[Federal Register Volume 85, Number 34 (Thursday, February 20, 2020)]
[Notices]
[Pages 9834-9843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03328]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88208; File No. SR-CboeBZX-2019-097]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 1, 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

February 13, 2020.
    On November 15, 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, among other things, 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 proposed rule change was published for comment 
in the Federal Register on November 22, 2019.\3\
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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. 87560 (Nov. 18, 
2019), 84 FR 64607.
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    On December 17, 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 disapprove the proposed rule 
change.\5\ On February 12, 2020, the Exchange filed Amendment No. 1 to 
the proposed rule change, which amended and replaced the proposed rule 
change in its entirety.\6\ The Commission has received no comment 
letters on the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 87777, 84 FR 70598 
(Dec. 23, 2019). The Commission designated February 20, 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-2019-097/srcboebzx2019097-6804772-208449.pdf.
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    The Commission is publishing this notice and order to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons and 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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    \7\ 15 U.S.C. 78s(b)(2)(B).
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I. The Exchange's Description of the Proposal, as Modified by Amendment 
No. 1

    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, 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
    This Amendment No. 1 to SR-CboeBZX-2019-097 amends and replaces in 
its entirety the proposal as originally submitted on November 15, 2019. 
The Exchange submits this Amendment No. 1 in order to clarify certain 
points and add additional details to the proposal.
    The Exchange proposes to add new Rule 14.11(l) \8\ for the purpose 
of permitting the generic listing and trading, or trading pursuant to 
unlisted trading privileges, of Exchange-Traded

[[Page 9835]]

Fund Shares \9\ that are permitted to operate in reliance on Rule 6c-11 
(``Rule 6c-11'') under the Investment Company Act of 1940 (the ``1940 
Act'').\10\ The Exchange is also proposing to make conforming changes 
to the Exchange's corporate governance requirements under Rule 14.10(e) 
in order to accommodate the proposed listing of Exchange-Traded Fund 
Shares. Finally, the Exchange is 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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    \8\ 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).
    \9\ 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.
    \10\ 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.\11\ 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.\12\ 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. Except as 
otherwise provided, the Exchange would continue to enforce all 
governance, disclosure, and trading rules for this ETF Shares, as 
defined below, listed on the Exchange.
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    \11\ 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'').
    \12\ 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.\13\
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    \13\ 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 14.11(l), 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 14.11(l).
    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 14.11(l), 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 Share'' 
shall mean a share of stock issued by an Exchange-Traded Fund.
    Proposed Rule 14.11(l)(3)(B) provides that the term ``Exchange-
Traded Fund'' has the same meaning as the term ``exchange-traded fund'' 
as defined in Rule 6c-11 under the Investment Company Act of 1940.
    Proposed Rule 14.11(l)(3)(C) 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 calculating and 
reporting information relating to such series, including, but not 
limited to, the amount of any dividend equivalent payment or cash 
distribution to holders of ETF Shares, net asset value, 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, 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 a 
series of 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, provided such series of ETF Shares is eligible to 
operate in reliance on Rule 6c-11 under the Investment Company Act of 
1940 and must satisfy the requirements of this Rule 14.11(l) on an 
initial and continued listing basis.
    Proposed Rule 14.11(l)(4)(A) provides that the requirements of Rule 
6c-11 must be satisfied by a series of ETF Shares on an initial and 
continued listing basis. Such securities must also satisfy the 
following criteria on an initial and, except for paragraph (i) below, 
continued, listing basis. Further, proposed Rule 14.11(l)(4)(A) 
provides that: (i) For each series, the Exchange

[[Page 9836]]

will establish a minimum number of ETF Shares required to be 
outstanding at the time of commencement of trading on the Exchange; 
(ii) if an index underlying a series of ETF Shares is maintained by a 
broker-dealer or fund adviser, the broker-dealer or fund adviser shall 
erect and maintain a ``fire wall'' around the personnel who have access 
to information concerning changes and adjustments to the index and the 
index shall be calculated by a third party who is not a broker-dealer 
or fund adviser. If the investment adviser to the investment company 
issuing an actively managed series of ETF Shares is affiliated with a 
broker-dealer, such investment adviser shall erect and maintain a 
``fire wall'' between the investment adviser and the broker-dealer with 
respect to access to information concerning the composition and/or 
changes to such Investment Company portfolio; and (iii) any advisory 
committee, supervisory board, or similar entity that advises a 
Reporting Authority or that makes decisions on the composition, 
methodology, and related matters of an index underlying a series of ETF 
Shares, must implement and maintain, or be subject to, procedures 
designed to prevent the use and dissemination of material non-public 
information regarding the applicable index. For actively managed 
Exchange-Traded Funds, personnel who make decisions on the portfolio 
composition must be subject to procedures designed to prevent the use 
and dissemination of material nonpublic information regarding the 
applicable portfolio.
    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 Proposed Rule 14.11(l)(4)(B)(i) and (ii). 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 Exchange becomes aware that the issuer of the 
ETF Shares is no longer eligible to operate in reliance on Rule 6c-11 
under 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; (c) if, following the initial twelve month 
period after commencement of trading on the Exchange of a series of ETF 
Shares, there are fewer than 50 beneficial holders of the series of ETF 
Shares for 30 or more consecutive trading days; or (d) 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 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.
    Proposed Rule 14.11(l)(7) provides that a security that has 
previously been approved for listing on the Exchange pursuant to the 
generic listing requirements specified in Rule 14.11(c) or Rule 
14.11(i), or pursuant to the approval of a proposed rule change or 
subject to a notice of effectiveness by the Commission, may be 
considered for listing solely under this Rule 14.11(l) if such security 
is eligible to operate in reliance on Rule 6c-11 under the 1940 Act. At 
the time of listing of such security under this Rule 14.11(l), the 
continued listing requirements applicable to such previously-listed 
security will be those specified in paragraph (b) of this Rule 
14.11(l). Any requirements for listing as specified in Rule 14.11(c) or 
Rule 14.11(i), or an approval order or notice of effectiveness of a 
separate proposed rule change, that differ from the requirements of 
this Rule 14.11(l) will no longer be applicable to such security.
    The Exchange is also proposing to make two corresponding amendments 
to include ETF Shares in other Exchange rules. Specifically, the 
Exchange is also proposing: (i) To amend Rule 14.10(e)(1)(E) and 
Interpretation and Policy .13 to Rule 14.10 in order to add ETF Shares 
to a list of product types listed on the Exchange, including Index Fund 
Shares, Managed Fund Shares, and Managed Portfolio Shares, that are 
exempted from the Audit Committee requirements set forth in Rule

[[Page 9837]]

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 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; and 
(ii) proposed Rule 14.11(l) does not include any requirements related 
to the dissemination of a fund's Intraday Indicative Value.\14\ These 
differences are discussed below.
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    \14\ 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),\15\ 
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 will 
also halt trading in ETFs under the conditions specified in Rule 11.18, 
``Trading Halts Due to Extraordinary Market Volatility.'' 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.\16\ 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.\17\ 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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    \15\ 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.
    \16\ 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.
    \17\ 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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    The Exchange may 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.\18\
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    \18\ Specifically, 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 Proposed Rule 14.11(l)(4)(B)(i) and 
(ii). 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 Exchange 
becomes aware that the issuer of the ETF Shares is no longer 
eligible to operate in reliance on Rule 6c-11 under 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; (c) 
if, following the initial twelve month period after commencement of 
trading on the Exchange of a series of ETF Shares, there are fewer 
than 50 beneficial holders of the series of ETF Shares for 30 or 
more consecutive trading days; or (d) 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 upon termination of an investment 
company, the Exchange requires that ETF Shares issued in connection 
with such entity be removed from Exchange listing.
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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

[[Page 9838]]

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 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) and Interpretation and Policy .13 to Rule 14.10.
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.\19\ 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.\20\ 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.\21\ 
Further, in instances when IIV may be free and publicly available, it 
can be delayed by up to 45 minutes.\22\
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    \19\ 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.
    \20\ See Rule 6c-11 Release at 62.
    \21\ See Id., at 66.
    \22\ 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.\23\ 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,\24\ the Commission noted that IIV was 
not necessary to support the arbitrage mechanism.\25\ 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.\26\
---------------------------------------------------------------------------

    \23\ See Id., at 63.
    \24\ See Id., at 63.
    \25\ See Id., at 65.
    \26\ 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.
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,\27\ 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 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).'' \28\ This 
reporting requirement is not specifically enumerated in Rule 14.11(i).
---------------------------------------------------------------------------

    \27\ See Securities Exchange Act Release No. 78396 (July 22, 
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100) (the ``MFS 
Approval Order'').
    \28\ See MFS Approval Order at footnote 14.
---------------------------------------------------------------------------

    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. The approval of the Rule 6c-11 collapses the 
distinction between index funds and active funds, which the Exchange 
believes represents that the Commission is generally comfortable with 
actively managed funds, rendering the reports unnecessary. 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.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \29\ in general and Section 6(b)(5) of the Act \30\ 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.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f.
    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 14.11(l) is designed to 
prevent

[[Page 9839]]

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 a series of 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, 
provided such series of ETF Shares is eligible to operate in reliance 
on Rule 6c-11 under the Investment Company Act of 1940 and must satisfy 
the requirements of this Rule 14.11(l) on an initial and continued 
listing basis. The Exchange will submit a Form 19b-4(e) for all series 
of ETF Shares upon being listed pursuant to Rule 14.11(l), including 
those series of ETF Shares that are listed under Rule 14.11(l) pursuant 
to proposed Rule 14.11(l)(7).
    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 Proposed Rule 14.11(l)(4)(B)(i) and (ii). 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 Exchange becomes aware that the issuer of the 
ETF Shares is no longer eligible to operate in reliance on Rule 6c-11 
under 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; (c) if, following the initial twelve month 
period after commencement of trading on the Exchange of a series of ETF 
Shares, there are fewer than 50 beneficial holders of the series of ETF 
Shares for 30 or more consecutive trading days; or (d) 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 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; and (ii) proposed Rule 
14.11(l) does not include any requirements related to the dissemination 
of a fund's Intraday Indicative Value.
Quantitative Standards
    The Exchange believes that the proposal is consistent with Section 
6(b)(1) of the Act \31\ in that, in addition to being designed to 
prevent fraudulent and manipulative acts and practices, the Exchange 
has the capacity to enforce proposed Rule 14.11(l) by performing 
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 a fund and a fund's holdings or underlying 
index that are included in Rules 14.(c) and 14.11(i),\32\ 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.\33\ 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.\34\ The Exchange will monitor for compliance with Rule 6c-11 
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.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78f(b)(1).
    \32\ 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.
    \33\ 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.
    \34\ 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). Further, 
the

[[Page 9840]]

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.\35\
---------------------------------------------------------------------------

    \35\ Specifically, 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 Proposed Rule 14.11(l)(4)(B)(i) and 
(ii). 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 Exchange 
becomes aware that the issuer of the ETF Shares is no longer 
eligible to operate in reliance on Rule 6c-11 under 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; (c) 
if, following the initial twelve month period after commencement of 
trading on the Exchange of a series of ETF Shares, there are fewer 
than 50 beneficial holders of the series of ETF Shares for 30 or 
more consecutive trading days; or (d) 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 upon termination of an investment 
company, the Exchange requires that ETF Shares issued in connection 
with such entity be removed from Exchange listing.
---------------------------------------------------------------------------

    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) and Interpretation and Policy .13 to 
Rule 14.10.
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.\36\ 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.\37\ 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.\38\ 
Further, in instances when IIV may be free and publicly available, it 
can be delayed by up to 45 minutes.\39\
---------------------------------------------------------------------------

    \36\ 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.
    \37\ See Rule 6c-11 Release at 62.
    \38\ See Id., at 66.
    \39\ 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.\40\ 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,\41\ the Commission noted that IIV was 
not necessary to support the arbitrage mechanism.\42\ 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.\43\
---------------------------------------------------------------------------

    \40\ See Id., at 63.
    \41\ See Id., at 63.
    \42\ See Id., at 65.
    \43\ 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.
    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 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

[[Page 9841]]

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 and the IIV requirements are designed to address are 
otherwise mitigated by the proposal and the new Disclosure Obligations 
and flexibility under Rule 6c-11.
    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.\44\
---------------------------------------------------------------------------

    \44\ 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 corresponding change to amend 
Rule 14.10(e)(1)(E) and Interpretation and Policy .13 to Rule 14.10 in 
order to add ETF Shares to a list of product types listed on the 
Exchange, including Index Fund Shares, Managed Fund Shares, and Managed 
Portfolio 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. All other corporate governance requirements that ETF Shares are 
not specifically exempted from will otherwise apply. 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.'' \45\ 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.
---------------------------------------------------------------------------

    \45\ 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. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2019-097, as Modified by Amendment No. 1, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \46\ 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

[[Page 9842]]

issues raised by the proposed rule change. 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 proposed rule change.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2)(B) of the Act,\47\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change'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.'' \48\
---------------------------------------------------------------------------

    \47\ Id.
    \48\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 proposal 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, any request for an 
opportunity to make an oral presentation.\49\
---------------------------------------------------------------------------

    \49\ Section 19(b)(2) of the Act, as amended by the Securities 
Act 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 Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by March 12, 2020. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by March 26, 
2020. 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,\50\ in addition to any other comments they 
may wish to submit about the proposed rule change. In particular, the 
Commission seeks comment on the following questions and asks commenters 
to submit data where appropriate to support their views:
---------------------------------------------------------------------------

    \50\ See supra note 6.
---------------------------------------------------------------------------

    1. The Exchange's proposed generic listing requirements would 
require that, for the Exchange to list and trade ETF Shares, the 
requirements of Rule 6c-11 must be satisfied on a continued listing 
basis. The Exchange states that it will monitor for compliance with the 
1940 Act, generally, as well as with Rule 6c-11, specifically, in order 
to ensure that the continued listing standards are being met. The 
Exchange states that it plans to review the website of series of ETF 
Shares to ensure that the disclosure requirements of Rule 6c-11 are 
being met and to review the portfolios underlying each series of ETF 
Shares listed on the Exchange to ensure that certain investment 
requirements and limitations under the 1940 Act are being met. The 
Exchange also states that it will 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, the Exchange notes that 
current BZX rules require, and BZX's proposed rules would require, an 
issuer of ETF Shares to notify the Exchange of any failure to comply 
with Rule 6c-11 under the 1940 Act. What are commenters' views on 
whether the Exchange's surveillance procedures are adequate to monitor 
for non-compliance with respect to the proposed continued listing 
requirements? Do commenters believe that the Exchange should adopt 
other procedures or employ additional measures to ensure that it is 
capable of adequately monitoring for non-compliance with the proposed 
listing rule?
    2. Under the proposal, the Exchange describes its discretion to 
halt trading in ETF Shares in its proposed listing rule. For ETF Shares 
that are based on an underlying index, what are commenters' views on 
whether the Exchange should consider halting trading if there is an 
interruption or disruption in the calculation and dissemination of the 
underlying index value? What are commenters' views on whether the 
Exchange should consider halting trading in the event of an 
interruption or disruption in the calculation and dissemination of the 
intraday indicative value, to the extent such value is calculated and 
publicly disseminated for an Exchange-Traded Fund? Do commenters 
believe there are other circumstances in which the Exchange ought to 
consider halting trading in ETF Shares listed under the proposed rule?
    3. What are commenters' views on whether the proposed rule change 
is sufficiently clear regarding Exchange members' obligations with 
respect to disclosures to ETF Share purchasers? More generally, what 
are commenters' views on whether the proposal provides sufficient 
clarity for members' obligations with respect to transactions in ETF 
Shares on the Exchange?
    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 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.

[[Page 9843]]

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 by March 12, 2020. Rebuttal comments should be submitted 
by March 26, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12) & 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03328 Filed 2-19-20; 8:45 am]
 BILLING CODE 8011-01-P


