Notice2021-21483
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Granting Approval 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
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 4, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 189 (Monday, October 4, 2021)</title>
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[Federal Register Volume 86, Number 189 (Monday, October 4, 2021)]
[Notices]
[Pages 54772-54774]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-21483]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93147; File No. SR-CboeBZX-2021-053]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Granting Approval 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
September 28, 2021.
I. Introduction
On August 3, 2021, 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 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend BZX 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 (``1940 Act'') \3\ applicable to a series of
Tracking Fund Shares. The proposed rule change was published for
comment in the Federal Register on August 16, 2021.\4\ The Commission
has received no comments on the proposed rule change. The Commission is
approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 80a.
\4\ See Securities Exchange Act Release No. 92626 (August 10,
2021), 86 FR 45792.
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II. Description
The Exchange proposes to amend BZX Rule 14.11(m), which permits the
listing and trading of series of Tracking Fund Shares. BZX Rule
14.11(m) currently requires that Tracking Fund Shares be issued and
redeemed in a specified aggregate minimum number in return for the
Tracking Basket \5\ and/or cash.\6\ The Exchange proposes to amend
[[Page 54773]]
the definition of ``Tracking Fund Share'' in BZX Rule 14.11(m)(3)(A) to
permit creations and redemptions of shares in return for a Custom
Basket in addition to the Tracking Basket, to the extent permitted by a
fund's exemptive relief.\7\ Further, the Exchange proposes to define
the term ``Custom Basket'' as a portfolio of securities that is
different from the Tracking Basket and is otherwise consistent with the
exemptive relief issued pursuant to the 1940 Act applicable to a series
of Tracking Fund Shares.\8\ The Exchange also proposes to amend the
definition of ``Reporting Authority'' in BZX Rule 14.11(m)(3)(C) to
include Custom Baskets among the types of information for which the
Reporting Authority designated for a particular series of Tracking Fund
Shares will be the official source for calculating and reporting such
information.\9\
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\5\ The term ``Tracking Basket'' means the identities and
quantities of the securities and other assets included in a basket
that is designed to closely track the daily performance of the Fund
Portfolio, as provided in the exemptive relief under the 1940 Act
applicable to a series of Tracking Fund Shares. See BZX Rule
14.11(m)(3)(E). The term ``Fund Portfolio'' means the identities and
quantities of the securities and other assets held by the investment
company registered under the 1940 Act (``Investment Company'') that
will form the basis for the Investment Company's calculation of net
asset value (``NAV'') at the end of the business day. See BZX Rule
14.11(m)(3)(B).
\6\ See BZX Rule 14.11(m)(3)(A) (defining the term ``Tracking
Fund Share'').
\7\ See proposed BZX Rule 14.11(m)(3)(A) (defining ``Tracking
Fund Share'' as a security that: (i) Represents an interest in an
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 or Custom Basket, as
applicable, and/or a cash amount with a value equal to the next
determined NAV; (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 or Custom Basket, as applicable,
and/or a cash amount with a value equal to the next determined NAV;
and (iv) the portfolio holdings for which are disclosed within at
least 60 days following the end of every fiscal quarter).
\8\ See proposed BZX Rule 14.11(m)(3)(F).
\9\ See proposed BZX Rule 14.11(m)(3)(C) (defining ``Reporting
Authority'' in respect of a particular series of Tracking Fund
Shares as 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 Custom Basket; the amount of any cash
distribution to holders of Tracking Fund Shares, NAV, or other
information relating to the issuance, redemption or trading of
Tracking Fund Shares).
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The Exchange proposes to amend BZX Rule 14.11(m)(4) to incorporate
specific initial and continued listing criteria relating to Custom
Baskets. Specifically, the Exchange proposes to add a new initial
listing requirement to stipulate that the Exchange will 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 Exchange Act (``Regulation FD''),\10\ including with respect to any
Custom Basket.\11\ The Exchange also proposes to add a new continued
listing requirement 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,\12\ 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.\13\
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\10\ 17 CFR 243.100.
\11\ See proposed BZX Rule 14.11(m)(4)(A)(ii)(c). BZX 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 NAV per share for the series will be calculated
daily and that the NAV, the Tracking Basket, and the Fund Portfolio
will be made available to all market participants at the same time
when disclosed. The current requirements would be designated as BZX
Rule 14.11(m)(4)(A)(ii)(a) and (b).
\12\ The term ``Regular Trading Hours'' means the time between
9:30 a.m. and 4:00 p.m. Eastern Time. See BZX Rule 1.5(w).
\13\ See proposed BZX Rule 14.11(m)(4)(B)(ii). The Exchange also
proposes to renumber the remainder of BZX Rule 14.11(m)(4)(B).
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Finally, the Exchange proposes to amend BZX Rules 14.11(m)(2)(E)
and (F), which contain requirements that specified parties must erect
and maintain ``fire walls'' with respect to access to information
concerning the Fund Portfolio and Tracking Basket and enact procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the Fund Portfolio and Tracking Basket, so that
these requirements would also cover information concerning Custom
Baskets. As proposed to be amended, BZX Rule 14.11(m)(2)(E) would
require 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, 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. Proposed BZX Rule
14.11(m)(2)(F) would require 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.
III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the Exchange Act and rules and regulations
thereunder applicable to a national securities exchange.\14\ In
particular, the Commission finds that the proposed rule change is
consistent with Section 6(b)(5) of the Exchange Act,\15\ which
requires, among other things, that the Exchange's rules be 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.
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\14\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\15\ 15 U.S.C. 78f(b)(5).
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The Commission previously approved BZX Rule 14.11(m) to permit the
listing and trading of Tracking Fund Shares.\16\
[[Page 54774]]
As discussed above, under the current rule, a series of Tracking Fund
Shares must create or redeem shares in return for the Tracking Basket
and/or cash. The Exchange is now proposing to amend BZX Rule 14.11(m)
to allow a series of Tracking Fund Shares to create or redeem shares in
return for a Custom Basket, which is a portfolio of securities that is
different from the Tracking Basket, to the extent consistent with an
issuer's exemptive relief under the 1940 Act.\17\ For the reasons
discussed below, the Commission finds that the proposed amendments to
BZX Rule 14.11(m) to provide for the use of Custom Baskets for Tracking
Fund Shares, to the extent permitted by an issuer's exemptive relief
under the 1940 Act, are consistent with Section 6(b)(5) of the Exchange
Act.
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\16\ See Securities Exchange Act Release No. 88887 (May 15,
2020), 85 FR 30990 (May 21, 2020) (SR-CboeBZX-2019-107) (approving
proposal to adopt Rule 14.11(m) to permit the listing and trading of
Tracking Fund Shares and to list and trade shares of the Fidelity
Blue Chip Value ETF, Fidelity Blue Chip Growth ETF, and Fidelity New
Millennium ETF (``2020 Order'')). The Exchange must file a separate
proposed rule change pursuant to Section 19(b) of the Exchange Act
for each series of Tracking Fund Shares. See BZX Rule
14.11(m)(2)(A).
\17\ The Commission has granted exemptive relief under the 1940
Act to certain series of Tracking Fund Shares to permit the creation
or redemption of shares using a Custom Basket that includes
instruments that are not included, or included with different
weightings, in the fund's Tracking Basket. See, e.g., Fidelity Beach
Street Trust, et al., Investment Company Act Release No. 34350
(August 5, 2021).
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The Commission believes that the proposed changes to BZX Rules
14.11(m)(2)(E) and (F) are consistent with the Exchange Act and are
reasonably designed to help prevent fraudulent and manipulative acts
and practices. The Commission notes that, because Tracking Fund Shares
do not publicly disclose on a daily basis information about the
holdings of the Fund Portfolio, it is vital that key information
relating to Tracking Fund Shares, including information relating to
Custom Baskets, be kept confidential prior to its public disclosure and
not be subject to misuse.\18\ Accordingly, the Commission believes that
the Exchange's proposal to amend BZX Rules 14.11(m)(2)(E) and (F) \19\
to apply the current ``fire wall'' and other requirements contained
therein to those that have access to information concerning, or make
decisions pertaining to, the composition of and/or changes to the
Custom Baskets, in addition to the existing requirements relating to
the Fund Portfolio and the Tracking Basket, is designed to prevent
fraud and manipulation with respect to Tracking Fund Shares.
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\18\ See 2020 Order, supra note 16, 85 FR at 31002-03.
\19\ See supra Section II, describing proposed BZX Rules
14.11(m)(2)(E) and (F).
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The Commission also believes that the proposed amendments to the
initial and continued listing requirements for Tracking Fund Shares are
adequate to ensure transparency of information relating to Custom
Baskets utilized by a fund and to ensure that such information is
available to the rest of the market participants at the same time.
Specifically, prior to the opening of trading on each business day, the
Investment Company will 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.\20\ In addition, prior to the initial
listing of the Tracking Fund Shares, the Exchange will be required to
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 FD, including with
respect to any Custom Basket.\21\ These measures help to mitigate
concerns that certain information regarding the funds will be available
only to select market participants and thereby helps to prevent fraud
and manipulation.
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\20\ See proposed BZX Rule 14.11(m)(4)(B)(ii).
\21\ See proposed BZX Rule 14.11(m)(4)(A)(ii)(c). The Commission
notes that a fund's use of, or conversations with authorized
participants about, Creation Baskets that would result in selective
disclosure of nonpublic information would effectively be limited by
the fund's obligation to comply with Regulation FD. See, e.g.,
Fidelity Beach Street Trust, et al., Investment Company Act Release
No. 34326 (July 9, 2021).
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The Commission notes that, as set forth in the definition of
``Custom Basket,'' a series of Tracking Fund Shares may only utilize
Custom Baskets to the extent consistent with the exemptive relief
issued pursuant to the 1940 Act applicable to such series.\22\ The
Commission further notes that all series of Tracking Fund Shares will
continue to be subject to the existing rules and procedures that govern
the listing and trading of Tracking Fund Shares and the trading of
equity securities on the Exchange.
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\22\ See proposed BZX Rule 14.11(m)(3)(F).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act \23\ that the proposed rule change (SR-CboeBZX-2021-053),
be, and it hereby is, approved.
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\23\ 15 U.S.C. 78s(b)(2).
\24\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21483 Filed 10-1-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on October 4, 2021.
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