[Federal Register Volume 83, Number 133 (Wednesday, July 11, 2018)]
[Notices]
[Pages 32158-32161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14752]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83594; File No. SR-CboeBZX-2018-044]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend BZX Rule 14.11(c), Index Fund 
Shares

July 5, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 21, 2018, Cboe BZX Exchange, Inc. (``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 proposal to amend BZX Rule 14.11(c), Index 
Fund Shares, to make clear that a series of Index Fund Shares meets the 
quantitative requirements of Rules 14.11(c)(3), (4), and (5) where 
either the index or portfolio holdings underlying such fund meets the 
quantitative requirements.
    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

[[Page 32159]]

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 amend BZX Rule 14.11(c), Index Fund 
Shares, to make clear that a series of Index Fund Shares meets the 
quantitative requirements of Rules 14.11(c)(3), (4), and (5) where 
either the index or portfolio holdings underlying such fund meets the 
quantitative requirements. More specifically, the Exchange is proposing 
to make clear that any instance of the phrase ``index or portfolio'' or 
``portfolio or index'' in Rules 14.11(c)(3)(A), 14.11(c)(4)(A) and (B), 
and 14.11(c)(5) (collectively, the ``Generic Listing Standards'') shall 
be interpreted as referring to the constituents of the underlying index 
or the portfolio holdings of the series of Index Fund Shares.
    Practically, this proposal provides that a series of Index Fund 
Shares will be deemed to meet the Generic Listing Standards on a 
continuous basis where the underlying index meets the Generic Listing 
Standards or the fund's portfolio holdings meet the Generic Listing 
Standards. The Generic Listing Standards were designed to allow certain 
series of Index Fund Shares to be listed on the Exchange that, by 
virtue of meeting certain quantitative standards, are deemed as not 
being susceptible to manipulation and for which the creation and 
redemption process and arbitrage mechanism will operate efficiently.\3\ 
Historically, Rule 14.11(c) provided that the Generic Listing Standards 
did not apply on an ongoing basis and meeting such requirements was 
required only prior to the series of Index Fund Shares being listed on 
the Exchange. Because such determination occurred prior to listing on 
the Exchange, the index constituents constituted the best means for 
determining whether a series of Index Fund Shares would be susceptible 
to manipulation and whether the creation and redemption process and 
arbitrage mechanism would operate efficiently. However, the Exchange 
believes that after a series of Index Fund Shares is listed on the 
Exchange, both the index constituents and the portfolio holdings are 
equally viable for evaluating whether the shares are susceptible to 
manipulation and the efficiency of the creation and redemption process 
and the arbitrage mechanism.
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    \3\ Series of Index Fund Shares that meet the Generic Listing 
Standards and the other applicable provisions of Rule 14.11(c) are 
allowed do list on the Exchange pursuant to Rule 19b-4(e). See 17 
CFR 240.19b-4(e).
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    On January 1, 2018, the Generic Listing Standards began applying on 
both an initial and continuous basis,\4\ but the Adopting Order did not 
address the issue of whether the portfolio holdings could satisfy the 
Generic Listing Standards and, thus, the underlying index remains the 
only basis for determining whether a series of Index Fund Shares meets 
the Generic Listing Standards. Looking only to the index constituents 
to determine whether a series of Index Fund Shares can continue to be 
listed on the Exchange is contrary to the policy goals underlying the 
rules for a number of reasons, as further laid out below.
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    \4\ Securities Exchange Act Release Nos. 80169 (March 7, 2017), 
82 FR 13536 (March 13, 2017) (SR-BatsBZX-2016-80) (order approving 
the application of listing standards on a continuous basis) (the 
``Adopting Order'') and 81777 (September 29, 2017), 82 FR 46583 
(October 5, 2017) (notice of filing and immediate effectiveness of 
proposed rule change to extend implementation to January 1, 2018).
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    First, the portfolio holdings are at least as accurate of a measure 
as the index constituents to evaluate whether a series of Index Fund 
Shares are consistent with the policy goals after such fund is already 
listed and trading on the Exchange. When determining whether a series 
of Index Fund Shares are going to be susceptible to manipulation and 
how efficiently the creation and redemption process and the arbitrage 
mechanism will operate, the Generic Listing Standards require that the 
underlying assets associated with a series of Index Fund Shares are 
sufficiently liquid, diverse, unconcentrated, and large. The portfolio 
holdings are arguably a better means for making this determination than 
the index constituents because the portfolio holdings reflect the 
actual assets held by the series of Index Fund Shares while the index 
constituents are just the assets that the series is designed to track. 
As such, the Exchange is proposing that where either the portfolio 
holdings or the index constituents meet the Generic Listing Standards, 
the series of Index Fund Shares should be considered to meet the 
Generic Listing Standards and be able to continue to be listed on the 
Exchange.
    Second, every index is bound by its respective methodology. This 
process is intentionally out of the control of the issuers, whose 
products are ultimately required to meet the Generic Listing Standards. 
While it makes sense to look to the index constituents for compliance 
with the Generic Listing Standards on an initial basis, it becomes 
problematic on an ongoing basis. Where the index constituents no longer 
meet the Generic Listing Standards, the only way that the constituents 
can get back into compliance is through natural market movements, an 
index rebalance, a change to the index methodology, or a change of 
index. It is not feasible for an issuer to rely on natural market 
movements to bring a series of Index Fund Shares back into compliance 
with the Generic Listing Standards. An index rebalance may bring a 
series of Index Fund Shares back into compliance with the Generic 
Listing Standards, but it isn't guaranteed (index providers do not 
generally consider the Generic Listing Standards in constructing 
indexes) and may not occur within the time frame of the cure periods 
provided under Rule 14.12 (rebalances generally occur quarterly or 
annually). Changes to an index methodology or changing the underlying 
index would require significant effort and months of notice, again 
putting the timeline for implementation outside of the window for the 
cure periods in Rule 14.12. Providing that a series of Index Fund 
Shares meets the Generic Listing Standards where the portfolio holdings 
meet the Generic Listing Standards will allow issuers with a greater 
degree of control over whether their products meet their ongoing 
listing obligations. While such portfolio holdings will still need to 
meet the requirements under the Investment Company Act of 1940 related 
to tracking the underlying index, such flexibility will allow issuers 
to continue to meet the Generic Listing Standards even where an 
underlying index narrowly fails to meet them. Further, it will provide 
issuers with certainty that they will be able to meet the Generic 
Listing Standards even where the underlying index may drift out of 
compliance for any number of reasons.
    Finally, the generic listing standards applicable to the equity and 
index holdings of a series of Managed Fund Shares under Rule 14.11(i) 
are nearly identical to the Generic Listing Standards and are designed 
to mitigate the same policy concerns, but look only to portfolio 
holdings to determine compliance with ongoing listing

[[Page 32160]]

obligations.\5\ The only substantive difference between Index Fund 
Shares and Managed Fund Shares is that Index Fund Shares are designed 
to track the returns of an underlying index and Managed Fund Shares 
employ an actively managed portfolio that is designed to accomplish an 
investment objective rather than tracking an index. The Commission 
determined that such generic listing standards were consistent with the 
Act in the Active Generics Approval Order and the Exchange agrees with 
that determination and further believes that it would be consistent 
with the Act for compliance with the Generic Listing Standards to be 
evaluated based on either the series of Index Fund Shares underlying 
index constituents or portfolio holdings.
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    \5\ See Securities Exchange Act Release No. 78396 (July 22, 
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100).
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    In sum, the Exchange believes that by allowing a series of Index 
Fund Shares to comply with the Generic Listing Standards where either 
its portfolio holdings or index constituents meet the Generic Listing 
Standards, the proposal would provide issuers with significant 
additional regulatory certainty related to a fund's ability to continue 
to be listed and traded on the Exchange pursuant to the Rule 19b-4(e), 
while simultaneously continuing to accomplish the policy goals 
underlying the Generic Listing Standards. The Exchange believes that 
this proposal would enhance competition among market participants, to 
the benefit of investors and the marketplace. In addition, the proposed 
amendments would create greater investor confidence in exchange-traded 
products generally because there will be a greater degree of certainty 
that Index Fund Shares will not be subject to regulatory action or 
delisting.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\6\ in general, and furthers the 
objectives of Sections 6(b)(5) of the Act,\7\ in particular, because 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 regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to, and 
perfect the mechanisms of, a free and open market and a national market 
system and, in general, to protect investors and the public interest 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Exchange has in place surveillance procedures that are adequate 
to properly monitor trading in Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws.
    The Exchange believes the proposed amendments, by explicitly 
permitting the portfolio holdings to determine compliance with the 
Generic Listing Standards, would provide issuers with significant 
additional regulatory certainty related to a fund's ability to continue 
to be listed and traded on the Exchange pursuant to the Rule 19b-4(e), 
while simultaneously continuing to accomplish the policy goals 
underlying the Generic Listing Standards, which would enhance 
competition among market participants, to the benefit of investors and 
the marketplace. In addition, the proposed amendments would create 
greater investor confidence in exchange-traded products generally 
because there will be a greater degree of certainty that Index Fund 
Shares will not be subject to regulatory action or delisting.
    The Exchange believes that looking only to the index constituents 
to determine whether a series of Index Fund Shares can continue to be 
listed on the Exchange is actually inconsistent with the policy goals 
underlying the Generic Listing Standards for a number of reasons, as 
further laid out below. First, the portfolio holdings are at least as 
accurate of a measure as the index constituents to evaluate whether a 
series of Index Fund Shares are consistent with the policy goals after 
such fund is already listed and trading on the Exchange. When 
determining whether a series of Index Fund Shares are going to be 
susceptible to manipulation and how efficiently the creation and 
redemption process and the arbitrage mechanism will operate, the 
Generic Listing Standards require that the underlying assets associated 
with a series of Index Fund Shares are sufficiently liquid, diverse, 
unconcentrated, and large. The portfolio holdings are arguably a better 
means for making this determination than the index constituents because 
the portfolio holdings reflect the actual assets held by the series of 
Index Fund Shares while the index constituents are just the assets that 
the series is designed to track. As such, the Exchange is proposing 
that where either the portfolio holdings or the index constituents meet 
the Generic Listing Standards, the series of Index Fund Shares should 
be considered to meet the Generic Listing Standards and be able to 
continue to be listed on the Exchange.
    Second, indexes are by design slow-moving, relatively inflexible, 
and generally out of the control of issuers. While it makes sense to 
look to the index constituents for compliance with the Generic Listing 
Standards on an initial basis, it becomes problematic on an ongoing 
basis. Where the index constituents no longer meet the Generic Listing 
Standards, the only way that the constituents can get back into 
compliance is through natural market movements, an index rebalance, a 
change to the index methodology, or a change of index. It is not 
feasible for an issuer to rely on natural market movements to bring a 
series of Index Fund Shares back into compliance with the Generic 
Listing Standards. An index rebalance may bring a series of Index Fund 
Shares back into compliance with the Generic Listing Standards, but it 
isn't guaranteed (index providers do not generally consider the Generic 
Listing Standards in constructing indexes) and may not occur within the 
time frame of the cure periods provided under Rule 14.12 (rebalances 
generally occur quarterly or annually). Changes to an index methodology 
or changing the underlying index would require significant effort and 
months of notice, again putting the timeline for implementation outside 
of the window for the cure periods in Rule 14.12. Providing that a 
series of Index Fund Shares meets the Generic Listing Standards where 
the portfolio holdings meet the Generic Listing Standards will allow 
issuers with a greater degree of control over whether their products 
meet their ongoing listing obligations. While such portfolio holdings 
will still need to meet the requirements under the Investment Company 
Act of 1940 related to tracking the underlying index, such flexibility 
will allow issuers to continue to meet the Generic Listing Standards 
even where an underlying index narrowly fails to meet them. Further, it 
will provide issuers with certainty that they will be able to meet the 
Generic Listing Standards even where the underlying index may drift out 
of compliance for any number of reasons.
    Finally, the generic listing standards applicable to the equity and 
index holdings of a series of Managed Fund Shares under Rule 14.11(i) 
are nearly identical to the Generic Listing Standards and are designed 
to mitigate the same policy concerns, but look only to portfolio 
holdings to determine compliance with ongoing listing obligations. The 
only substantive

[[Page 32161]]

difference between Index Fund Shares and Managed Fund Shares is that 
Index Fund Shares are designed to track the returns of an underlying 
index and Managed Fund Shares employ an actively managed portfolio that 
is designed to accomplish an investment objective rather than tracking 
an index. The Commission determined that such generic listing standards 
were consistent with the Act in the Active Generics Approval Order and 
the Exchange agrees with that determination and further believes that 
it would be consistent with the Act for compliance with the Generic 
Listing Standards to be evaluated based on either the series of Index 
Fund Shares underlying index constituents or portfolio holdings.
    In sum, the Exchange believes that by allowing a series of Index 
Fund Shares to comply with the Generic Listing Standards where either 
its portfolio holdings or index constituents meet the Generic Listing 
Standards, the proposal would provide issuers with significant 
additional regulatory certainty related to a fund's ability to continue 
to be listed and traded on the Exchange pursuant to the Rule 19b-4(e), 
while simultaneously continuing to accomplish the policy goals 
underlying the Generic Listing Standards. The Exchange believes that 
this proposal would enhance competition among market participants, to 
the benefit of investors and the marketplace. In addition, the proposed 
amendments would create greater investor confidence in exchange-traded 
products generally because there will be a greater degree of certainty 
that Index Fund Shares will not be subject to regulatory action or 
delisting.
    For the above reasons, the Exchange believes that the proposal 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 believes that the proposed rule change would not 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change 
would allow the portfolio holdings for a series of Index Fund Shares to 
be used to determine compliance with the Generic Listing Standards in 
addition to the index constituents, which would enhance competition 
among market participants, 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
    (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 [email protected]. Please include 
File Number SR-CboeBZX-2018-044 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2018-044. 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 the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2018-044 and should be submitted 
on or before August 1, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-14752 Filed 7-10-18; 8:45 am]
 BILLING CODE 8011-01-P


