Notice2021-17412
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 14.11(m) (Tracking Fund Shares) To Provide for the Use of Custom Baskets Consistent With the Exemptive Relief Issued Pursuant to the Investment Company Act of 1940 Applicable to a Series of Tracking Fund Shares
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Published
August 16, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 155 (Monday, August 16, 2021)</title>
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[Federal Register Volume 86, Number 155 (Monday, August 16, 2021)]
[Notices]
[Pages 45792-45795]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17412]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92626; File No. SR-CboeBZX-2021-053]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rule 14.11(m) (Tracking Fund
Shares) To Provide for the Use of Custom Baskets Consistent With the
Exemptive Relief Issued Pursuant to the Investment Company Act of 1940
Applicable to a Series of Tracking Fund Shares
August 10, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on August 3, 2021, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``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'') proposes to
amend Rule 14.11(m) (Tracking Fund Shares) to provide for the use of
``Custom Baskets'' consistent with the exemptive relief issued pursuant
to the Investment Company Act of 1940 (``Investment Company Act'')
applicable to a series of Tracking 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 (<a href="http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/">http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/</a>), 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
The Exchange proposes to amend Rule 14.11(m) (Tracking Fund Shares)
\3\ to provide for the use of ``Custom Baskets'' consistent with the
exemptive relief issued pursuant to the Investment Company Act \4\
applicable to a series of Tracking Fund Shares.
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\3\ Rule 14.11(m)(3)(A) defines the term ``Tracking Fund Share''
as a security that: (i) Represents an interest in an investment
company registered under the Investment Company Act of 1940
(``Investment Company'') organized as an open-end management
investment company, that invests in a portfolio of securities
selected by the Investment Company's investment adviser consistent
with the Investment Company's investment objectives and policies;
(ii) is issued in a specified aggregate minimum number in return for
a deposit of a specified Tracking Basket and/or a cash amount with a
value equal to the next determined net asset value; (iii) when
aggregated in the same specified minimum number, may be redeemed at
a holder's request, which holder will be paid a specified Tracking
Basket and/or a cash amount with a value equal to the next
determined net asset value; and (iv) the portfolio holdings for
which are disclosed within at least 60 days following the end of
every fiscal quarter.
\4\ 15 U.S.C. 80a et seq.
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To effectuate this change, the Exchange proposes the following
amendments to Rule 14.11(m). First, the proposed rule change adopts new
subparagraph (F) under Rule 14.11(m)(3) (Definitions), which defines
``Custom Basket'', for the purposes of Rule 14.11(m), to mean a
portfolio of securities that is different from the Tracking Basket and
is otherwise consistent with the exemptive relief issued pursuant to
the Investment Company Act applicable to a series of Tracking Fund
Shares. The proposed rule change makes conforming amendments to the
definition of Tracking Fund Shares in Rule 14.11(m)(3)(A) and Reporting
Authority in Rule 14.11(m)(3)(C). The proposed rule change amends the
definition of ``Tracking Fund Share'' in Rule 14.11(m)(3)(A) to provide
for creations of shares in return for a deposit by the purchaser of,
and redemptions of shares at a holder's request in return for, a Custom
Basket rather than a Tracking Basket to the extent permitted by a
fund's exemptive relief. In addition, the proposed rule change amends
the definition of ``Reporting Authority'' in respect of a particular
series of Tracking Fund Shares in Rule 14.11(m)(3)(C) to provide for
Custom Baskets to the extent permitted by a fund's exemptive relief.
Currently, ``Reporting Authority'' in respect of a particular series of
Tracking Fund Shares means the Exchange, an institution, or a reporting
service designated by the Exchange or by the exchange that lists a
particular series of Tracking Fund 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 Tracking Basket; the Fund
Portfolio; the amount of any cash distribution to holders of Tracking
Fund Shares, net asset value, or other information relating to the
issuance, redemption or trading of Tracking Fund Shares. Rule
14.11(m)(3)(C) further provides that a series of Tracking Fund Shares
may have more than one Reporting Authority, each having different
functions. The proposed rule change adds ``Custom Basket'' to the non-
exclusive list of information relating to Tracking Fund Shares that a
Reporting Authority calculates and reports, i.e., including, but not
limited to, the Tracking Basket; the Fund Portfolio; the amount of any
cash distribution to holders of Tracking Fund Shares, net asset value,
or other information relating to the issuance, redemption or trading of
Tracking Fund Shares.
Second, the proposed rule change amends Rule 14.11(m)(4) (Initial
and Continued Listing), which currently provides criteria that Tracking
Fund Shares must satisfy for initial and continued listing on the
Exchange, to incorporate specific initial and continued listing
criteria for Custom Baskets. Specifically, Rule 14.11(m)(4)(A)(ii)
currently provides that the Exchange will obtain a representation from
the issuer of each series of Tracking Fund Shares that the net asset
value per share for the series will be calculated daily and that each
of the following will be made available to all market participants at
the same time when disclosed: the net asset value, the
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Tracking Basket, and the Fund Portfolio. The proposed rule change
adopts an additional requirement in Rule 14.11(m)(4)(A)(ii) providing
that the Exchange will also obtain a representation from the issuer of
each series of Tracking Fund Shares that the issuer and any person
acting on behalf of the series of Tracking Fund Shares will comply with
Regulation Fair Disclosure under the Securities Exchange Act of 1934
(``Exchange Act'') \5\, including with respect to any Custom Basket.\6\
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\5\ 17 CFR 243.100-243.103. Regulation Fair Disclosure provides
that whenever an issuer, or any person acting on its behalf,
discloses material nonpublic information regarding that issuer or
its securities to certain individuals or entities--generally,
securities market professionals, such as stock analysts, or holders
of the issuer's securities who may well trade on the basis of the
information--the issuer must make public disclosure of that
information.
\6\ The proposed rule change also delineates each of the three
representation requirements, as proposed, as (a) through (c) within
the text of Rule 14.11(m)(4)(A)(ii) for ease of reading.
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Third, the proposed Rule change adopts new Rule 14.11(m)(4)(B)(ii),
which provides that, with respect to each Custom Basket utilized by a
series of Tracking Fund Shares, each business day, before the opening
of trading in Regular Trading Hours (as defined in Rule 1.5(w)), the
investment company shall make publicly available on its website the
composition of any Custom Basket transacted on the previous business
day, except a Custom Basket that differs from the applicable Tracking
Basket only with respect to cash.\7\
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\7\ As a result of the addition of subparagraph (4)(B)(ii), the
proposed rule change also updates the subsequent numbering of
current subparagraphs (4)(b)(ii), (4)(b)(iii), (4)(b)(iv), (4)(b)(v)
and (4)(b)(vi) to (4)(b)(iii), (4)(b)(iv) (4)(b)(v), (4)(b)(vi) and
(4)(b)(vii) respectively.
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Finally, the proposed rule change makes conforming amendments to
Rule 14.11(m)(2)(E) and (F). In particular, Rule 14.11(m)(2)(E)
currently provides that, if the investment adviser to the Investment
Company issuing Tracking Fund Shares is registered as a broker-dealer
or is affiliated with a broker-dealer, such investment adviser will
erect and maintain a ``fire wall'' between the investment adviser and
personnel of the broker-dealer or broker-dealer affiliate, as
applicable, with respect to access to information concerning the
composition of and/or changes to the Fund Portfolio and/or the Tracking
Basket. Any person related to the investment adviser or Investment
Company who makes decisions pertaining to the Investment Company's Fund
Portfolio and/or the Tracking Basket or has access to nonpublic
information regarding the Fund Portfolio and/or the Tracking Basket or
changes thereto must be subject to procedures designed to prevent the
use and dissemination of material nonpublic information regarding the
Fund Portfolio and/or the Tracking Basket or changes thereto. The
proposed rule change amends 14.11(m)(2)(E) to provide for Custom
Baskets to the extent permitted by a fund's exemptive relief. As
proposed, Rule 14.11(m)(2)(E) provides that if the investment adviser
to the Investment Company issuing Tracking Fund Shares is registered as
a broker-dealer or is affiliated with a broker-dealer, such investment
adviser will erect and maintain a ``fire wall'' between the investment
adviser and personnel of the broker-dealer or broker-dealer affiliate,
as applicable, with respect to access to information concerning the
composition of and/or changes to the Fund Portfolio, the Tracking
Basket, and/or the Custom Basket, as applicable. In addition, proposed
Rule 14.11(m)(2)(E) provides that any person related to the investment
adviser or Investment Company who makes decisions pertaining to the
Investment Company's Fund Portfolio, the Tracking Basket, and/or the
Custom Basket or has access to nonpublic information regarding the Fund
Portfolio, the Tracking Basket, and/or the Custom Basket, as
applicable, or changes thereto must be subject to procedures designed
to prevent the use and dissemination of material nonpublic information
regarding the Fund Portfolio, the Tracking Basket, and/or the Custom
Basket, as applicable, or changes thereto.
Rule 14.11(m)(2)(F) currently provides that any person or entity,
including a custodian, Reporting Authority, distributor, or
administrator, who has access to nonpublic information regarding the
Fund Portfolio or the Tracking Basket or changes thereto, must be
subject to procedures designed to prevent the use and dissemination of
material nonpublic information regarding the applicable Fund Portfolio
or the Tracking Basket or changes thereto. Moreover, if any such person
or entity is registered as a broker-dealer or affiliated with a broker-
dealer, such person or entity will erect and maintain a ``fire wall''
between the person or entity and the broker-dealer with respect to
access to information concerning the composition and/or changes to such
Fund Portfolio or Tracking Basket. The proposed rule change similarly
amends Rule 14.11(m)(2)(F) to provide for Custom Baskets to the extent
permitted by a fund's exemptive relief. As proposed, Rule
14.11(m)(2)(F) provides that any person or entity, including a
custodian, Reporting Authority, distributor, or administrator, who has
access to nonpublic information regarding the Fund Portfolio, the
Tracking Basket, or the Custom Basket, as applicable, or changes
thereto, must be subject to procedures designed to prevent the use and
dissemination of material nonpublic information regarding the
applicable Fund Portfolio, the Tracking Basket, or the Custom Basket,
as applicable, or changes thereto. Moreover, if any such person or
entity is registered as a broker-dealer or affiliated with a broker-
dealer, such person or entity will erect and maintain a ``fire wall''
between the person or entity and the broker-dealer with respect to
access to information concerning the composition and/or changes to such
Fund Portfolio, Tracking Basket, or Custom Basket, as applicable.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Exchange Act and the rules and regulations thereunder applicable to
the Exchange and, in particular, the requirements of Section 6(b) of
the Exchange Act.\8\ Specifically, the Exchange believes the proposed
rule change is consistent with the Section 6(b)(5) \9\ 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. Additionally, the Exchange
believes the proposed rule change is consistent with the Section
6(b)(5) \10\ requirement that the rules of an exchange not be designed
to permit unfair discrimination between customers, issuers, brokers, or
dealers.
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\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
\10\ Id.
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In particular, the Exchange believes that proposed rule change to
provide for the use of Custom Baskets consistent with the applicable
exemptive relief applicable to a series of Tracking Fund Shares will
perfect the mechanism of a free and open market and, in general, to
protect investors and the public interest
[[Page 45794]]
in that it will permit use of Custom Baskets, consistent with the
applicable exemptive relief, in a manner that will benefit investors by
increasing efficiencies in the creation and redemption process. More
specifically, Custom Baskets provide an issuer with flexibility in
portfolio construction that may assist in reducing taxable capital
gains distributions for investors and may generally improve tax
efficiencies. Further, the use of Custom Baskets, to the extent
permitted by a fund's exemptive relief, may also result in narrower
bid/ask spreads and smaller premiums and discounts to the net asset
value for Tracking Fund Shares to the extent that the Investment
Company utilizes Custom Baskets with fewer securities which may, in
turn, allow Authorized Participants to more efficiently hedge and
participate generally in the Tracking Fund Shares. In addition to this,
the flexibility provided in the creation of Custom Baskets may serve to
increase competition between issuers. The Exchange believes the
proposed rule change will enhance competition among market participants
overall, to the benefit of investors and the marketplace.
The Exchange also believes that amending Rule 14.11(m) to
incorporate specific initial listing criteria required to be met by
Tracking Fund Shares that utilize Custom Baskets is designed to prevent
fraudulent and manipulative acts and practices. The Exchange believes
that the daily dissemination of the composition of any Custom Basket
transacted on the previous day, except a Custom Basket that differs
from the applicable Tracking Basket only with respect to cash, together
with the right of Authorized Participants to create and redeem each day
at the net asset value, will enable market participants to value and
trade shares in a manner that will not lead to significant deviations
between the bid/ask price and net asset value of shares of a series of
Tracking Fund Shares. Further, including Custom Baskets in the
requirements of Rules 14.11(m)(2)(E) and (F) would act as a safeguard
against any misuse and improper dissemination of nonpublic information
related to a fund's Custom Basket or changes thereto. The requirement
that any person or entity implement procedures reasonably designed to
prevent the use and dissemination of material non-public information
regarding a Custom Basket will act to prevent any individual or entity
from sharing such information externally and the internal ``fire wall''
requirements applicable where an entity is a registered broker-dealer
or affiliated with a broker-dealer will act to make sure that no entity
will be able to misuse the data for their own purposes. As such, the
Exchange believes that the proposed rule change to Rule 14.11(m) is
designed to prevent fraudulent and manipulative acts and practices.
The Exchange also believes that the proposed initial and continued
listing standards are designed to promote disclosure and transparency
with respect to the use of Custom Baskets consistent with the
applicable exemptive relief. Specifically, the Exchange believes that
requiring as an initial listing condition that an issuer and any person
acting on behalf of the series of Tracking Fund Shares comply with
Regulation Fair Disclosure under the Exchange Act, including with
respect to any Custom Basket, would further the full and fair
disclosure objectives of Regulation Fair Disclosure to the benefit of
the investing public and all market participants. Further, with respect
to each Custom Basket utilized by a series of Tracking Fund Shares, the
Exchange believes that requiring, as a continued listing condition,
that each business day, before the opening of trading in Regular
Trading Hours (as defined in Rule 1.5(w)), an investment company make
publicly available on its website the composition of any Custom Basket
transacted on the previous business day, except a Custom Basket that
differs from the applicable Tracking Basket only with respect to cash,
also furthers the goals of transparency and full and fair disclosure,
to the benefit of investors and the public interest.
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 Exchange Act. The Exchange
believes the proposed rule change, by permitting the use of Custom
Baskets, consistent with a fund's exemptive relief, would introduce
additional competition among various ETF products to the benefit of
investors.
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 Exchange Act. Comments may be submitted
by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#5e2c2b323b733d3133333b302a2d1e2d3b3d70393128"><span class="__cf_email__" data-cfemail="1163647d743c727e7c7c747f6562516274723f767e67">[email protected]</span></a>. Please include
File Number SR-CboeBZX-2021-053 on the subject line.
Paper Comments
<bullet> 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-2021-053. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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
[[Page 45795]]
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-2021-053 and should
be submitted on or before September 7, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17412 Filed 8-13-21; 8:45 am]
BILLING CODE 8011-01-P
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