[Federal Register Volume 85, Number 39 (Thursday, February 27, 2020)]
[Notices]
[Pages 11419-11421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03920]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88259; File No. SR-CboeBZX-2020-007]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Eliminate the Requirement That the 
Intraday Indicative Value Be Disseminated as Set Forth Under Rule 
14.11(c) for Certain Series of Index Fund Shares and Under Rule 
14.11(i) for All Series of Managed Fund Shares

February 21, 2020.
    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 February 14, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'') 
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

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change to eliminate the requirement that the Intraday Indicative 
Value be disseminated as set forth under Rule 14.11(c) (``Index Fund 
Shares'') for certain series of Index Fund Shares and under Rule 
14.11(i) (``Managed Fund Shares'') for all series of Managed Fund 
Shares. The text of the proposed rule change is provided in Exhibit 5.
    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
    Exchange Rules 14.11(c) and 14.11(i) relate to the listing and 
trading of Index Fund Shares and Managed Fund Shares on the Exchange. 
Among a number of other requirements, numerous sub-paragraphs of each 
of these rules require that an intraday estimate of the value of a 
share of each series (the ``Intraday Indicative Value'' or ``IIV'') of 
Index Fund Shares and Managed Fund Shares be disseminated and updated 
at least every 15 seconds.\3\ The Exchange is proposing to eliminate 
the requirement to disseminate an IIV for all series of Managed Fund 
Shares \4\ listed on the Exchange and for those series of Index Fund 
Shares that also publish their Portfolio Holdings (as defined below) on 
a daily basis.
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    \3\ See subparagraphs (c)(3)(C), (c)(6)(A), and (c)(9)(B)(i)(e) 
of Exchange Rule 14.11. See also subparagraphs (i)(3)(C), (i)(3)(D), 
(i)(4)(B)(i), (i)(4)(B)(iii)(b), and (i)(4)(B)(iv) of Exchange Rule 
14.11.
    \4\ The Exchange notes that Rule 14.11(i)(4)(B)(ii)(a) requires 
that the Disclosed Portfolio for a series of Managed Fund Shares be 
disseminated at least once daily and be made available to all market 
participants at the same time. Further, Rule 14.11(i)(4)(B)(iii)(b) 
requires that the Exchange consider suspension of trading in and 
commence delisting proceedings for a series of Managed Fund Shares 
where the Disclosed Portfolio is not made available to all market 
participants at the same time. As such, the Exchange is proposing to 
eliminate the IIV dissemination requirements entirely from Rule 
14.11(i).
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    As part of this proposal, the Exchange is also proposing to adopt 
proposed Rule 14.11(c)(1)(F) to define the term ``Portfolio Holdings'' 
which would mean the holdings of a particular series of Index Fund 
Shares that will form the basis for the calculation of its net asset 
value (``NAV'') at the end of the business day.\5\ Existing Exchange 
Rules require issuers of Managed Fund Shares to provide IIV and daily 
disclosure of the Disclosed Portfolio.\6\ Similarly, existing Exchange 
Rules require issuers of Index Fund Shares to disseminate an IIV for 
each fund, but do not universally require daily disclosure of a fund's 
underlying holdings.\7\
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    \5\ For purposes of Rule 14.11(c), Portfolio Holdings would 
include various information, to the extent applicable, as listed in 
proposed subparagraphs (c)(1)(F)(i) through (c)(1)(F)(xi). The 
proposed definition of Portfolio Holdings is substantively identical 
to the definition of ``Disclosed Portfolio'' as set forth in Rule 
14.11(i)(3)(B).
    \6\ See subparagraphs (i)(3)(B), (i)(4)(A)(ii), and 
(i)(4)(B)(ii) of Exchange Rule 14.11. The term ``Disclosed 
Portfolio'' means the identities and quantities of the securities 
and other assets held by the Investment Company that will form the 
basis for the Investment Company's calculation of net asset value at 
the end of the business day. See also Exchange Rule 14.11(i)(3)(B).
    \7\ The Exchange notes that Rule 14.11(c)(1)(B)(iv) would 
require the daily disclosure of certain information related to a 
fund's portfolio holdings where a fund ``seeks to provide investment 
results that either exceed the performance of a specified . . . 
index . . . by a specified multiple or that correspond to the 
inverse (opposite) of the performance of a specified . . . index . . 
. by a specified multiple,'' however, the Exchange does not 
currently list any such funds.
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    The dissemination of an IIV, together with disclosure of the fund's 
underlying

[[Page 11420]]

holdings, was designed to allow investors to determine the value of the 
underlying portfolio of such funds on a daily basis and provide a close 
estimate of that value throughout the trading day. However, as 
consistently highlighted in the adopting release of Rule 17 CFR 270.6c-
11 (``Rule 6c-11'') \8\ under the Investment Company Act of 1940 \9\ 
(the ``1940 Act''), the Commission has expressed concerns regarding the 
accuracy of IIV estimates for certain Exchange-Traded Funds 
(``ETFs'').\10\ 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.\11\ Similarly, 
the Commission also expressed concerns with the IIV of ETFs with 
frequently traded component securities because ``in today's fast moving 
markets, given the dissemination lags, an IIV may not accurately 
reflect the value of an ETF that holds frequently traded component 
securities.'' \12\ 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.\13\ Further, 
in instances when IIV may be free and publicly available, it can be 
delayed by up to 45 minutes.\14\
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    \8\ See Investment Company Act Release No. 10695 (September 25, 
2019), 84 FR 57162 (October 24, 2019) (the ``Adopting Release'').
    \9\ 15 U.S.C. 80a-1.
    \10\ An Exchange-Traded Fund means a registered open-end 
investment company: (i) That issues (and redeems) creation units to 
(and from) authorized participants in exchange for a basket and a 
cash balancing amount if any; and (ii) Whose shares are listed on a 
national securities exchange and traded at market-determined prices. 
See Id.
    \11\ See supra note 8, at 62.
    \12\ See id.
    \13\ See Id., at 66.
    \14\ 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.\15\ Such information allows those market participants to 
support the arbitrage mechanism for ETFs. The arbitrage mechanism is 
designed to help keep the market price of ETF shares at or close to the 
NAV per share of an ETF, and is important because it helps to ensure 
ETF investors are treated equitably when buying and selling fund 
shares.\16\ 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,\17\ 
the Commission noted that IIV was not necessary to support the 
arbitrage mechanism.\18\ Given this, combined with shortcomings of the 
IIV noted above, the Commission concluded that ETFs will not be 
required to disseminate an IIV under Rule 6c-11.\19\ As such, exchange 
listing rules are the only reason that a series of Managed Fund Shares 
is required to disseminate an IIV. Similarly, exchange listings rules 
are the only reason that a series of Index Fund Shares that also 
publishes its Portfolio Holdings on a daily basis is required to 
disseminate an IIV.
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    \15\ See Id., at 63.
    \16\ See Id., at 12.
    \17\ See Id., at 63.
    \18\ See Id., at 65.
    \19\ See Id., at 61.
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    The Exchange believes that the limitations and shortcomings of IIV 
as it pertains to ETFs relying on Rule 6c-11 and highlighted in the 
Adopting Release are equally applicable to all Managed Fund Shares 
listed on the Exchange and Index Fund Shares for which the Portfolio 
Holdings are disclosed on a daily basis. 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 provides market participants with 
sufficient information to facilitate the intraday valuation of the 
shares of an ETF, including Managed Fund Shares and Index Fund Shares 
for which Portfolio Holdings are disclosed daily, which, ignoring the 
many criticisms of IIV in the Adopting Order, renders IIV at the very 
least duplicative and unnecessary.
    As such, the Exchange is proposing to eliminate the requirement for 
the dissemination of the IIV for all series of Managed Fund Shares and 
for Index Fund Shares for which Portfolio Holdings are disclosed on a 
daily basis. Additionally, the Exchange is proposing to make conforming 
numbering changes to Rules 14.11(c) and 14.11(i).
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\20\ Specifically, the Exchange believes the proposed rule change 
is consistent with the Section 6(b)(5) \21\ requirements that the rules 
of an exchange be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The proposed amendment seeks to eliminate the requirement that Managed 
Fund Shares and Index Fund Shares for which the Portfolio Holdings are 
disclosed daily, disseminate an IIV for the same reasons articulated in 
the Adopting Order for Rule 6c-11, which does not require the 
dissemination of IIV. The Exchange believes that the proposed amendment 
will eliminate the dissemination of potentially stale and misleading 
IIV information to market participants, as was also noted in the 
Adopting Order. Further, as the proposed rule text would only eliminate 
the requirement for series of Index Fund Shares \22\ and Managed Fund 
Shares \23\ that provide full daily portfolio transparency, such full 
daily portfolio transparency would provide market participants with a 
tool to easily calculate the IIV of a series of Managed Fund Shares or 
Index Fund Shares, which the Exchange believes generally mitigates the 
need for the dissemination of an IIV for certain series of Index Fund 
Shares or Managed Fund Shares. Nonetheless, nothing in this proposal 
limits the ability of such Index Fund Shares or Managed Fund Shares 
from disseminating the IIV should they choose to do so. Further, the 
Exchange notes that its rules still include certain circumstances in 
which an issuer would be required to disseminate an IIV.\24\
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ As provided in proposed Rules 14.11(c)(3)(C) and 
14.11(c)(6)(A), a series of Index Fund Shares would only be exempt 
from IIV dissemination requirements where there is daily public 
website disclosure of Portfolio Holdings.
    \23\ See supra note 4.
    \24\ For example, a series of Index Fund Shares that does not 
provide daily portfolio transparency would still be required to 
disseminate an IIV. Additionally, the requirement of IIV 
dissemination will continue to be required for certain products that 
are not subject to the Investment Company Act of 1940.
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    As a result of the proposed rule change, the Exchange believes 
issuers may benefit from cost savings because of the eliminated 
requirement to disseminate an IIV. The reduced cost

[[Page 11421]]

could also result in lower barriers to entry for new issuers and new 
series of Managed Fund Shares and Index Fund Shares for which the 
Portfolio Holdings are disclosed daily, which will result in enhanced 
competition among products and issuers of such funds, which can lead to 
lower fees for investors, encourage financial innovation, and increase 
investor choice in the ETF market.

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 purposes of the Act. To the contrary, the 
Exchange believes that issuers may benefit from cost savings and lower 
barriers to entry because of the eliminated requirement to disseminate 
an IIV. In turn, the proposed rule change will enable increased product 
competition among issuers of such funds, which can lead to lower fees 
for investors, encourage financial innovation, and increase investor 
choice in the ETF market.

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

    The Exchange neither solicited nor received 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-2020-007 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-2020-007. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2020-007 and should be submitted 
on or before March 19, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Jill M. Peterson,
Assistant Secretary.


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    \25\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2020-03920 Filed 2-26-20; 8:45 am]
 BILLING CODE 8011-01-P


