[Federal Register Volume 84, Number 226 (Friday, November 22, 2019)]
[Notices]
[Pages 64607-64616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25317]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87560; File No. SR-CboeBZX-2019-097]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt BZX Rule 14.11(l) To Permit 
the Listing and Trading of Exchange-Traded Fund Shares That Are 
Permitted To Operate in Reliance on Rule 6c-11 Under the Investment 
Company Act of 1940

November 18, 2019.
    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 November 15, 2019 Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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 proposes a rule change to adopt BZX Rule 14.11(l) to 
permit the listing and trading of Exchange-Traded Fund Shares that are 
permitted to operate in reliance on Rule 6c-11 under the Investment 
Company Act of 1940. The Exchange is also proposing to discontinue the 
quarterly reports required with respect to Managed Fund Shares listed 
on the Exchange pursuant to the generic listing standards under Rule 
14.11(i).
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary,

[[Page 64608]]

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 aspects 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(l) \3\ for the purpose 
of permitting the generic listing and trading, or trading pursuant to 
unlisted trading privileges, of Exchange-Traded Fund Shares \4\ that 
are permitted to operate in reliance on Rule 6c-11 (``Rule 6c-11'') 
under the Investment Company Act of 1940 (the ``1940 Act'').\5\ The 
Exchange is also proposing to discontinue the quarterly reports 
required with respect to Managed Fund Shares listed on the Exchange 
pursuant to the generic listing standards under Rule 14.11(i).
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    \3\ The Exchange notes that it is proposing new Rule 14.11(l) 
because it has also proposed a new Rule 14.11(k) as part of another 
proposal. See Securities Exchange Act Release No. 87062 (September 
23, 2019), 84 FR 51193 (September 27, 2019) (SR-CboeBZX-2019-047).
    \4\ As provided below, proposed Rule 14.11(l)(3)(A) provides 
that the term ``ETF Shares'' shall mean the shares issued by a 
registered open-end management investment company that: (i) Is 
eligible to operate in reliance on Rule 6c-11 under the Investment 
Company Act of 1940; (ii) issues (and redeems) creation units to 
(and from) authorized participants in exchange for a basket and a 
cash balancing amount (if any); and (iii) issues shares that it 
intends to list or are listed on a national securities exchange and 
traded at market-determined prices.
    \5\ 15 U.S.C. 80a-1.
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    The Commission recently adopted Rule 6c-11 to permit exchange-
traded funds (``ETFs'') that satisfy certain conditions to operate 
without obtaining an exemptive order from the Commission under the 1940 
Act.\6\ Since the first ETF was approved by the Commission in 1992, the 
Commission has routinely granted exemptive orders permitting ETFs to 
operate under the 1940 Act because there was no ETF specific rule in 
place and they have characteristics that distinguish them from the 
types of structures contemplated and included in the 1940 Act. After 
such an extended period operating without a specific rule set and only 
under exemptive relief, Rule 6c-11 is designed to provide a consistent, 
transparent, and efficient regulatory framework for ETFs.\7\ Exchange 
listing standards applicable to ETFs have been similarly adopted and 
tweaked over the years and the Exchange believes that, just as the 
Commission has undertaken a review of the 1940 Act as it is applicable 
to ETFs, it is appropriate to perform a similar holistic review and 
overhaul of Exchange listing rules. With this in mind, the Exchange 
submits this proposal to add new Rule 14.11(l) and certain 
corresponding rule changes because it believes that this proposal 
similarly promotes consistency, transparency, and efficiency 
surrounding the exchange listing process for ETF Shares in a manner 
that is consistent with the Act, as further described below.
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    \6\ See Release Nos. 33-10695; IC-33646; File No. S7-15-18 
(Exchange-Traded Funds) (September 25, 2019), 84 FR 57162 (October 
24, 2019) (the ``Rule 6c-11 Release'').
    \7\ In approving the rule, the Commission stated that the ``rule 
will modernize the regulatory framework for ETFs to reflect our more 
than two decades of experience with these investment products. The 
rule is designed to further important Commission objectives, 
including establishing a consistent, transparent, and efficient 
regulatory framework for ETFs and facilitating greater competition 
and innovation among ETFs.'' Rule 6c-11 Release, at 57163. The 
Commission also stated the following regarding the rule's impact: 
``We believe rule 6c-11 will establish a regulatory framework that: 
(1) Reduces the expense and delay currently associated with forming 
and operating certain ETFs unable to rely on existing orders; and 
(2) creates a level playing field for ETFs that can rely on the 
rule. As such, the rule will enable increased product competition 
among certain ETF providers, which can lead to lower fees for 
investors, encourage financial innovation, and increase investor 
choice in the ETF market.'' Rule 6c-11 Release, at 57204.
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    Consistent with Index Fund Shares and Managed Fund Shares listed 
under the generic listing standards in Rules 14.11(c) and 14.11(i), 
respectively, series of Exchange-Traded Fund Shares that are permitted 
to operate in reliance on Rule 6c-11 would be permitted to be listed 
and traded on the Exchange without a prior Commission approval order or 
notice of effectiveness pursuant to Section 19(b) of the Act.\8\
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    \8\ Rule 19b-4(e)(1) provides that the listing and trading of a 
new derivative securities product by a self-regulatory organization 
(``SRO'') is not deemed a proposed rule change, pursuant to 
paragraph (c)(1) of Rule 19b-4, if the Commission has approved, 
pursuant to Section 19(b) of the Act, the SRO's trading rules, 
procedures and listing standards for the product class that would 
include the new derivative securities product and the SRO has a 
surveillance program for the product class. As contemplated by this 
Rule, the Exchange proposes new Rule 14.11(l) to establish generic 
listing standards for ETFs that are permitted to operate in reliance 
on Rule 6c-11. An ETF listed under proposed Rule 14.11(l) would 
therefore not need a separate proposed rule change pursuant to Rule 
19b-4 before it can be listed and traded on the Exchange.
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Proposed Listing Rules
    Proposed Rule 14.11(l)(1) provides that the Exchange will consider 
for trading, whether by listing or pursuant to unlisted trading 
privileges, the shares of Exchange-Traded Funds (``ETF Shares'') that 
meet the criteria of this Rule.
    Proposed Rule 14.11(l)(2) provides that the proposed rule would be 
applicable only to ETF Shares. Except to the extent inconsistent with 
this Rule, or unless the context otherwise requires, the rules and 
procedures of the Board of Directors shall be applicable to the trading 
on the Exchange of such securities. ETF 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(l)(2) further provides that: (A) Transactions 
in ETF Shares will occur throughout the Exchange's trading hours; (B) 
the minimum price variation for quoting and entry of orders in ETF 
Shares is $0.01; and (C) the Exchange will implement and maintain 
written surveillance procedures for ETF Shares.
    Proposed Rule 14.11(l)(3)(A) provides that the term ``ETF Shares'' 
shall mean the shares issued by a registered open-end management 
investment company that: (i) Is eligible to operate in reliance on Rule 
6c-11 under the Investment Company Act of 1940; \9\ (ii) issues (and 
redeems) creation units to (and from) authorized participants in 
exchange for a basket and a cash balancing amount (if any); and (iii) 
issues shares that it intends to list or are listed on a national 
securities exchange and traded at market-determined prices.\10\
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    \9\ The Exchange notes that certain types of ETFs, such as 
leveraged ETFs, are not eligible to operate in reliance on Rule 6c-
11 and therefore would not be eligible to list under this proposed 
Rule 14.11(l). Such ETFs could, however, be listed pursuant to Rule 
14.11(c) or 14.11(i).
    \10\ The Exchange notes that this definition is substantially 
similar to the definition under Rule 6c-11 except that the proposed 
definition includes in the definition of ETF Shares those shares 
that it intends to list on a national securities exchange.
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    Proposed Rule 14.11(l)(3)(B) provides that the term ``Reporting 
Authority'' in respect of a particular series of ETF Shares means the 
Exchange, an institution, or a reporting service designated by the 
Exchange or by the exchange that lists a particular series of ETF 
Shares (if the Exchange is trading such series pursuant to unlisted 
trading privileges) as the official source for

[[Page 64609]]

calculating and reporting information relating to such series, 
including, but not limited to, the amount of any cash distribution to 
holders of ETF Shares, net asset value, or other information relating 
to the issuance, redemption or trading of ETF Shares. A series of ETF 
Shares may have more than one Reporting Authority, each having 
different functions.
    Proposed Rule 14.11(l)(4) provides that the Exchange may approve 
ETF Shares for listing and/or trading (including pursuant to unlisted 
trading privileges) on the Exchange pursuant to Rule 19b-4(e) under the 
Act so long as such series of ETF Shares is eligible to operate in 
reliance on Rule 6c-11 under the Investment Company Act of 1940 and 
meets all applicable requirements under such Rule 6c-11 upon initial 
listing and on a continuing basis. ETF Shares will be listed and traded 
on the Exchange subject to application of the following criteria.
    Proposed Rule 14.11(l)(4)(A) provides that each series of ETF 
Shares will be listed and traded on the Exchange subject to application 
of the following initial listing criteria: (i) For each series, the 
Exchange will establish a minimum number of ETF Shares required to be 
outstanding at the time of commencement of trading on the Exchange; and 
(ii) the Exchange will obtain a representation from the issuer of each 
series of ETF Shares stating that the disclosures required under Rule 
6c-11 of the Investment Company Act of 1940 will be made available on a 
daily basis in compliance with Rule 6c-11 and that the issuer will 
notify the Exchange of any failure to do so.
    Proposed Rule 14.11(l)(4)(B) provides that each series of ETF 
Shares will be listed and traded on the Exchange subject to application 
of the following continued listing criteria.
    Proposed Rule 14.11(l)(4)(B)(i) provides that the Exchange will 
consider the suspension of trading in, and will commence delisting 
proceedings under Rule 14.12 for, a series of ETF Shares under any of 
the following circumstances: (a) If the issuer of the ETF Shares has 
failed to file any filings required by the Commission or if the 
Exchange is aware that the issuer is not in compliance with the 
requirements of Rule 6c-11 of the Investment Company Act of 1940; (b) 
if any of the other listing requirements set forth in this Rule 
14.11(l) are not continuously maintained; or (c) 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(l)(4)(B)(ii) provides that the Exchange may 
consider all relevant factors in exercising its discretion to halt or 
suspend trading in a series of ETF Shares. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) The extent to which certain information about the ETF Shares that 
is required to be disclosed under Rule 6c-11 of the Investment Company 
Act of 1940 is not being made available; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
    Proposed Rule 14.11(l)(4)(B)(iii) provides that upon termination of 
an investment company, the Exchange requires that ETF Shares issued in 
connection with such entity be removed from Exchange listing.
    Proposed Rule 14.11(l)(5) 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 index 
or portfolio value; the current value of the portfolio of securities 
required to be deposited to the open-end management investment company 
in connection with issuance of ETF Shares; the amount of any dividend 
equivalent payment or cash distribution to holders of ETF Shares; net 
asset value; or other information relating to the purchase, redemption, 
or trading of ETF 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.
    Proposed Rule 14.11(l)(6) provides that the provisions of this 
subparagraph apply only to series of ETF Shares that are the subject of 
an order by the Securities and Exchange Commission exempting such 
series from certain prospectus delivery requirements under Section 
24(d) of the Investment Company Act of 1940 and are not otherwise 
subject to prospectus delivery requirements under the Securities Act of 
1933. The Exchange will inform its Members regarding application of 
this subparagraph to a particular series of ETF Shares by means of an 
information circular prior to commencement of trading in such series. 
The Exchange requires that members provide to all purchasers of a 
series of ETF Shares a written description of the terms and 
characteristics of those securities, in a form prepared by the open-end 
management investment company issuing such securities, not later than 
the time a confirmation of the first transaction in such series is 
delivered to such purchaser. In addition, members shall include such a 
written description with any sales material relating to a series of ETF 
Shares that is provided to customers or the public. Any other written 
materials provided by a member to customers or the public making 
specific reference to a series of ETF Shares as an investment vehicle 
must include a statement in substantially the following form: ``A 
circular describing the terms and characteristics of (the series of ETF 
Shares) has been prepared by the (open-end management investment 
company name) and is available from your broker. It is recommended that 
you obtain and review such circular before purchasing (the series of 
ETF Shares).'' A member carrying an omnibus account for a non-member 
broker-dealer is required to inform such non-member that execution of 
an order to purchase a series of ETF Shares for such omnibus account 
will be deemed to constitute agreement by the non-member to make such 
written description available to its customers on the same terms as are 
directly applicable to members under this rule. Upon request of a 
customer, a member shall also provide a prospectus for the particular 
series of ETF Shares.
    The Exchange is also proposing to make two non-substantive 
amendments to include ETF Shares in other Exchange rules. Specifically, 
the Exchange is also proposing: (i) To amend Rule 14.10(e)(1)(E) in 
order to add ETF Shares to a list of product types listed on the 
Exchange, including Index Fund Shares and Managed Fund Shares, that are 
exempted from the Audit Committee requirements set forth in Rule 
14.10(c)(3), except for the applicable requirements of SEC Rule 10A-3; 
and (ii) to amend Rule 14.11(c)(3)(A)(i)(a) in order to include ETF 
Shares in the definition of Derivative Securities Products.
Discussion
    Proposed Rule 14.11(l) is based in large part on Rules 14.11(c) and 
(i) related to the listing and trading of Index Fund Shares and Managed 
Fund

[[Page 64610]]

Shares on the Exchange, respectively, both of which are issued under 
the 1940 Act and would qualify as ETF Shares after Rule 6c-11 is 
effective. Rule 14.11(c) and 14.11(i) are very similar, their primary 
difference being that Index Fund Shares are designed to track an 
underlying index and Managed Fund Shares are based on an actively 
managed portfolio that is not designed to track an index. As such, the 
Exchange believes that using Rules 14.11(c) and (i) (collectively, the 
``Current ETF Standards'') as the basis for proposed Rule 14.11(l) is 
appropriate because they are generally designed to address the issues 
associated with ETF Shares. The only substantial differences between 
proposed Rule 14.11(l) and the Current ETF Standards that are not 
otherwise required under Rule 6c-11 are as follows: (i) Proposed Rule 
14.11(l) does not include the quantitative standards applicable to a 
fund or an index that are included in the Current ETF Standards; (ii) 
proposed Rule 14.11(l) does not include any requirements related to the 
dissemination of a fund's Intraday Indicative Value; \11\ (iii) and 
proposed Rule 14.11(l) does not include any specific requirements 
related to ``firewalls'' that need to be in place between certain 
parties associated with a fund and their affiliates. These differences 
are discussed below.
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    \11\ For purposes of this filing, the term ``Intraday Indicative 
Value'' or ``IIV'' shall mean an intraday estimate of the value of a 
share of each series of either Index Fund Shares or Managed Fund 
Shares.
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Quantitative Standards
    The Exchange believes that the proposal is designed to prevent 
fraudulent and manipulative acts and practices because the Exchange 
will perform ongoing surveillance of ETF Shares listed on the Exchange 
in order to ensure compliance with Rule 6c-11 and the 1940 Act on an 
ongoing basis. While proposed Rule 14.11(l) does not include the 
quantitative requirements applicable to an ETF or an ETF's holdings or 
underlying index that are included in Rules 14.(c) and 14.11(i),\12\ 
the Exchange believes that the manipulation concerns that such 
standards are intended to address are otherwise mitigated by a 
combination of the Exchange's surveillance procedures, the Exchange's 
ability to halt trading under the proposed Rule 14.11(l)(4)(B)(ii), and 
the Exchange's ability to suspend trading and commence delisting 
proceedings under proposed Rule 14.11(l)(4)(B)(i). The Exchange also 
believes that such concerns are further mitigated by enhancements to 
the arbitrage mechanism that will come from Rule 6c-11, specifically 
the additional flexibility provided to issuers of ETF Shares through 
the use of custom baskets for creations and redemptions and the 
additional information made available to the public through the 
additional Disclosure Obligations.\13\ The Exchange believes that the 
combination of these factors will act to keep ETF Shares trading near 
the value of their underlying holdings and further mitigate concerns 
around manipulation of ETF Shares on the Exchange without the inclusion 
of quantitative standards.\14\ The Exchange will monitor for compliance 
with the 1940 Act generally as well as Rule 6c-11 specifically in order 
to ensure that the continued listing standards are being met. 
Specifically, the Exchange plans to review the website of series of ETF 
Shares in order to ensure that the disclosure requirements of Rule 6c-
11 are being met and to review the portfolio underlying series of ETF 
Shares listed on the Exchange in order to ensure that certain 
investment requirements and limitations under the 1940 Act are being 
met. The Exchange will also employ numerous intraday alerts that will 
notify Exchange personnel of trading activity throughout the day that 
is potentially indicative of certain disclosures not being made 
accurately or the presence of other unusual conditions or circumstances 
that could be detrimental to the maintenance of a fair and orderly 
market. As a backstop to the surveillances described above, the 
Exchange also notes that Rule 14.11(a) and proposed Rule 
14.11(l)(4)(A)(ii) would require an issuer of ETF Shares to notify the 
Exchange of any failure to comply with Rule 6c-11 or the 1940 Act.
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    \12\ The Exchange notes that Rules 14.11(c) and (i) include 
certain quantitative standards related to the size, trading volume, 
concentration, and diversity of the holdings of a series of Index 
Fund Shares or Managed Fund Shares (the ``Holdings Standards'') as 
well as related to the minimum number of beneficial holders of a 
fund (the ``Distribution Standards''). The Exchange believes that to 
the extent that manipulation concerns are mitigated based on the 
factors described herein, such concerns are mitigated both as it 
relates to the Holdings Standards and the Distribution Standards.
    \13\ The Exchange notes that the Commission came to a similar 
conclusion in several places in the Rule 6c-11 Release. See Rule 6c-
11 Release at 15-18; 60-61; 69-70; 78-79; 82-84; and 95-96.
    \14\ The Exchange believes that this applies to all quantitative 
standards, whether applicable to the portfolio holdings of a series 
of ETF Shares or the distribution of the ETF Shares.
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    To the extent that any of the requirements under Rule 6c-11 or the 
1940 Act are not being met, the Exchange may halt trading in a series 
of ETF Shares as provided in proposed Rule 14.11(l)(4)(B)(ii).\15\ 
Further, the Exchange may also suspend trading in and commence 
delisting proceedings for a series of ETF Shares where such series is 
not in compliance with the applicable listing standards or where the 
Exchange believes that further dealings on the Exchange are 
inadvisable.\16\
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    \15\ Specifically, proposed Rule 14.11(l)(4)(B)(ii) states that 
the Exchange may consider all relevant factors in exercising its 
discretion to halt or suspend trading in a series of ETF Shares. 
Trading may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) The extent to which certain 
information about the ETF Shares that is required to be disclosed 
under Rule 6c-11 of the Investment Company Act of 1940 is not being 
made available; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.
    \16\ Specifically, proposed Rule 14.11(l)(4)(B)(i), provides 
that if a series of ETF Shares is not in compliance with the 
applicable listing requirements, including: (a) If the issuer of the 
ETF Shares has failed to file any filings required by the Commission 
or if the Exchange is aware that the issuer is not in compliance 
with the requirements of Rule 6c-11 of the Investment Company Act of 
1940; (b) if any of the other listing requirements set forth in this 
Rule 14.11(l) are not continuously maintained; or (c) if such other 
event shall occur or condition exists which, in the opinion of the 
Exchange, makes further dealings on the Exchange inadvisable, the 
Exchange will commence delisting procedures under Rule 14.12.
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    Further, the Exchange also represents that its surveillance 
procedures are adequate to properly monitor the trading of the ETF 
Shares in all trading sessions and to deter and detect violations of 
Exchange rules and applicable federal securities laws. Specifically, 
the Exchange intends to utilize its existing surveillance procedures 
applicable to derivative products, which are currently applicable to 
Index Fund Shares and Managed Fund Shares, among other product types, 
to monitor trading in ETF Shares. The Exchange or the Financial 
Industry Regulatory Authority, Inc. (``FINRA''), on behalf of the 
Exchange, will communicate as needed regarding trading in ETF Shares 
and certain of their applicable underlying components with other 
markets that are members of the Intermarket Surveillance Group 
(``ISG'') or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. In addition, the Exchange may obtain 
information regarding trading in ETF Shares and certain of their 
applicable underlying components from markets and other entities that 
are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. Additionally, FINRA, on 
behalf of the Exchange, is able to access, as needed, trade information 
for certain

[[Page 64611]]

fixed income securities that may be held by a series of ETF Shares 
reported to FINRA's Trade Reporting and Compliance Engine (``TRACE''). 
FINRA also can access data obtained from the Municipal Securities 
Rulemaking Board's (``MSRB'') Electronic Municipal Market Access 
(``EMMA'') system relating to municipal bond trading activity for 
surveillance purposes in connection with trading in a series of ETF 
Shares, to the extent that a series of ETF Shares holds municipal 
securities. Finally, as noted above, the issuer of a series of ETF 
Shares will be required to comply with Rule 10A-3 under the Act for the 
initial and continued listing of Exchange-Traded Fund Shares, as 
provided under Rule 14.10(e)(1)(E).
Intraday Indicative Value
    As described above, proposed Rule 14.11(l) does not include any 
requirements related to the dissemination of an Intraday Indicative 
Value. Both Rule 14.11(c) and Rule 14.11(i) include the requirement 
that a series of Index Fund Shares and Managed Fund Shares, 
respectively, disseminate and update an Intraday Indicative Value at 
least every 15 seconds.\17\ Historically (and theoretically), the IIV 
could provide valuable information about an ETF that would not 
otherwise be available or easily calculable. However, as consistently 
highlighted in the Rule 6c-11 Release, that is not reflective of the 
current marketplace and the Commission has expressed concerns regarding 
the accuracy of IIV estimates for certain ETFs. Specifically, the 
Commission noted that an IIV may not accurately reflect the value of an 
ETF that holds securities that trade less frequently as such IIV can be 
stale or inaccurate.\18\ Additionally, the Commission indicated that 
even in circumstances when an IIV may be reliable, retail investors do 
not have easy access to free, publicly available IIV information.\19\ 
Further, in instances when IIV may be free and publicly available, it 
can be delayed by up to 45 minutes.\20\
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    \17\ See Rules 14.11(c)(3)(C), 14.11(c)(6)(A), and 
14.11(c)(9)(B)(e) related to Index Fund Shares and Rules 
14.11(i)(3)(C), 14.11(i)(4)(B)(i), 14.11(i)(4)(B)(iii)(b), and 
14.11(i)(4)(B)(iv) related to Managed Fund Shares.
    \18\ See Rule 6c-11 Release at 62.
    \19\ See Id., at 66.
    \20\ See Id.
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    Aside from the fact that the disseminated IIV may provide investors 
with stale or misleading data, the Commission also stated that market 
makers and authorized participants typically calculate their own 
intraday value of an ETF's portfolio with proprietary algorithms that 
use an ETF's daily portfolio disclosure and available pricing 
information.\21\ Such information allows those market participants to 
support the arbitrage mechanism for ETFs. Therefore, as market 
participants who engage in arbitrage typically calculate their own 
intraday value of an ETF's portfolio based on the ETF's daily portfolio 
disclosure and pricing information and use an IIV only as a secondary 
check to their own calculation,\22\ the Commission noted that IIV was 
not necessary to support the arbitrage mechanism.\23\ Given this, 
combined with potential shortcomings of the IIV noted above, the 
Commission concluded that ETFs will not be required to disseminate an 
IIV under Rule 6c-11.\24\
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    \21\ See Id., at 63.
    \22\ See Id., at 63.
    \23\ See Id., at 65.
    \24\ See Id., at 61.
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    The Exchange generally agrees with the limitations and shortcomings 
of IIV described in the Rule 6c-11 Release. The Exchange further agrees 
with the conclusion of the Adopting Release that the ``IIV is not 
necessary to support the arbitrage mechanism for ETFs that provide 
daily portfolio holdings disclosure.'' The transparency that comes from 
daily portfolio holdings disclosure as required under Rule 6c-11 
provides market participants with sufficient information to facilitate 
the intraday valuation of ETF Shares. The Exchange notes that it is not 
proposing to prohibit the dissemination of an IIV for a series of ETF 
Shares and believes that there are certain instances in which the 
dissemination of an IIV could provide valuable information to the 
investing public. The Exchange is simply not proposing to require the 
dissemination of such information.
    As such, the Exchange believes that it is appropriate and 
consistent with the Act to not include a requirement for the 
dissemination of an IIV for a series of ETF Shares to be listed on the 
Exchange.
Firewalls
    Both Rule 14.11(c) and Rule 14.11(i) require under certain 
circumstances the implementation of firewalls between certain 
affiliates and related employees as well as policies and procedures 
designed to prevent the dissemination of material non-public 
information.\25\ The Exchange fully supports the rationale underlying 
these rules, but generally agrees with the sentiment expressed by the 
Commission in the Rule 6c-11 Release that existing federal securities 
laws adequately address concerns about dissemination and misuse of 
material non-public information.\26\ The Exchange also further agrees 
that issuers of ETF Shares are likely to be in a position to best 
understand the circumstances and relationships that could give rise to 
misuse of material non-public information and can develop appropriate 
measures to address them.\27\ As such, the Exchange is not proposing to 
include firewall or material non-public information policies and 
procedures requirements in the generic listing standards for ETF Shares 
because it believes that such issues are sufficiently addressed by 
existing federal securities laws.
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    \25\ See Rules 14.11(c)(3)(B)(i) and (iii), Rules 
14.11(c)(4)(C)(i) and (iii), Rules 14.11(c)(5)(A)(i) and (iii), and 
Rule 14.11(7).
    \26\ See 17 CFR 270.38a-1 (Rule 38a-1 under the 1940 Act) 
(requiring funds to adopt policies and procedures reasonably 
designed to prevent violation of federal securities laws); 17 CFR 
270.17j-1(c)(1) (Rule 17j-1(c)(1) under the 1940 Act) (requiring 
funds to adopt a code of ethics containing provisions designed to 
prevent certain fund personnel (``access persons'') from misusing 
information regarding fund transactions); Section 204A of the 
Investment Advisers Act of 1940 (``Advisers Act'') (15 U.S.C. 80b-
204A) (requiring an adviser to adopt policies and procedures that 
are reasonably designed, taking into account the nature of its 
business, to prevent the misuse of material, non-public information 
by the adviser or any associated person, in violation of the 
Advisers Act or the Act, or the rules or regulations thereunder); 
Section 15(g) of the Act (15 U.S.C. 78o(f)) (requiring a registered 
broker or dealer to adopt policies and procedures reasonably 
designed, taking into account the nature of the broker's or dealer's 
business, to prevent the misuse of material, nonpublic information 
by the broker or dealer or any person associated with the broker or 
dealer, in violation of the Exchange Act or the rules or regulations 
thereunder).
    \27\ See Rule 6c-11 Release at 25.
---------------------------------------------------------------------------

Discontinuing Quarterly Reporting for Managed Fund Shares
    Finally, the Exchange is proposing to eliminate certain quarterly 
reporting obligations related to the listing and trading of Managed 
Fund Shares on the Exchange. In the order approving the Exchange's 
proposal to adopt generic listing standards for Managed Fund 
Shares,\28\ the Commission noted that the Exchange had represented that 
``on a quarterly basis, the Exchange will provide a report to the 
Commission staff that contains, for each ETF whose shares are 
generically listed and traded under BATS Rule 14.11(i): (a) Symbol and 
date of listing; (b) the number of active authorized participants 
(``APs'') and a description of any failure by either a fund or an AP to 
deliver promised baskets of shares, cash, or

[[Page 64612]]

cash and instruments in connection with creation or redemption orders; 
and (c) a description of any failure by an ETF to comply with BATS Rule 
14.11(i).'' \29\ This reporting requirement is not specifically 
enumerated in Rule 14.11(i).
---------------------------------------------------------------------------

    \28\ See Securities Exchange Act Release No. 78396 (July 22, 
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100) (the ``MFS 
Approval Order'').
    \29\ See MFS Approval Order at footnote 14.
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    The Exchange has provided such information to the Commission on a 
quarterly basis since the MFS Approval Order was issued in 2016. The 
type of information provided in the reports was created to provide a 
window into the creation and redemption process for Managed Fund Shares 
in order to ensure that the arbitrage mechanism would work as expected 
for products that were listed pursuant to the newly approved generic 
listing standards. In the Rule 6c-11 Release, the Commission concluded 
that ``the arbitrage mechanism for existing actively managed ETFs has 
worked effectively with small deviations between market price and NAV 
per share.'' \30\ The Exchange generally agrees with this conclusion 
and, while such quarterly reports were useful when Managed Fund Shares 
were first able to be listed pursuant to generic listing standards, the 
Exchange believes that such a window into the creation and redemption 
process for Managed Fund Shares no longer provides useful information 
related to the prevention of manipulation or protection of investors 
which it was originally designed to provide. Further, because the same 
general types of information provided in those reports will be made 
available under Rule 6c-11 directly from the issuers of such securities 
the Exchange also believes that it is consistent with the Act to remove 
this reporting obligation because it will be duplicative and no longer 
necessary.
---------------------------------------------------------------------------

    \30\ See Rule 6c-11 Release at 23.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \31\ in general and Section 6(b)(5) of the Act \32\ 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.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f.
    \32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 14.11(l) is designed to 
prevent fraudulent and manipulative acts and practices in that the 
proposed rules relating to listing and trading ETF Shares on the 
Exchange provide specific initial and continued listing criteria 
required to be met by such securities. Proposed Rule 14.11(l)(4) sets 
forth initial and continued listing criteria applicable to ETF Shares, 
specifically providing that the Exchange may approve ETF Shares for 
listing and/or trading (including pursuant to unlisted trading 
privileges) on the Exchange pursuant to Rule 19b-4(e) under the Act so 
long as such series of ETF Shares is eligible to operate in reliance on 
Rule 6c-11 and meets all applicable requirements under such Rule 6c-11 
upon initial listing and on a continuing basis. Proposed Rule 
14.11(l)(4)(A)(i) provides that the Exchange will establish for each 
series of ETF Shares a minimum number of shares required to be 
outstanding at the time of commencement of trading on the Exchange. 
Proposed Rule 14.11(l)(4)(A)(i) provides that the Exchange will obtain 
a representation from the issuer of each series of ETF Shares stating 
that the disclosures required under Rule 6c-11 of the Investment 
Company Act of 1940 will be made available on a daily basis in 
compliance with Rule 6c-11 and that the issuer will notify the Exchange 
of any failure to do so.
    Proposed Rule 14.11(l)(4)(B)(i) provides that the Exchange will 
consider the suspension of trading in, and will commence delisting 
proceedings under Rule 14.12 for, a series of ETF Shares under any of 
the following circumstances: (a) If the issuer of the ETF Shares has 
failed to file any filings required by the Commission or if the 
Exchange is aware that the issuer is not in compliance with the 
requirements of Rule 6c-11 of the Investment Company Act of 1940; (b) 
if any of the other listing requirements set forth in this Rule 
14.11(l) are not continuously maintained; or (c) 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(l)(4)(B)(ii) provides that the Exchange may consider all relevant 
factors in exercising its discretion to halt or suspend trading in a 
series of ETF Shares. Trading may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. These may include: (1) The extent to 
which certain information about the ETF Shares that is required to be 
disclosed under Rule 6c-11 is not being made available; or (2) whether 
other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. Finally, proposed 
Rule 14.11(l)(4)(B)(iii) provides that, upon termination of an 
investment company, the Exchange requires that ETF Shares issued in 
connection with such entity be removed from Exchange listing.
    The Exchange further believes that proposed Rule 14.11(l) is 
designed to prevent fraudulent and manipulative acts and practices 
because of the robust surveillances in place on the Exchange as 
required under proposed Rule 14.11(l)(2)(C) along with the similarities 
of proposed Rule 14.11(l) to the rules related to other securities that 
are already listed and traded on the Exchange and which would qualify 
as ETF Shares. Proposed Rule 14.11(l) is based in large part on Rules 
14.11(c) and (i) related to the listing and trading of Index Fund 
Shares and Managed Fund Shares on the Exchange, respectively, both of 
which are issued under the 1940 Act and would qualify as ETF Shares 
after Rule 6c-11 is effective. Rule 14.11(c) and 14.11(i) are very 
similar, their primary difference being that Index Fund Shares are 
designed to track an underlying index and Managed Fund Shares are based 
on an actively managed portfolio that is not designed to track an 
index. As such, the Exchange believes that using the Current ETF 
Standards as the basis for proposed Rule 14.11(l) is appropriate 
because they are generally designed to address the issues associated 
with ETF Shares. The only substantial differences between proposed Rule 
14.11(l) and the Current ETF Standards that are not otherwise required 
under Rule 6c-11 are as follows: (i) proposed Rule 14.11(l) does not 
include the quantitative standards applicable to a fund or an index 
that are included in the Current ETF Standards; (ii) proposed Rule 
14.11(l) does not include any requirements related to the dissemination 
of a fund's Intraday Indicative Value; \33\ (iii) and proposed Rule 
14.11(l) does not include any specific requirements related to 
``firewalls'' that need to be in place between certain parties 
associated with a fund and their affiliates.
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    \33\ For purposes of this filing, the term ``Intraday Indicative 
Value'' or ``IIV'' shall mean an intraday estimate of the value of a 
share of each series of either Index Fund Shares or Managed Fund 
Shares.
---------------------------------------------------------------------------

Quantitative Standards
    The Exchange believes that the proposal is designed to prevent 
fraudulent and manipulative acts and practices because the Exchange 
will perform ongoing surveillance of ETF

[[Page 64613]]

Shares listed on the Exchange in order to ensure compliance with Rule 
6c-11 and the 1940 Act on an ongoing basis. While proposed Rule 
14.11(l) does not include the quantitative requirements applicable to a 
fund and a fund's holdings or underlying index that are included in 
Rules 14.(c) and 14.11(i),\34\ the Exchange believes that the 
manipulation concerns that such standards are intended to address are 
otherwise mitigated by a combination of the Exchange's surveillance 
procedures, the Exchange's ability to halt trading under the proposed 
Rule 14.11(l)(4)(B)(ii), and the Exchange's ability to suspend trading 
and commence delisting proceedings under proposed Rule 
14.11(l)(4)(B)(i). The Exchange also believes that such concerns are 
further mitigated by enhancements to the arbitrage mechanism that will 
come from Rule 6c-11, specifically the additional flexibility provided 
to issuers of ETF Shares through the use of custom baskets for 
creations and redemptions and the additional information made available 
to the public through the additional Disclosure Obligations.\35\ The 
Exchange believes that the combination of these factors will act to 
keep ETF Shares trading near the value of their underlying holdings and 
further mitigate concerns around manipulation of ETF Shares on the 
Exchange without the inclusion of quantitative standards.\36\ The 
Exchange will monitor for compliance with the 1940 Act generally as 
well as Rule 6c-11 specifically in order to ensure that the continued 
listing standards are being met. Specifically, the Exchange plans to 
review the website of series of ETF Shares in order to ensure that the 
disclosure requirements of Rule 6c-11 are being met and to review the 
portfolio underlying series of ETF Shares listed on the Exchange in 
order to ensure that certain investment requirements and limitations 
under the 1940 Act are being met. The Exchange will also employ 
numerous intraday alerts that will notify Exchange personnel of trading 
activity throughout the day that is potentially indicative of certain 
disclosures not being made accurately or the presence of other unusual 
conditions or circumstances that could be detrimental to the 
maintenance of a fair and orderly market. As a backstop to the 
surveillances described above, the Exchange also notes that Rule 
14.11(a) and proposed Rule 14.11(l)(4)(A)(ii) would require an issuer 
of ETF Shares to notify the Exchange of any failure to comply with Rule 
6c-11 or the 1940 Act.
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    \34\ The Exchange notes that Rules 14.11(c) and (i) include 
certain quantitative standards related to the size, trading volume, 
concentration, and diversity of the holdings of a series of Index 
Fund Shares or Managed Fund Shares (the ``Holdings Standards'') as 
well as related to the minimum number of beneficial holders of a 
fund (the ``Distribution Standards''). The Exchange believes that to 
the extent that manipulation concerns are mitigated based on the 
factors described herein, such concerns are mitigated both as it 
relates to the Holdings Standards and the Distribution Standards.
    \35\ The Exchange notes that the Commission came to a similar 
conclusion in several places in the Rule 6c-11 Release. See Rule 6c-
11 Release at 15-18; 60-61; 69-70; 78-79; 82-84; and 95-96.
    \36\ The Exchange believes that this applies to all quantitative 
standards, whether applicable to the portfolio holdings of a series 
of ETF Shares or the distribution of the ETF Shares.
---------------------------------------------------------------------------

    To the extent that any of the requirements under Rule 6c-11 or the 
1940 Act are not being met, the Exchange may halt trading in a series 
of ETF Shares as provided in proposed Rule 14.11(l)(4)(B)(ii).\37\ 
Further, the Exchange may also suspend trading in and commence 
delisting proceedings for a series of ETF Shares where such series is 
not in compliance with the applicable listing standards or where the 
Exchange believes that further dealings on the Exchange are 
inadvisable.\38\
---------------------------------------------------------------------------

    \37\ Specifically, proposed Rule 14.11(l)(4)(B)(ii) states that 
the Exchange may consider all relevant factors in exercising its 
discretion to halt or suspend trading in a series of ETF Shares. 
Trading may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) The extent to which certain 
information about the ETF Shares that is required to be disclosed 
under Rule 6c-11 of the Investment Company Act of 1940 is not being 
made available; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.
    \38\ Specifically, proposed Rule 14.11(l)(4)(B)(i), provides 
that if a series of ETF Shares is not in compliance with the 
applicable listing requirements, including: (a) If the issuer of the 
ETF Shares has failed to file any filings required by the Commission 
or if the Exchange is aware that the issuer is not in compliance 
with the requirements of Rule 6c-11 of the Investment Company Act of 
1940; (b) if any of the other listing requirements set forth in this 
Rule 14.11(l) are not continuously maintained; or (c) if such other 
event shall occur or condition exists which, in the opinion of the 
Exchange, makes further dealings on the Exchange inadvisable, the 
Exchange will commence delisting procedures under Rule 14.12.
---------------------------------------------------------------------------

    Further, the Exchange also represents that its surveillance 
procedures are adequate to properly monitor the trading of the ETF 
Shares in all trading sessions and to deter and detect violations of 
Exchange rules. Specifically, the Exchange intends to utilize its 
existing surveillance procedures applicable to derivative products, 
which are currently applicable to Index Fund Shares and Managed Fund 
Shares, among other product types, to monitor trading in ETF Shares. 
The Exchange or FINRA, on behalf of the Exchange, will communicate as 
needed regarding trading in ETF Shares and certain of their applicable 
underlying components with other markets that are members of the ISG or 
with which the Exchange has in place a comprehensive surveillance 
sharing agreement. In addition, the Exchange may obtain information 
regarding trading in ETF Shares and certain of their applicable 
underlying components from markets and other entities that are members 
of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. Additionally, FINRA, on behalf of the 
Exchange, is able to access, as needed, trade information for certain 
fixed income securities that may be held by a series of ETF Shares 
reported to FINRA's TRACE. FINRA also can access data obtained from the 
MSRB's EMMA system relating to municipal bond trading activity for 
surveillance purposes in connection with trading in a series of ETF 
Shares, to the extent that a series of ETF Shares holds municipal 
securities. Finally, as noted above, the issuer of a series of ETF 
Shares will be required to comply with Rule 10A-3 under the Act for the 
initial and continued listing of Exchange-Traded Fund Shares, as 
provided under Rule 14.10(e)(1)(E).
Intraday Indicative Value
    As described above, proposed Rule 14.11(l) does not include any 
requirements related to the dissemination of an Intraday Indicative 
Value. Both Rule 14.11(c) and Rule 14.11(i) include the requirement 
that a series of Index Fund Shares and Managed Fund Shares, 
respectively, disseminate and update an Intraday Indicative Value at 
least every 15 seconds.\39\ Historically (and theoretically), the IIV 
could provide valuable information about an ETF that would not 
otherwise be available or easily calculable. However, as consistently 
highlighted in the Rule 6c-11 Release, that is not reflective of the 
current marketplace and the Commission has expressed concerns regarding 
the accuracy of IIV estimates for certain ETFs. Specifically, the 
Commission noted that an IIV may not accurately reflect the value of an 
ETF that holds securities that trade less frequently as such IIV can be 
stale or

[[Page 64614]]

inaccurate.\40\ Additionally, the Commission indicated that even in 
circumstances when an IIV may be reliable, retail investors do not have 
easy access to free, publicly available IIV information.\41\ Further, 
in instances when IIV may be free and publicly available, it can be 
delayed by up to 45 minutes.\42\
---------------------------------------------------------------------------

    \39\ See Rules 14.11(c)(3)(C), 14.11(c)(6)(A), and 
14.11(c)(9)(B)(e) related to Index Fund Shares and Rules 
14.11(i)(3)(C), 14.11(i)(4)(B)(i), 14.11(i)(4)(B)(iii)(b), and 
14.11(i)(4)(B)(iv) related to Managed Fund Shares.
    \40\ See Rule 6c-11 Release at 62.
    \41\ See Id., at 66.
    \42\ See Id.
---------------------------------------------------------------------------

    Aside from the fact that the disseminated IIV may provide investors 
with stale or misleading data, the Commission also stated that market 
makers and authorized participants typically calculate their own 
intraday value of an ETF's portfolio with proprietary algorithms that 
use an ETF's daily portfolio disclosure and available pricing 
information.\43\ Such information allows those market participants to 
support the arbitrage mechanism for ETFs. Therefore, as market 
participants who engage in arbitrage typically calculate their own 
intraday value of an ETF's portfolio based on the ETF's daily portfolio 
disclosure and pricing information and use an IIV only as a secondary 
check to their own calculation,\44\ the Commission noted that IIV was 
not necessary to support the arbitrage mechanism.\45\ Given this, 
combined with potential shortcomings of the IIV noted above, the 
Commission concluded that ETFs will not be required to disseminate an 
IIV under Rule 6c-11.\46\
---------------------------------------------------------------------------

    \43\ See Id., at 63.
    \44\ See Id., at 63.
    \45\ See Id., at 65.
    \46\ See Id., at 61.
---------------------------------------------------------------------------

    The Exchange generally agrees with the limitations and shortcomings 
of IIV described in the Rule 6c-11 Release. The Exchange further agrees 
with the conclusion of the Adopting Release that the ``IIV is not 
necessary to support the arbitrage mechanism for ETFs that provide 
daily portfolio holdings disclosure.'' The transparency that comes from 
daily portfolio holdings disclosure as required under Rule 6c-11 
provides market participants with sufficient information to facilitate 
the intraday valuation of ETF Shares. The Exchange notes that it is not 
proposing to prohibit the dissemination of an IIV for a series of ETF 
Shares and believes that there are certain instances in which the 
dissemination of an IIV could provide valuable information to the 
investing public. The Exchange is simply not proposing to require the 
dissemination of such information.
    As such, the Exchange believes that it is appropriate and 
consistent with the Act to not include a requirement for the 
dissemination of an IIV for a series of ETF Shares to be listed on the 
Exchange.
Firewalls
    Both Rule 14.11(c) and Rule 14.11(i) require under certain 
circumstances the implementation of firewalls between certain 
affiliates and related employees as well as policies and procedures 
designed to prevent the dissemination of material non-public 
information.\47\ The Exchange fully supports the rationale underlying 
these rules, but generally agrees with the sentiment expressed by the 
Commission in the Rule 6c-11 Release that existing federal securities 
laws adequately address concerns about dissemination and misuse of 
material non-public information.\48\ The Exchange also further agrees 
that issuers of ETF Shares are likely to be in a position to best 
understand the circumstances and relationships that could give rise to 
misuse of material non-public information and can develop appropriate 
measures to address them.\49\ As such, the Exchange is not proposing to 
include firewall or material non-public information policies and 
procedures requirements in the generic listing standards for ETF Shares 
because it believes that such issues are sufficiently addressed by 
existing federal securities laws. With this in mind, the Exchange 
further believes that proposed Rule 14.11(l) is consistent with the Act 
and is designed to prevent fraudulent and manipulative acts and 
practices.
---------------------------------------------------------------------------

    \47\ See Rules 14.11(c)(3)(B)(i) and (iii), Rules 
14.11(c)(4)(C)(i) and (iii), Rules 14.11(c)(5)(A)(i) and (iii), and 
Rule 14.11(7).
    \48\ See 17 CFR 270.38a-1 (Rule 38a-1 under the 1940 Act) 
(requiring funds to adopt policies and procedures reasonably 
designed to prevent violation of federal securities laws); 17 CFR 
270.17j-1(c)(1) (Rule 17j-1(c)(1) under the 1940 Act) (requiring 
funds to adopt a code of ethics containing provisions designed to 
prevent certain fund personnel (``access persons'') from misusing 
information regarding fund transactions); Section 204A of the 
Investment Advisers Act of 1940 (``Advisers Act'') (15 U.S.C. 80b-
204A) (requiring an adviser to adopt policies and procedures that 
are reasonably designed, taking into account the nature of its 
business, to prevent the misuse of material, non-public information 
by the adviser or any associated person, in violation of the 
Advisers Act or the Act, or the rules or regulations thereunder); 
Section 15(g) of the Act (15 U.S.C. 78o(f)) (requiring a registered 
broker or dealer to adopt policies and procedures reasonably 
designed, taking into account the nature of the broker's or dealer's 
business, to prevent the misuse of material, nonpublic information 
by the broker or dealer or any person associated with the broker or 
dealer, in violation of the Exchange Act or the rules or regulations 
thereunder).
    \49\ See Rule 6c-11 Release at 25.
---------------------------------------------------------------------------

    The Exchange also believes that 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 each series of ETF Shares 
stating that the Disclosure Requirements under Rule 6c-11 of the 
Investment Company Act of 1940 will be made available on a daily basis 
in compliance with Rule 6c-11 and that the issuer will notify the 
Exchange of any failure to do so. In addition, 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 ETF Shares will be available via the CTA high-speed 
line. The website for each series of ETF Shares will include a form of 
the prospectus for the Fund 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 in the series of ETF 
Shares. As noted above, series of ETF Shares will not be required to 
publicly disseminate an IIV. The Exchange continues to believe that 
this proposal is consistent with the Act and is designed to promote 
just and equitable principles of trade and to protect investors and the 
public interest because the transparency that comes from daily 
portfolio holdings disclosure as required under Rule 6c-11 provides 
market participants with sufficient information to facilitate the 
intraday valuation of ETF Shares, rendering the dissemination of the 
IIV unnecessary.
    The Exchange notes that it is not proposing to prohibit the 
dissemination of an IIV for a series of ETF Shares and believes that 
there could be certain instances in which the dissemination of an IIV 
could provide valuable information to the investing public. The 
Exchange proposes to leave that decision to an issuer of ETF Shares and 
is simply not proposing to require the dissemination of an IIV.
    Based on the foregoing discussion regarding proposed Rule 14.11(l) 
and its similarities to and differences between the Current ETF 
Standards, the Exchange believes that the proposal is consistent with 
the Act and is designed to prevent fraudulent and manipulative 
transactions and that the manipulation concerns that the quantitative 
standards, the IIV, and the firewall requirements are designed to 
address are otherwise mitigated by the proposal and the new Disclosure 
Obligations and flexibility under Rule 6c-11.

[[Page 64615]]

    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 
ETF Shares in a manner that will enhance competition among market 
participants, to the benefit of investors and the marketplace. The 
Exchange believes that approval of this proposal will streamline 
current procedures, reduce the costs and timeline associated with 
bringing ETFs to market, and provide significantly greater regulatory 
certainty to potential issuers considering bringing ETF Shares to 
market, thereby enhancing competition among ETF issuers and reducing 
costs for investors.\50\
---------------------------------------------------------------------------

    \50\ In approving the rule, the Commission stated that the 
``rule will modernize the regulatory framework for ETFs to reflect 
our more than two decades of experience with these investment 
products. The rule is designed to further important Commission 
objectives, including establishing a consistent, transparent, and 
efficient regulatory framework for ETFs and facilitating greater 
competition and innovation among ETFs.'' Rule 6c-11 Release, at 
57163. The Commission also stated the following regarding the rule's 
impact: ``We believe rule 6c-11 will establish a regulatory 
framework that: (1) Reduces the expense and delay currently 
associated with forming and operating certain ETFs unable to rely on 
existing orders; and (2) creates a level playing field for ETFs that 
can rely on the rule. As such, the rule will enable increased 
product competition among certain ETF providers, which can lead to 
lower fees for investors, encourage financial innovation, and 
increase investor choice in the ETF market.'' Rule 6c-11 Release, at 
57204.
---------------------------------------------------------------------------

    The Exchange also believes that the non-substantive change to amend 
Rule 14.10(e)(1)(E) in order to add ETF Shares to a list of product 
types listed on the Exchange, including Index Fund Shares and Managed 
Fund Shares, that are exempted from the Audit Committee requirements 
set forth in Rule 14.10(c)(3), except for the applicable requirements 
of SEC Rule 10A-3 because it is a non-substantive change meant only to 
subject ETF Shares to the same corporate governance requirements 
currently applicable to Index Fund Shares and Managed Fund Shares. The 
Exchange also believes that the non-substantive change to amend Rule 
14.11(c)(3)(A)(i)(a) in order to include ETF Shares in the definition 
of Derivative Securities Products is also a non-substantive change 
because it is just intended to add ETF Shares to a definition that 
includes Index Fund Shares and Managed Fund Shares in order to make 
sure that ETF Shares are treated consistently with Index Fund Shares 
and Managed Fund Shares throughout the Exchange's rules.
    Finally, the Exchange believes that eliminating the quarterly 
reporting requirement for Managed Fund Shares is designed to prevent 
fraudulent and manipulative acts and practices and, in general, to 
protect investors and the public interest because the report no longer 
serves the purpose for which it was originally intended. The type of 
information provided in the reports was created to provide a window 
into the creation and redemption process for Managed Fund Shares in 
order to ensure that the arbitrage mechanism would work as expected for 
products that were listed pursuant to the newly approved generic 
listing standards. In the Rule 6c-11 Release, the Commission concluded 
that ``the arbitrage mechanism for existing actively managed ETFs has 
worked effectively with small deviations between market price and NAV 
per share.'' \51\ The Exchange generally agrees with this conclusion 
and, while such quarterly reports were useful when Managed Fund Shares 
were first able to be listed pursuant to generic listing standards, the 
Exchange believes that such a window into the creation and redemption 
process for Managed Fund Shares no longer provides useful information 
related to the prevention of manipulation or protection of investors 
which it was originally designed to provide. Further, because the same 
general types of information provided in those reports will be made 
available under Rule 6c-11 directly from the issuers of such securities 
the Exchange also believes that it is consistent with the Act to remove 
this reporting obligation because it will be duplicative and no longer 
necessary.
---------------------------------------------------------------------------

    \51\ See Rule 6c-11 Release at 23.
---------------------------------------------------------------------------

    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. To the contrary, the Exchange 
believes that the proposed rule change would enhance competition by 
streamlining current procedures, reducing the costs and timeline 
associated with bringing ETFs to market, and providing significantly 
greater regulatory certainty to potential issuers considering bringing 
ETF Shares to market, all of which the Exchange believes would enhance 
competition among ETF issuers and reduce costs for investors. The 
Exchange also believes that the proposed change would make enhance 
competition among ETF Shares by ensuring the application of uniform 
listing standards.

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 Exchange 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-CboeBZX-2019-097 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-2019-097. 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

[[Page 64616]]

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-2019-097, and should 
be submitted on or before December 13, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25317 Filed 11-21-19; 8:45 am]
 BILLING CODE 8011-01-P


