[Federal Register Volume 82, Number 248 (Thursday, December 28, 2017)]
[Notices]
[Pages 61608-61611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27998]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82379; File No. SR-CboeBZX-2017-012]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To List and Trade Shares of the LHA 
Market State[supreg] Tactical U.S. Equity ETF, a Series of the ETF 
Series Solutions, Under Rule 14.11(i), Managed Fund Shares

December 21, 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 December 7, 2017, Cboe 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 filed a proposed rule change to list and trade shares 
of the LHA Market State[supreg] Tactical U.S. Equity ETF (the 
``Fund''), a series of the ETF Series Solutions (the ``Trust''), under 
Rule 14.11(i) (``Managed Fund Shares''). The shares of the Fund are 
referred to herein as the ``Shares.''
    The text of the proposed rule change is available at the Exchange's 
website at www.markets.cboe.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 list and trade the Shares under Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange.\3\ The Fund will be an actively managed exchange-
traded fund that seeks to provide investment results that exceed the 
total return performance of the broader U.S. equity market on a risk-
adjusted basis. The Exchange submits this proposal in order to allow 
the Fund to hold listed derivatives, in particular S&P 500 futures, in 
a manner that does not comply with Rule 14.11(i)(4)(C)(iv)(b).\4\ 
Otherwise, the

[[Page 61609]]

Fund will comply with all other listing requirements on an initial and 
continued listing basis under Rule 14.11(i).\5\
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    \3\ The Commission originally approved BZX Rule 14.11(i) in 
Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 
55148 (September 6, 2011) (SR-BATS-2011-018) and subsequently 
approved generic listing standards for Managed Fund Shares under 
Rule 14.11(i) in Securities Exchange Act Release No. 78396 (July 22, 
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100).
    \4\ Rule 14.11(i)(4)(C)(iv)(b) provides that ``the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets shall not exceed 65% of the weight 
of the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset shall not exceed 30% of the weight 
of the portfolio (including gross notional exposures).'' The 
Exchange is proposing that the Fund be exempt only from the 
requirement of Rule 14.11(i)(4)(C)(iv)(b) that prevents the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset from exceeding 30% of the weight 
of the portfolio (including gross notional exposures). The Fund will 
meet the requirement that the aggregate gross notional value of 
listed derivatives based on any five or fewer underlying reference 
assets shall not exceed 65% of the weight of the portfolio 
(including gross notional exposures).
    \5\ The Exchange notes that this proposal is very similar to a 
previously approved proposal to list and trade a series of Managed 
Fund Shares on the Exchange with similar exposures to a single 
underlying reference asset and U.S. exchange-listed equity 
securities. See Securities Exchange Act Release No. 80529 (April 26, 
2017), 82 FR 20506 (May 2, 2017) (SR-BatsBZX-2017-14).
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    The Shares will be offered by the Trust, which was established as a 
Delaware statutory trust on February 9, 2012. The Trust is registered 
with the Commission as an open-end investment company and is expected 
to file a registration statement on behalf of the Fund on Form N-1A 
(``Registration Statement'') with the Commission.\6\ The Fund's 
adviser, Little Harbor Advisors, LLC (the ``Adviser''), is not 
registered as a broker-dealer and is not affiliated with a broker-
dealer. Adviser personnel who make decisions regarding the Fund's 
portfolio are subject to procedures designed to prevent the use and 
dissemination of material nonpublic information regarding the Fund's 
portfolio. In the event that (a) the Adviser becomes registered as a 
broker-dealer or newly affiliated with a broker-dealer; or (b) any new 
adviser or sub-adviser is a registered broker-dealer or becomes 
affiliated with a broker-dealer; it will implement a fire wall with 
respect to its relevant personnel or such broker-dealer affiliate, as 
applicable, regarding access to information concerning the composition 
and/or changes to the portfolio, and will be subject to procedures 
designed to prevent the use and dissemination of material non-public 
information regarding such portfolio.
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    \6\ The Trust expects to file a post-effective amendment to the 
Registration Statement on or about December 15, 2017. See 
Registration Statement on Form N-1A for the Trust (File Nos. 333-
179562 and 811-22668). The descriptions of the Fund and the Shares 
contained herein are based, in part, on information expected to be 
included in the Registration Statement. The Commission has not yet 
issued an order granting exemptive relief to the Trust under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1) applicable to the 
activities of the Fund, but the Fund will not be listed on the 
Exchange until such an order is issued and any conditions contained 
therein are satisfied.
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    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.
LHA Market State Tactical U.S. Equity ETF
    In order to achieve its investment objective, under Normal Market 
Conditions,\7\ the Fund will invest approximately 80% of its net assets 
at the time of investment in U.S. exchange-listed ETFs \8\ that 
principally invest in U.S. equity securities (``U.S. ETFs'') or the 
constituent stocks of a U.S. ETF. As noted above, Rule 
14.11(i)(4)(C)(iv)(b) prevents the Fund from holding listed derivatives 
based on any single underlying reference asset in excess of 30% of the 
weight of its portfolio (including gross notional exposures). The 
Exchange is proposing to allow the Fund to hold up to 60% of the weight 
of its portfolio at the time of investment (including gross notional 
exposures) in S&P 500 futures contracts traded on the Chicago 
Mercantile Exchange (``S&P 500 Futures''). Allowing the Fund to hold a 
greater portion of its portfolio in S&P 500 Futures would mitigate the 
Fund's dependency on holding OTC instruments, which would reduce the 
Fund's operational burden by allowing the Fund to primarily use listed 
futures contracts to achieve its investment objective and would further 
reduce counter-party risk associated with holding OTC instruments. The 
Exchange notes that the Fund may also hold certain fixed income 
securities and cash and cash equivalents in compliance with Rules 
14.11(i)(4)(C)(ii) and (iii) in order to collateralize its derivatives 
positions.
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    \7\ The term ``Normal Market Conditions'' includes, but is not 
limited to, the absence of trading halts in the applicable financial 
markets generally; operational issues causing dissemination of 
inaccurate market information or system failures; or force majeure 
type events such as natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot or labor disruption, or any similar 
intervening circumstance.
    \8\ For purposes of this proposal, the term ETF means Portfolio 
Depositary Receipts and Index Fund Shares as defined in Rule 
14.11(b) and 14.11(c), respectively, and their equivalents on other 
national securities exchanges.
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    As noted above, the Fund's investment in U.S. ETFs or the 
constituent stocks of a U.S. ETF will constitute approximately 80% of 
the Fund's net assets at the time of investment and under Normal Market 
Conditions, and such holdings will meet the requirements for U.S. 
Component Stocks in Rule 14.11(i)(4)(C)(i)(a). The Fund may hold 
approximately 20% of its net assets at the time of investment in fixed 
income securities, cash, and the cash value of futures positions \9\ 
under Normal Market Conditions. The combination of U.S. ETFs, 
constituent stocks of U.S. ETFs, fixed income securities, cash, cash 
equivalents, and the cash value of futures positions will constitute 
the entirety of the Fund's holdings and the cash value of these 
holdings will be used to form the basis for these calculations. The 
Exchange notes that this is different than the calculation used to 
measure the Fund's holdings in S&P 500 Futures as it relates to the 
Fund holding up to 60% of the weight of its portfolio, which, as noted 
above, includes gross notional exposures gained through the S&P 500 
Futures in both the numerator and denominator, which is consistent with 
the derivatives exposure calculation under Rule 14.11(i)(4)(C)(iv). The 
Exchange represents that, except for the 30% limitation in Rule 
14.11(i)(4)(C)(iv)(b), the Fund's proposed investments will satisfy, on 
an initial and continued listing basis, all of the generic listing 
standards under BZX Rule 14.11(i)(4)(C) and all other applicable 
requirements for Managed Fund Shares under Rule 14.11(i).
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    \9\ The cash value of futures positions is based on the value of 
the Fund's daily margin account with the applicable futures 
exchange(s).
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    The Trust is required to comply with Rule 10A-3 under the Act for 
the initial and continued listing of the Shares of the Fund. In 
addition, the Exchange represents that the Shares of the Fund will 
comply with all other requirements applicable to Managed Fund Shares, 
which includes the dissemination of key information such as the 
Disclosed Portfolio,\10\ Net Asset Value,\11\ and the Intraday 
Indicative Value,\12\ suspension of trading or removal,\13\ trading 
halts,\14\ surveillance,\15\ minimum price variation for quoting and 
order entry,\16\ the information circular,\17\ and firewalls \18\ as 
set forth in Exchange rules applicable to Managed Fund Shares. 
Moreover, all of the futures contracts and U.S. ETFs held by the Fund 
will trade on markets that are a member of Intermarket Surveillance 
Group (``ISG'') or affiliated with a member of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing 
agreement.\19\ All statements and representations made in this filing 
regarding (a) the description

[[Page 61610]]

of the portfolio, reference assets, and indices, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules shall constitute continued listing requirements for 
listing the Shares on the Exchange. The issuer has represented to the 
Exchange that it will advise the Exchange of any failure by the Fund or 
Shares to comply with the continued listing requirements, and, pursuant 
to its obligations under Section 19(g)(1) of the Act, the Exchange will 
surveil for compliance with the continued listing requirements. If the 
Fund or Shares are not in compliance with the applicable listing 
requirements, then, with respect to such Fund or Shares, the Exchange 
will commence delisting procedures under Exchange Rule 14.12. FINRA 
conducts certain cross-market surveillances on behalf of the Exchange 
pursuant to a regulatory services agreement. The Exchange is 
responsible for FINRA's performance under this regulatory services 
agreement. If the Fund is not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures with 
respect to such Fund under Exchange R7ule [sic] 14.12.
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    \10\ See Rule 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
    \11\ See Rule 14.11(i)(4)(A)(ii).
    \12\ See Rule 14.11(i)(4)(B)(i).
    \13\ See Rule 14.11(i)(4)(B)(iii).
    \14\ See Rule 14.11(i)(4)(B)(iv).
    \15\ See Rule 14.11(i)(2)(C).
    \16\ See Rule 14.11(i)(2)(B).
    \17\ See Rule 14.11(i)(6).
    \18\ See Rule 14.11(i)(7).
    \19\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange notes that not all 
components of the Disclosed Portfolio for the Fund may trade on 
markets that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \20\ in general and Section 6(b)(5) of the Act \21\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest in that the Shares will meet each of the initial and 
continued listing criteria in BZX Rule 14.11(i) with the exception Rule 
14.11(i)(4)(C)(iv)(b), which requires that the aggregate gross notional 
value of listed derivatives based on any five or fewer underlying 
reference assets shall not exceed 65% of the weight of the portfolio 
(including gross notional exposures), and the aggregate gross notional 
value of listed derivatives based on any single underlying reference 
asset shall not exceed 30% of the weight of the portfolio (including 
gross notional exposures).\22\ The Exchange believes that the liquidity 
in the S&P 500 Futures markets mitigates the concerns that Rule 
14.11(i)(4)(C)(iv)(b) is intended to address and that such liquidity 
would prevent the Shares from being susceptible to manipulation.\23\ 
The Exchange also believes that the concerns that Rule 
14.11(c)(3)(A)(i) are intended to address are mitigated by the 
diversity, liquidity, and market cap of the securities underlying the 
S&P 500[supreg] Index.\24\ Further, allowing the Fund to hold a greater 
portion of its portfolio in S&P 500 Futures would mitigate the Fund's 
dependency on holding OTC instruments, which would reduce the Fund's 
operational burden by allowing the Fund to primarily use listed futures 
contracts to achieve its investment objective and would further reduce 
counter-party risk associated with holding OTC instruments. The 
Exchange further believes that the diversity, liquidity, and market cap 
of the securities underlying the S&P 500 Index are sufficient to 
protect against market manipulation of both the Fund's holdings and the 
Shares.
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    \20\ 15 U.S.C. 78f.
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ As noted above, the Exchange is proposing that the Fund be 
exempt only from the requirement of Rule 14.11(i)(4)(C)(iv)(b) that 
prevents the aggregate gross notional value of listed derivatives 
based on any single underlying reference asset from exceeding 30% of 
the weight of the portfolio (including gross notional exposures). 
The Fund will continue to meet the requirement that the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets shall not exceed 65% of the weight 
of the portfolio (including gross notional exposures).
    \23\ As of December 7, 2017, the average daily notional volume 
for S&P 500 Futures was more than $180 billion over the previous 
thirty trading days.
    \24\ The Exchange notes that the diversity, liquidity, and 
market cap of the components of the S&P 500 Index are such that the 
S&P 500 Index would without question meet the generic listing 
standards applicable to an index composed of U.S. Component Stocks 
in Rule 14.11(c)(3)(A)(i).
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    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. All of the futures 
contracts held by the Fund will trade on markets that are a member of 
ISG or affiliated with a member of ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement. The Exchange 
may obtain information regarding trading in the Shares and the 
underlying futures contracts held by the Fund via the ISG from other 
exchanges who are members or affiliates of the ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement.\25\ The Exchange further notes that the Fund will meet and 
be subject to all other requirements of the Generic Listing Rules and 
other applicable continued listing requirements for Managed Fund Shares 
under Rule 14.11(i), including those requirements regarding the 
dissemination of key information such as the Disclosed Portfolio,\26\ 
Net Asset Value,\27\ and the Intraday Indicative Value,\28\ suspension 
of trading or removal,\29\ trading halts,\30\ surveillance,\31\ minimum 
price variation for quoting and order entry,\32\ the information 
circular,\33\ and firewalls \34\ as set forth in Exchange rules 
applicable to Managed Fund Shares.
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    \25\ See note 19, supra.
    \26\ See note 10, supra.
    \27\ See note 11, supra.
    \28\ See note 12, supra.
    \29\ See note 13, supra.
    \30\ See note 14, supra.
    \31\ See note 15, supra.
    \32\ See note 16, supra.
    \33\ See note 17, supra.
    \34\ See note 18, supra.
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    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change, rather will facilitate the listing and trading of 
an additional actively-managed exchange-traded product that will 
enhance competition among both market participants and listing venues, 
to the benefit of investors and the marketplace.

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

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

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

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

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    (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 proposal 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 [email protected]. Please include 
File No. SR-CboeBZX-2017-012 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 No. SR-CboeBZX-2017-012. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing will also be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-CboeBZX-2017-012 and should be submitted on 
or before January 18, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27998 Filed 12-27-17; 8:45 am]
 BILLING CODE 8011-01-P


