[Federal Register Volume 84, Number 214 (Tuesday, November 5, 2019)]
[Notices]
[Pages 59669-59672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24088]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87421; File No. SR-CboeBZX-2019-068]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade 
Shares of the iShares California Short Maturity Muni Bond ETF of the 
iShares U.S. ETF Trust Under Rule 14.11(i), Managed Fund Shares

October 30, 2019.

I. Introduction

    On July 19, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend Cboe BZX Rule 14.11(c) to list and trade shares (``Shares'') of 
the iShares California Short Maturity Muni Bond ETF (``Fund'') of the 
iShares U.S. ETF Trust under BZX Rule 14.11(i). The proposed rule 
change was published for comment in the Federal Register on August 7, 
2019.\3\ On September 19, 2019, pursuant to Section 19(b)(2) of the 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to approve or disapprove 
the proposed rule change.\5\ On October 1, 2019, the Exchange filed 
Amendment No. 1 to the proposed rule change, which replaced in its 
entirety the proposed rule change as originally submitted.\6\ The 
Commission has received no comments on the proposal. The Commission is 
publishing this order to institute proceedings pursuant to Section 
19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86546 (Aug. 1, 
2019), 84 FR 38689.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 87018, 84 FR 50501 
(Sep. 25, 2019). The Commission designated November 5, 2019 as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to approve or disapprove, 
the proposed rule change.
    \6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-cboebzx-2019-068/srcboebzx2019068-6362715-196411.pdf.
    \7\ 15 U.S.C. 78s(b)(2)(B).

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[[Page 59670]]

II. Summary of the Proposed Rule Change, as Modified by Amendment No. 1 
8
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    \8\ For a full description of the proposal, see Amendment No. 1, 
supra note 6.
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    BZX Rule 14.11(i) permits the Exchange to generically list Managed 
Fund Shares \9\ issued by a fund whose portfolio components satisfy 
certain criteria. The Exchange must file separate proposals under 
Section 19(b) of the Act to list and trade shares of a series of 
Managed Fund Shares with portfolio components that do not satisfy the 
applicable generic listing criteria (including portfolio components not 
specified in the generic listing standards).\10\
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    \9\ ``Managed Fund Shares'' is defined in BZX Rule 
14.11(i)(3)(A).
    \10\ See BZX Rule 14.11(i)(4)(C).
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    According to the Exchange, the Fund will satisfy all of the 
applicable generic listing requirements except for BZX Rule 
14.11(i)(4)(C)(ii)(a),\11\ which requires that fixed income securities 
in a fund's portfolio that in the aggregate account for at least 75% of 
the fixed income weight of the portfolio each have a minimum principal 
amount outstanding of $100 million or more. Accordingly, the Exchange 
filed the pending proposal to seek Commission approval to list and 
trade the Shares.
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    \11\ See Amendment No. 1, supra note 6, 84 FR at 14.
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    BlackRock Fund Advisors (``Adviser'') is the investment adviser to 
the Fund.\12\ The Fund will seek to maximize tax-free current income 
from a portfolio composed of short maturity, investment-grade municipal 
bonds issued in the State of California. To achieve its objective, the 
Fund will invest, under Normal Market Conditions,\13\ at least 80% of 
its net assets in U.S.-dollar denominated investment-grade short-term 
fixed- and floating-rate Municipal Securities, as defined below, with 
remaining maturities of five years or less, issued in the State of 
California by or on behalf of California state or local governments or 
agencies, whose interest payments are exempt from U.S. federal, 
including the federal alternative minimum tax, and California state 
income taxes. Under Normal Market Conditions, the Fund will seek to 
maintain a weighted average maturity that is less than three years.\14\
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    \12\ BFA is an indirect wholly owned subsidiary of BlackRock, 
Inc.
    \13\ 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. In the absence of Normal Market 
Conditions, the Fund may temporarily depart from its normal 
investment process, provided that such departure is, in the opinion 
of the Adviser, consistent with the Fund's investment objective and 
in the best interest of the Fund. For example, the Fund may hold a 
higher than normal proportion of its assets in cash in response to 
adverse market, economic or political conditions. See id. at 7, n.8.
    \14\ Weighted average maturity is a U.S. dollar-weighted average 
of the remaining term to maturity of the underlying securities in 
the Fund's portfolio. For the purposes of determining the Fund's 
weighted average maturity, a security's final maturity date will be 
used for calculation purposes.
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    Municipal Securities include only the following instruments: 
General obligation bonds; limited obligation bonds (or revenue bonds); 
municipal notes; municipal commercial paper; tender option bonds; 
variable rate demand notes and demand obligations; municipal lease 
obligations, stripped securities; structured securities; \15\ zero 
coupon securities; and shares of exchange-traded and non-exchange-
traded investment companies that principally invest in such Municipal 
Securities.
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    \15\ Structured securities, when combined with those instruments 
held as part of the other portfolio holdings described below, will 
not exceed 20% of the Fund's net assets. See id. at 9, n.20
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    Other Portfolio Holdings. The Fund may also, to a limited extent 
(under Normal Market Conditions, less than 20% of the Fund's net 
assets), invest in certain futures, options and swap contracts; \16\ 
cash and cash equivalents; as well as in Municipal Securities of 
issuers located outside of California whose interest payments are 
exempt from regular federal income taxes.\17\ The Fund may also enter 
into repurchase and reverse repurchase agreements for Municipal 
Securities (collectively, ``Repurchase Agreements''). The Fund may also 
invest in short-term instruments (``Short-Term Instruments''),\18\ 
which includes exchange traded and non-exchange traded investment 
companies that invest in money market instruments.
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    \16\ Such futures, options and swap contracts will include only 
the following: Interest rate futures, interest rate options, and 
interest rate swaps. The derivatives will be centrally cleared and 
they will be collateralized. At least 90% of the Fund's net assets 
that are invested in listed derivatives will be invested in 
instruments that trade in markets that are members or affiliates of 
members of the Intermarket Surveillance Group or are parties to a 
comprehensive surveillance sharing with the Exchange. See id. at 10, 
n.24.
    \17\ Issuers located outside of California may be states, 
territories and possessions of the U.S., including the District of 
Columbia, and their political subdivisions, agencies and 
instrumentalities.
    \18\ The Fund may invest in Short-Term Instruments, including 
money market instruments, on an ongoing basis to provide liquidity 
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of 
money market funds; (ii) obligations issued or guaranteed by the 
U.S. government, its agencies or instrumentalities (including 
government-sponsored enterprises); (iii) negotiable certificates of 
deposit, bankers' acceptances, fixed-time deposits and other 
obligations of U.S. and non-U.S. banks (including non-U.S. branches) 
and similar institutions; (iv) commercial paper, including asset-
backed commercial paper; (v) non-convertible corporate debt 
securities (e.g., bonds and debentures) with remaining maturities at 
the date of purchase of not more than 397 days and that satisfy the 
rating requirements set forth in Rule 2a-7 under the 1940 Act; and 
(vi) short-term U.S. dollar-denominated obligations of non-U.S. 
banks (including U.S. branches) that, in the opinion of BFA, are of 
comparable quality to obligations of U.S. banks which may be 
purchased by the Fund. All money market securities acquired by the 
Fund will be rated investment grade. The Fund does not intend to 
invest in any unrated money market securities. However, it may do 
so, to a limited extent, such as where a rated money market security 
becomes unrated, if such money market security is determined by the 
Adviser to be of comparable quality. BFA may determine that unrated 
securities are of comparable quality based on such credit quality 
factors that it deems appropriate, which may include, among other 
things, performing an analysis similar, to the extent possible, to 
that performed by a nationally recognized statistical rating 
organization rating similar securities and issuers.
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    Investment Restrictions. The Fund may hold up to an aggregate 
amount of 15% of its net assets in illiquid assets (calculated at the 
time of investment), as deemed illiquid by the Adviser under the 1940 
Act. The 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 
the Fund's net assets are held in illiquid assets.\19\
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    \19\ Illiquid assets are defined by Rule 22e-4. In reaching 
liquidity decisions, the Adviser may consider factors including: 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; the nature of the security and the nature of the 
marketplace trades (e.g., the time needed to dispose of the 
security, the method of soliciting offers, and the mechanics of 
transfer); any legal or contractual restrictions on the ability to 
transfer the security or asset; significant developments involving 
the issuer or counterparty specifically (e.g., default, bankruptcy, 
etc.) or the securities markets generally; and settlement practices, 
registration procedures, limitations on currency conversion or 
repatriation, and transfer limitations (for foreign securities or 
other assets). See id. at 12-13.
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    Additionally, the Exchange states that the Fund will launch with at 
least 300,000 Shares outstanding. The Exchange also states: (1) The 
portfolio will hold a minimum of 15 different Municipal Securities from 
at least 15 unique issuers when at least six creation units are 
outstanding, but will never hold fewer than 10 different Municipal

[[Page 59671]]

Securities from at least 10 unique issuers; (2) no single obligor will 
account for more than 10% of the weight of the Fund's portfolio and no 
10 obligors will account for more than 75% of the weight of the Fund's 
portfolio.\20\ Additionally, no more than 50% of the Fund's assets will 
be invested in issuers that are more than 5% of the value of the Fund's 
assets, and the Fund will not invest more than 25% of its assets in any 
single issuer.\21\
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    \20\ See id. at 13.
    \21\ See id. at 13-14.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2019-068 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of such proceedings is appropriate at this 
time in view of the legal and policy issues raised by the proposal. 
Institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved. 
Rather, as described below, the Commission seeks and encourages 
interested persons to provide comments on the proposal.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposal's consistency with Section 6(b)(5) of the Act, 
which requires, among other things, that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \24\ Specifically, the Commission seeks comment regarding 
the following:
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    \23\ Id.
    \24\ 15 U.S.C. 78f(b)(5).

    1. Would the proposed requirement that the portfolio hold a 
minimum of ten different Municipal Securities from at least ten 
unique issuers or, when at least six creation units are outstanding, 
fifteen different Municipal Securities from at least fifteen unique 
issuers be sufficient to ensure that the Fund's portfolio isn't 
susceptible to manipulation?
    2. Would the proposed concentration limit, i.e., that no single 
obligor will account for more than 10% of the weight of the Fund's 
portfolio and no ten obligors will account for more than 75% of the 
weight of the Fund's portfolio, be sufficient to ensure that the 
Fund's portfolio isn't susceptible to manipulation?
    3. Taken collectively, would the proposed listing requirements 
adequately ensure that the Fund's portfolio would not be susceptible 
to manipulation?

IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule 
change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) or any other provision of the Act, or the rules and regulations 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4 under the Act,\25\ any request for an 
opportunity to make an oral presentation.\26\
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    \25\ 17 CFR 240.19b-4.
    \26\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 1, should be approved or disapproved by November 26, 
2019. Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by December 10, 2019. The Commission 
asks that commenters address the sufficiency of the Exchange's 
statements in support of the proposal, which are set forth in Amendment 
No. 1,\27\ in addition to any other comments they may wish to submit 
about the proposal.
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    \27\ See supra note 6.
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    In this regard, the Commission seeks comment on the Exchange's 
proposed generic listing standards for Shares based on an index or 
portfolio of Municipal Securities. The Commission specifically seeks 
comment on whether the proposed requirement that an underlying index or 
portfolio must include a minimum of 500 component Municipal Securities 
is consistent with the requirement that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \28\
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    \28\ 15 U.S.C. 78f(b)(5).
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    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-CboeBZX-2019-068 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-2019-068. 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-2019-068 and should be submitted 
by November 26, 2019. Rebuttal comments should be submitted by December 
10, 2019.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24088 Filed 11-4-19; 8:45 am]
 BILLING CODE 8011-01-P


