceeds, if any, of the sale of portfolio 
securities distributed to the applicable Confidential Account plus or 
minus any cash balancing amounts, and less the expenses of liquidation.
Net Asset Value
    The NAV per Share of a Fund will be computed by dividing the value 
of the net assets of a Fund (i.e. the value of its total assets less 
total liabilities) by the total number of Shares of a Fund outstanding, 
rounded to the nearest cent. Expenses and fees, including, without 
limitation, the management, administration and distribution fees, will 
be accrued daily and taken into account for purposes of determining 
NAV. Interest and investment income on the Trust's assets accrue daily 
and will be included in the Fund's total assets. The NAV per Share for 
a Fund will be calculated by a Fund's administrator (``Administrator'') 
and determined as of the close of the regular trading session on the 
NYSE (ordinarily 4:00 p.m., E.T.) on each day that the NYSE is open.
    Shares of exchange-listed equity securities and exchange listed 
options will be valued at market value, which will generally be 
determined using the last reported official closing or last trading 
price on the exchange or market on which the securities are primarily 
traded at the time of valuation. Repurchase agreements will be valued 
based on price quotations or other equivalent indications of value 
provided by a third-party pricing service. Money market funds will be 
valued based on price quotations or other equivalent indications of 
value provided by a third-party pricing service. Cash equivalents

[[Page 27933]]

will generally be valued on the basis of independent pricing services 
or quotes obtained from brokers and dealers. Options not listed on an 
exchange, rights and warrants will be valued based on price quotations 
or other equivalent indications of value provided by a third-party 
pricing service.
    When last sale prices and market quotations are not readily 
available, are deemed unreliable or do not reflect material events 
occurring between the close of local markets and the time of valuation, 
investments will be valued using fair value pricing as determined in 
good faith by the Adviser under procedures established by and under the 
general supervision and responsibility of the Trust's Board of 
Trustees. Investments that may be valued using fair value pricing 
include, but are not limited to: (1) Securities that are not actively 
traded; (2) securities of an issuer that becomes bankrupt or enters 
into a restructuring; and (3) securities whose trading has been halted 
or suspended.
    The frequency with which each Fund's investments will be valued 
using fair value pricing will primarily be a function of the types of 
securities and other assets in which the respective Fund will invest 
pursuant to its investment objective, strategies and limitations. If 
the Funds invest in open-end management investment companies registered 
under the 1940 Act (other than ETFs), they may rely on the NAVs of 
those companies to value the shares they hold of them.
    Valuing the Funds' investments using fair value pricing involves 
the consideration of a number of subjective factors and thus the prices 
for those investments may differ from current market valuations. 
Accordingly, fair value pricing could result in a difference between 
the prices used to calculate NAV and the prices used to determine a 
Fund's VIIV, which could result in the market prices for Shares 
deviating from NAV. In cases where the fair value price of the security 
is materially different from the pricing data provided by the 
independent pricing sources and the Adviser determined that the ongoing 
pricing information is not likely to be reliable, the fair value will 
be used for calculation of the VIIV, and a Fund's Custodian will be 
instructed to disclose the identity and weight of the fair valued 
securities, as well as the fair value price being used for the 
security.
Availability of Information
    The Funds' Web site (www.precidianfunds.com), which will be 
publicly available prior to the public offering of Shares, will include 
a form of the prospectus for each Fund that may be downloaded. The 
Funds' Web site will include additional quantitative information 
updated on a daily basis, including, for each Fund, (1) daily trading 
volume, the prior Business Day's reported closing price, NAV and mid-
point of the bid/ask spread at the time of calculation of such NAV (the 
``Bid/Ask Price''),\31\ and a calculation of the premium and discount 
of the Bid/Ask Price against the NAV, and (2) data in chart format 
displaying the frequency distribution of discounts and premiums of the 
daily Bid/Ask Price against the NAV, within appropriate ranges, for 
each of the four previous calendar quarters. The Web site and 
information will be publicly available at no charge.
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    \31\ The Bid/Ask Price of a Fund will be determined using the 
mid-point of the highest bid and the lowest offer on the Exchange as 
of the time of calculation of a Fund's NAV. The records relating to 
Bid/Ask Prices will be retained by each Fund and its service 
providers.
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    As noted above, a mutual fund is required to file with the 
Commission its complete portfolio schedules for the second and fourth 
fiscal quarters on Form N-CSR under the 1940 Act, and is required to 
file its complete portfolio schedules for the first and third fiscal 
quarters on Form N-Q under the 1940 Act, within 60 days of the end of 
the quarter. Form N-Q requires funds to file the same schedules of 
investments that are required in annual and semi-annual reports to 
shareholders. The Trust's SAI and each Fund's shareholder reports will 
be available free upon request from the Trust. These documents and 
forms may be viewed on-screen or downloaded from the Commission's Web 
site at www.sec.gov.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Updated price information for U.S. exchange-
listed equity securities is available through major market data vendors 
or securities exchanges trading such securities. The intraday, closing 
and settlement prices of money market funds, repurchase agreements, 
reverse repurchase agreements and cash equivalents will be readily 
available from published or other public sources, or major market data 
vendors such as Bloomberg and Thomson Reuters. The NAV of any 
investment company security investment will be readily available on the 
Web site of the relevant investment company and from major market data 
vendors. Quotation and last sale information for the Shares will be 
available via the Consolidated Tape Association (``CTA'') high-speed 
line. In addition, the VIIV, as defined in proposed Rule 14.11(k)(3)(B) 
and as described further below, will be widely disseminated by one or 
more major market data vendors at least every second during Regular 
Trading Hours.
Dissemination of the Verified Intraday Indicative Value
    The VIIV, which is approximate value of each Fund's investments on 
a per Share basis, will be disseminated at least every second during 
Regular Trading Hours. The VIIV should not be viewed as a ``real-time'' 
update of NAV because the VIIV may not be calculated in the same manner 
as NAV, which is computed once per day.
    The Exchange will disseminate the VIIV for each Fund in at least 
one-second intervals during Regular Trading Hours, through the 
facilities of the CTA. The VIIV is essentially an intraday NAV 
calculation at least every second during Regular Trading Hours. Each 
Fund will adopt procedures governing the calculation of the VIIV and 
will bear responsibility for the accuracy of its calculation. Pursuant 
to those procedures, the VIIV will include all accrued income and 
expenses of a Fund and will assure that any extraordinary expenses 
booked during the day that would be taken into account in calculating a 
Fund's NAV for that day are also taken into account in calculating the 
VIIV. For purposes of the VIIV, securities held by a Fund will be 
valued throughout the day based on the mid-point between the 
disseminated current national best bid and offer. The Adviser 
represents that, by utilizing the mid-point pricing for purposes of 
VIIV calculation, stale prices are eliminated and more accurate 
representation of the real time value of the underlying securities is 
provided to the market. Specifically, quotations based on the mid-point 
of bid/ask spreads more accurately reflect current market sentiment by 
providing real time information on where market participants are 
willing to buy or sell securities at that point in time. Using 
quotations rather than last sale information addresses concerns 
regarding the staleness of pricing information of less actively traded 
securities. Because quotations are updated more frequently than last 
sale information especially for inactive securities, the VIIV will be 
based on more current and accurate information.

[[Page 27934]]

The use of quotations will also dampen the impact of any momentary 
spikes in the price of a portfolio security.
    Each Fund will utilize two independent pricing sources to provide 
two independent sources of pricing information. Each Fund will also 
utilize a ``Pricing Verification Agent'' and establish a computer-based 
protocol that will permit the Pricing Verification Agent to 
continuously compare the two data streams from the independent pricing 
agents sources on a real time basis.\32\ A single VIIV will be 
disseminated publicly for each Fund; however, the Pricing Verification 
Agent will continuously compare the public VIIV against a non-public 
alternative intra-day indicative value to which the Pricing 
Verification Agent has access. If it becomes apparent that there is a 
material discrepancy between the two data streams, the Exchange will be 
notified and have the ability to halt trading in a Fund until the 
discrepancy is resolved. Each Fund's Board will review the procedures 
used to calculate the VIIV and maintain its accuracy as appropriate, 
but not less than annually. The specific methodology for calculating 
the VIIV will be disclosed on each Fund's Web site.
---------------------------------------------------------------------------

    \32\ A Fund's Custodian will provide, on a daily basis, the 
constituent basket file comprised of all securities plus any cash to 
the independent pricing agent(s) for purposes of pricing.
---------------------------------------------------------------------------

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 Shares of the Funds. The Exchange will halt trading in 
the Shares under the conditions specified in BZX Rule 11.18. Trading 
may be halted because of market conditions or for reasons that, in the 
view of the Exchange, make trading in the Shares inadvisable, including 
whether unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. Trading in the 
Shares also will be subject to proposed Rule 14.11(k)(4)(B)(iii), which 
sets forth circumstances under which Shares of the Funds may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the Exchange only during Regular Trading Hours as provided in proposed 
Rule 14.11(k)(2)(B). As provided in BZX Rule 11.11(a), the minimum 
price variation for quoting and entry of orders in 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 variation for order entry 
is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under Rule 14.11(k). The Exchange represents that, for initial 
and/or continued listing, each Fund will be in compliance with Rule 
10A-3 under the Act.\33\ A minimum of 100,000 Shares of each Fund will 
be outstanding at the commencement of trading on the Exchange. The 
Exchange will obtain a representation from the issuer of the Shares of 
each Fund that the NAV per Share of each Fund will be calculated daily 
and will be made available to all market participants at the same time.
---------------------------------------------------------------------------

    \33\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Managed Portfolio Shares. 
The issuer has represented to the Exchange that it will advise the 
Exchange of any failure by a Fund to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If a Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under Exchange Rule 14.12.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares, underlying 
stocks, ETFs, and exchange-listed options with other markets and other 
entities that are members of the Intermarket Surveillance Group 
(``ISG''), and the Exchange or FINRA, on behalf of the Exchange, or 
both, may obtain trading information regarding trading such securities 
from such markets and other entities. In addition, the Exchange may 
obtain information regarding trading in the Shares, underlying stocks, 
ETFs, and exchange-listed options from markets and other entities that 
are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.\34\
---------------------------------------------------------------------------

    \34\ For a list of the current members of ISG, see 
www.isgportal.org.
---------------------------------------------------------------------------

    The Funds' Adviser will make available daily to FINRA and the 
Exchange the portfolio holdings of each Fund in order to facilitate the 
performance of the surveillances referred to above.
    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular (``Circular'') of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Circular will discuss the following: (1) The 
procedures for purchases and redemptions of Shares; (2) BZX Rule 3.7, 
which imposes suitability obligations on Exchange members with respect 
to recommending transactions in the Shares to customers; (3) how 
information regarding the VIIV is disseminated; (4) the requirement 
that members deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction; 
and (5) trading information.
    In addition, the Circular will reference that the Funds are subject 
to various fees and expenses described in the Registration Statement. 
The Circular will discuss any exemptive, no-action, and interpretive 
relief granted by the Commission from any rules under the Act. The 
Circular will also disclose that the NAV for the Shares will be 
calculated after 4:00 p.m., E.T. each trading day.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \35\ in general and Section 6(b)(5) of the Act \36\ 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.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78f.
    \36\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 14.11(k) is designed to 
prevent fraudulent and manipulative acts and practices in that the 
proposed rules relating to listing and trading of

[[Page 27935]]

Managed Portfolio Shares provide specific initial and continued listing 
criteria required to be met by such securities. Proposed Rule 
14.11(k)(4) sets forth initial and continued listing criteria 
applicable to Managed Portfolio Shares. Proposed Rule 14.11(k)(A) 
provides that, for each series of Managed Portfolio Shares, the 
Exchange will establish a minimum number of Managed Portfolio Shares 
required to be outstanding at the time of commencement of trading. In 
addition, the Exchange will obtain a representation from the issuer of 
each series of Managed Portfolio Shares that the NAV per share for the 
series will be calculated daily and that the NAV will be made available 
to all market participants at the same time. Proposed Rule 
14.11(k)(4)(B) provides that each series of Managed Portfolio Shares 
will be listed and traded subject to application of the specified 
continued listing criteria, as described above. Proposed Rule 
14.11(k)(4)(B)(i) provides that the VIIV for Managed Portfolio Shares 
will be widely disseminated by one or more major market data vendors at 
least every second during Regular Trading Hours. Proposed Rule 
14.11(k)(4)(B)(iii) provides that, upon notification to the Exchange by 
the Investment Company or its agent that (i) the prices from the 
multiple independent pricing sources to be validated by the Investment 
Company's pricing verification agent differ by more than 25 basis 
points for 60 seconds in connection with pricing of the VIIV, or (ii) 
that the VIIV of a series of Managed Portfolio Shares is not being 
priced and disseminated in at least one-second intervals, as required, 
the Exchange shall halt trading in the Managed Portfolio Shares as soon 
as practicable. Such halt in trading shall continue until the 
Investment Company or its agent notifies the Exchange that the prices 
from the independent pricing sources no longer differ by more than 25 
basis points for 60 seconds or that the VIIV is being priced and 
disseminated as required. Proposed Rule 14.11(k)(2)(E) provides that, 
if the investment adviser to the Investment Company issuing Managed 
Portfolio Shares is affiliated with a broker-dealer, or if any Trusted 
Agent is registered as a broker-dealer or is affiliated with a broker-
dealer, such investment adviser or Trusted Agent will erect and 
maintain a ``fire wall'' between the investment adviser or Trusted 
Agent and (i) personnel of the broker-dealer or broker-dealer 
affiliate, as applicable, or (ii) the Authorized Participant or non-
Authorized Participant market maker, as applicable, with respect to 
access to information concerning the composition and/or changes to such 
Investment Company portfolio. Personnel who make decisions on the 
Investment Company's portfolio composition must be subject to 
procedures designed to prevent the use and dissemination of material 
nonpublic information regarding the applicable Investment Company 
portfolio Personnel who make decisions on the Investment Company's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material nonpublic information regarding 
the applicable Investment Company portfolio.
    With respect to the proposed listing and trading of Shares of the 
Funds, the Exchange believes that the proposed rule change is designed 
to prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Rule 14.11(k). Price 
information for the exchange-listed equity securities held by the Funds 
will be available through major market data vendors or securities 
exchanges listing and trading such securities. All exchange-listed 
equity securities held by the Funds will be listed on U.S. national 
securities exchanges. The listing and trading of such securities is 
subject to rules of the exchanges on which they are listed and traded, 
as approved by the Commission. The Funds will primarily hold U.S. 
exchange-listed securities or ETFs. Further, the Funds will not invest 
in futures or swaps. A Fund's investments will be consistent with its 
respective investment objective and will not be used to enhance 
leverage. The Funds will not invest in securities listed on non-U.S. 
exchanges. The Exchange or FINRA, on behalf of the Exchange, or both, 
will communicate as needed regarding trading in the Shares, underlying 
stocks, ETFs, and exchange-listed options with other markets and other 
entities that are members of the ISG, and the Exchange or FINRA, on 
behalf of the Exchange, or both, may obtain trading information 
regarding trading such securities from such markets and other entities. 
In addition, the Exchange may obtain information regarding trading in 
the Shares, underlying stocks, ETFs, and exchange-listed options from 
markets and other entities that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. A 
Trusted Agent will provide information related to creations and 
redemption of Creation Units to FINRA upon request. The Funds' Adviser 
will make available daily to FINRA and the Exchange the portfolio 
holdings of each Fund in order to facilitate the performance of the 
surveillances referred to above.
    The Exchange, after consulting with various Lead Market Makers that 
trade exchange-traded funds (``ETFs'') on the Exchange, believes that 
market makers will be able to make efficient and liquid markets priced 
near the VIIV as long as a VIIV is disseminated at least every second, 
market makers have knowledge of a Fund's means of achieving its 
investment objective, and market makers are permitted to engage in 
``Bona Fide Arbitrage,'' as described below. The Exchange believes that 
market makers will employ Bona Fide Arbitrage in addition to risk-
management techniques such as ``statistical arbitrage,'' which is 
currently used throughout the financial services industry, to make 
efficient markets in exchange-traded products.\37\ This ability should 
permit market makers to make efficient markets in shares without 
precise knowledge of a fund's underlying portfolio.
---------------------------------------------------------------------------

    \37\ See note 9, supra.
---------------------------------------------------------------------------

    The Exchange understands that traders, in addition to employing 
Bona Fide Arbitrage, use statistical analysis to derive correlations 
between different sets of instruments to identify opportunities to buy 
or sell one set of instruments when it is mispriced relative to the 
others. For Managed Portfolio Shares, market makers utilizing 
statistical arbitrage use the knowledge of a fund's means of achieving 
its investment objective, as described in the applicable fund 
registration statement, to construct a hedging proxy for a fund to 
manage a market maker's quoting risk in connection with trading fund 
shares. Market makers will then conduct statistical arbitrage between 
their hedging proxy (for example, the Russell 1000 Index) and shares of 
a fund, buying and selling one against the other over the course of the 
trading day. Eventually, at the end of each day, they will evaluate how 
their proxy performed in comparison to the price of a fund's shares, 
and use that analysis as well as knowledge of risk metrics, such as 
volatility and turnover, to enhance their proxy calculation to make it 
a more efficient hedge.
    Market makers not intending to utilize Bona Fide Arbitrage have 
indicated to the Exchange that there will be sufficient data to run a 
statistical analysis which will lead to spreads

[[Page 27936]]

being tightened substantially around the VIIV. This is similar to 
certain other existing exchange traded products (for example, ETFs that 
invest in foreign securities that do not trade during U.S. trading 
hours), in which spreads may be generally wider in the early days of 
trading and then narrow as market makers gain more confidence in their 
real-time hedges.
    The Lead Market Makers also indicated that, as with some other new 
exchange- traded products, spreads may be generally wider in the early 
days of trading and would tend to narrow as market makers gain more 
confidence in the accuracy of their hedges and their ability to adjust 
these hedges in real-time relative to the published VIIV and gain an 
understanding of the applicable market risk metrics such as volatility 
and turnover, and as natural buyers and sellers enter the market. Other 
relevant factors cited by Lead Market Makers were that a fund's 
investment objectives are clearly disclosed in the applicable 
prospectus, the existence of quarterly portfolio disclosure, the 
capacity to engage in Bona Fide Arbitrage and the ability to create 
shares in creation unit size.
    The Commission's concept release regarding ``Actively Managed 
Exchange- Traded Funds'' highlighted several issues that could impact 
the Commission's willingness to authorize the operation of an actively-
managed ETF, including whether effective arbitrage of the ETF shares 
exists.\38\ The Concept Release identifies the transparency of a fund's 
portfolio and the liquidity of the securities in a fund's portfolio as 
central to effective arbitrage. With respect to the Funds, the Funds' 
use of U.S. exchange-listed securities and the ability of market makers 
to engage in Bona Fide Arbitrage provide adequate liquidity as well as 
the ability to engage in riskless arbitrage. Additionally, certain 
existing ETFs with portfolios of foreign securities have shown their 
ability to trade efficiently in the secondary market at approximately 
their NAV even though they do not provide opportunities for riskless 
arbitrage transactions during much of the trading day.\39\ Such ETFs 
have been shown to have pricing characteristics very similar to ETFs 
that can be arbitraged in this manner. For example, Index ETFs 
containing securities that trade during different trading hours than 
the ETF, such as Index ETFs that hold Asian stocks, have demonstrated 
efficient pricing characteristics notwithstanding the inability of 
market professionals to engage in ``riskless arbitrage'' with respect 
to the underlying portfolio for most, or even all, of the U.S. trading 
day when Asian markets are closed. Pricing for shares of such ETFs is 
efficient because market professionals are still able to hedge their 
positions with offsetting, correlated positions in derivative 
instruments during the entire trading day.
---------------------------------------------------------------------------

    \38\ See Investment Company Act Release No. 25258 (November 8, 
2001) (the ``Concept Release'').
    \39\ The Adviser represents that the mechanics of arbitrage and 
hedging differ. Prior Rule 10a-1 and Regulation T under the Act both 
describe arbitrage as either buying and selling the same security in 
two different markets or buying and selling two different 
securities, one of which is convertible into the other. This is also 
known as a ``riskless arbitrage'' transaction in that the 
transaction is risk free since it generally consists of buying an 
asset at one price and simultaneously selling that same asset at a 
higher price, thereby generating a profit on the difference. 
Hedging, on the other hand, involves managing risk by purchasing or 
selling a security or instrument that will track or offset the value 
of another security or instrument. Arbitrage and hedging are both 
used to manage risk; however, they involve different trading 
strategies.
---------------------------------------------------------------------------

    The real-time dissemination of a fund's VIIV and the ability for 
market makers to engage in riskless arbitrage through the Bona Fide 
Arbitrage mechanism together with the right of Authorized Participants 
to create and redeem each day at the NAV will be sufficient for market 
participants to value and trade shares in a manner that will not lead 
to significant deviations between the shares' Bid/Ask Price and NAV.
    The pricing efficiency with respect to trading a series of Managed 
Portfolio Shares will generally rest on the ability of market 
participants to arbitrage between the shares and a fund's portfolio, in 
addition to the ability of market participants to assess a fund's 
underlying value accurately enough throughout the trading day in order 
to hedge positions in shares effectively. Professional traders not 
employing Bona Fide Arbitrage can buy shares that they perceive to be 
trading at a price less than that which will be available at a 
subsequent time, and sell shares they perceive to be trading at a price 
higher than that which will be available at a subsequent time. It is 
expected that, as part of their normal day-to-day trading activity, 
market makers assigned to shares by the Exchange, off-exchange market 
makers, firms that specialize in electronic trading, hedge funds and 
other professionals specializing in short-term, non-fundamental trading 
strategies will assume the risk of being ``long'' or ``short'' shares 
through such trading and will hedge such risk wholly or partly by 
simultaneously taking positions in correlated assets \40\ or by netting 
the exposure against other, offsetting trading positions--much as such 
firms do with existing ETFs and other equities. Disclosure of a fund's 
investment objective and principal investment strategies in its 
prospectus and SAI, along with the dissemination of the VIIV every 
second, should permit professional investors to engage easily in this 
type of hedging activity.\41\
---------------------------------------------------------------------------

    \40\ Price correlation trading is used throughout the financial 
industry. It is used to discover both trading opportunities to be 
exploited, such as currency pairs and statistical arbitrage, as well 
as for risk mitigation such as dispersion trading and beta hedging. 
These correlations are a function of differentials, over time, 
between one or multiple securities pricing. Once the nature of these 
price deviations have been quantified, a universe of securities is 
searched in an effort to, in the case of a hedging strategy, 
minimize the differential. Once a suitable hedging basket has been 
identified, a trader can minimize portfolio risk by executing the 
hedging basket. The trader then can monitor the performance of this 
hedge throughout the trade period, making corrections where 
warranted.
    \41\ With respect to trading in Shares of the Funds, market 
participants would manage risk in a variety of ways. In addition to 
Bona Fide Arbitrage, it is expected that market participants will be 
able to determine how to trade Shares at levels approximating the 
VIIV without taking undue risk by gaining experience with how 
various market factors (e.g., general market movements, sensitivity 
of the VIIV to intraday movements in interest rates or commodity 
prices, etc.) affect VIIV, and by finding hedges for their long or 
short positions in Shares using instruments correlated with such 
factors. The Adviser expects that market participants will initially 
determine the VIIV's correlation to a major large capitalization 
equity benchmark with active derivative contracts, such as the 
Russell 1000 Index, and the degree of sensitivity of the VIIV to 
changes in that benchmark. For example, using hypothetical numbers 
for illustrative purposes, market participants should be able to 
determine quickly that price movements in the Russell 1000 Index 
predict movements in a Fund's VIIV 95% of the time (an acceptably 
high correlation) but that the VIIV generally moves approximately 
half as much as the Russell 1000 Index with each price movement. 
This information is sufficient for market participants to construct 
a reasonable hedge--buy or sell an amount of futures, swaps or ETFs 
that track the Russell 1000 equal to half the opposite exposure 
taken with respect to Shares. Market participants will also 
continuously compare the intraday performance of their hedge to a 
Fund's VIIV. If the intraday performance of the hedge is correlated 
with the VIIV to the expected degree, market participants will feel 
comfortable they are appropriately hedged and can rely on the VIIV 
as appropriately indicative of a Fund's performance.
---------------------------------------------------------------------------

    With respect to trading of Shares of the Funds, the ability of 
market participants to buy and sell Shares at prices near the VIIV is 
dependent upon their assessment that the VIIV is a reliable, indicative 
real-time value for a Fund's underlying holdings. Market participants 
are expected to accept the VIIV as a reliable, indicative real-time 
value because (1) the VIIV will be calculated and disseminated based on 
a Fund's actual portfolio holdings, (2) the securities in which the 
Funds plan to invest are generally highly liquid and actively traded 
and therefore generally have accurate real time pricing

[[Page 27937]]

available, and (3) market participants will have a daily opportunity to 
evaluate whether the VIIV at or near the close of trading is indeed 
predictive of the actual NAV.
    The real-time dissemination of a Fund's VIIV, the ability for 
market makers to engage in riskless arbitrage through the Bona Fide 
Arbitrage mechanism, together with the ability of Authorized 
Participants to create and redeem each day at the NAV, will be crucial 
for market participants to value and trade Shares in a manner that will 
not lead to significant deviations between the Shares' Bid/Ask Price 
and NAV.\42\
---------------------------------------------------------------------------

    \42\ The statements in the Statutory Basis section of this 
filing relating to pricing efficiency, arbitrage, and activities of 
market participants, including market makers and Authorized 
Participants, are based on representations by the Adviser and review 
by the Exchange.
---------------------------------------------------------------------------

    In a typical Index ETF, it is standard for Authorized Participants 
to know what securities must be delivered in a creation or will be 
received in a redemption. For Managed Portfolio Shares, however, 
Authorized Participants do not need to know the securities comprising 
the portfolio of a Fund since creations and redemptions are handled 
through the Confidential Account mechanism. The Adviser represents that 
the in-kind creations and redemptions through a Confidential Account 
will preserve the integrity of the active investment strategy and 
eliminate the potential for ``free riding'' or ``front-running,'' while 
still providing investors with the advantages of the ETF structure.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of an 
issue of Managed Portfolio Shares that the NAV per share of a fund will 
be calculated daily and that the NAV will be made available to all 
market participants at the same time. Investors can also obtain a 
fund's SAI, shareholder reports, and its Form N-CSR, Form N-Q and Form 
N-SAR. A fund's SAI and shareholder reports will be available free upon 
request from the applicable fund, and those documents and the Form N-
CSR, Form N-Q and Form N-SAR may be viewed on-screen or downloaded from 
the Commission's Web site. In addition, with respect to the Funds, a 
large amount of information will be publicly available regarding the 
Funds and the Shares, thereby promoting market transparency. Quotation 
and last sale information for the Shares will be available via the CTA 
high-speed line. Information regarding the VIIV will be widely 
disseminated at least every second throughout Regular Trading Hours by 
one or more major market data vendors. The Web site for the Funds will 
include a form of the prospectus for the Funds that may be downloaded, 
and additional data relating to NAV and other applicable quantitative 
information, updated on a daily basis.
    Moreover, prior to the commencement of trading, the Exchange will 
inform its members in a Circular of the special characteristics and 
risks associated with trading the Shares. The Exchange will halt 
trading in the Shares under the conditions specified in BZX Rule 11.18, 
market conditions, or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. Trading in the Shares will be 
subject to proposed Rule 14.11(k)(4)(B)(iii), which sets forth 
circumstances under which Shares of the Funds will be halted. In 
addition, as noted above, investors will have ready access to the VIIV, 
and quotation and last sale information for the Shares. The Shares will 
conform to the initial and continued listing criteria under proposed 
Rule 14.11(k). The Funds will not invest in futures, forwards or swaps. 
Each Fund's investments will be consistent with its investment 
objective and will not be used to enhance leverage. While a Fund may 
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X, 
-2X, 3X or -3X) ETFs.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange-traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, as noted above, investors 
will have ready access to information regarding the VIIV and quotation 
and last sale information for the Shares.
    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 purposes of the Act. The Exchange believes the 
proposed rule change would permit listing and trading of another type 
of actively-managed ETF that has characteristics different from 
existing actively-managed and Index ETFs, and would introduce 
additional competition among various ETF products to the benefit of 
investors.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BatsBZX-2017-30 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsBZX-2017-30. 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/

[[Page 27938]]

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 the filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; 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-
BatsBZX-2017-30 and should be submitted on or before July 10, 2017.
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    \43\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-12583 Filed 6-16-17; 8:45 am]
 BILLING CODE 8011-01-P


