Notice2024-27477
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Expand BZX Rule 14.11(l) To Permit the Generic Listing and Trading of Multi-Class ETF 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
November 25, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 227 (Monday, November 25, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 227 (Monday, November 25, 2024)]
[Notices]
[Pages 92989-92992]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27477]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101655; File No. SR-CboeBZX-2024-112]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Expand BZX Rule 14.11(l) To Permit
the Generic Listing and Trading of Multi-Class ETF Shares
November 19, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 8, 2024, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to amend Rule 14.11(l) to provide that the
Exchange may approve a series of Exchange-Traded Fund (``ETF'') Shares
for listing and/or trading on the Exchange that operates in reliance on
exemptive relief to Rule 6c-11 under the Investment Company Act of 1940
(the ``Investment Company Act'') that permits the trust issuing the ETF
Shares to offer an exchange-traded fund class in addition to classes of
shares that are not exchange-traded.
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
[[Page 92990]]
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(l) to provide that the
Exchange may approve a series of ETF Shares for listing and/or trading
on the Exchange where such series operates in reliance on exemptive
relief to Rule 6c-11 under the Investment Company Act that permits the
trust issuing the ETF Shares to offer ETF Shares in addition to classes
of shares that are not exchange-traded (``Multi-class ETF Shares'') of
an open-end fund.\3\ There are numerous applications for exemptive
relief for Multi-class ETF Shares currently before the Commission \4\
that request exemptive relief similar to that previously granted to
other funds that are not listed on the Exchange.\5\ This proposed
amendment would provide for the ``generic'' listing and/or trading of
Multi-class ETF Shares under Rule 14.11(l) on the Exchange immediately
upon the Commission's applicable order granting exemptive relief to the
outstanding applications. This proposal is not intended to amend any
other part of Rule 14.11(l) and the Exchange submits this proposal only
to prevent any unnecessary delay in listing additional Multi-Class ETF
Shares generically under Rule 14.11(l) when and if such requests are
granted by the Commission.
---------------------------------------------------------------------------
\3\ The Exchange notes that it had previously submitted a
version of this filing on April 15, 2024. See Securities Exchange
Act Release No. 34-100034 (May 1, 2024) 89 FR 35255. That filing was
withdrawn on November 8, 2024 and submitted this proposal.
\4\ See Perpetual US Services, LLC (filed February 7, 2023); DFA
Investment Dimensions Group Inc. and Dimensional Investment Group
Inc. (filed July 12, 2023); F/m Investments LLC (August 22, 2023);
Fidelity Hastings Street Trust and Fidelity Management & Research
Company (filed October 24, 2023); Morgan Stanley Institutional Fund
Trust and Morgan Stanley Investment Management Inc. (filed January
29, 2024); First Trust Series Fund and First Trust Variable
Insurance Trust (filed January 24, 2024); Guinness Atkinson Funds
(filed February 27, 2024); and Metropolitan West Funds, TCW ETF
Trust, and TCW Funds, Inc. (filed March 20, 2024).
\5\ Infra note 6.
---------------------------------------------------------------------------
Background
Starting in 2000, the Commission began granting limited relief for
The Vanguard Group, Inc. (``Vanguard'') to offer certain index-based
open-end management investment companies with Multi-class ETF
Shares.\6\ After this relief was granted, there was limited public
discourse about Multi-class ETF Shares until 2019, when the prospect of
providing blanket exemptive relief to Multi-class ETF Shares was
addressed in the Commission's adoption of Rule 6c-11 under the
Investment Company Act (the ``ETF Rule'').\7\ The ETF Rule permits ETFs
that satisfy certain conditions to operate without the expense or delay
of obtaining an exemptive order. However, the ETF Rule did not provide
blanket exemptive relief to allow for Multi-class ETF Shares as part of
the final rule. Instead, the Commission concluded that Multi-class ETF
Shares should request relief through the exemptive application process
so that the Commission may assess all relevant policy considerations in
the context of the facts and circumstances of particular applicants.
The Exchange adopted Rule 14.11(l) \8\ shortly after the implementation
of the ETF Rule and, because there were no exemptive applications
before the Commission and because none of the Multi-class ETF Shares
that were previously granted exemptive relief listed on the Exchange,
did not propose to include any language comparable to what is being
proposed herein.
---------------------------------------------------------------------------
\6\ See Vanguard Index Funds, Investment Company Act Release
Nos. 24680 (Oct. 6, 2000) (notice) and 24789 (Dec. 12, 2000)
(order). The Commission itself, as opposed to the Commission staff
acting under delegated authority, considered the original Vanguard
application and determined that the relief was appropriate in the
public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the
Act. In the process of granting the order, the Commission also
considered and denied a hearing request on the original application,
as reflected in the final Commission order. See also the Vanguard
Group, Inc., Investment Company Act Release Nos. 26282 (Dec. 2,
2003) (notice) and 26317 (Dec. 30, 2003) (order); Vanguard
International Equity Index Funds, Investment Company Act Release
Nos. 26246 (Nov. 3, 2003) (notice) and 26281 (Dec. 1, 2003) (order);
Vanguard Bond Index Funds, Investment Company Act Release Nos. 27750
(Mar. 9, 2007) (notice) and 27773 (April 2, 2007) (order)
(collectively referred to as the ``Vanguard Orders'').
\7\ See Securities Exchange Act Release No. 33-10695 (October
24, 2019) 84 FR 57162 (the ``ETF Rule Adopting Release'').
\8\ See Securities Exchange Act No. 88566 (April 6, 2020) 85 FR
20312 (April 10, 2020) (SR-CboeBZX-2019-097) (Notice of Filing of
Amendment No. 2 and Order Granting Accelerated Approval of a
Proposed Rule Change, as Modified by Amendment No. 2, To Adopt BZX
Rule 14.11(l) Governing the Listing and Trading of Exchange-Traded
Fund Shares).
---------------------------------------------------------------------------
As noted above, a number of applications for exemptive relief to
permit the applicable fund to offer Multi-class ETF Shares (the
``Applications'') have been submitted to the Commission starting in
early 2023. In general, the Applications state that the ability of a
fund to offer Multi-class ETF Shares, i.e., both a class of mutual fund
shares (each such class, a ``Mutual Fund class'' and such shares
``Mutual Fund Shares'') and ETF Shares, could be beneficial to the fund
and to shareholders of each type of class for various reasons,
including more efficient portfolio management, better secondary market
trading opportunities, and cost efficiencies, among others.\9\
---------------------------------------------------------------------------
\9\ Specifically, the Applicants believe that a Mutual Fund
class would benefit ETF class shareholders because investor cash
flows through a Mutual Fund class can be used for efficient
portfolio rebalancing. To the extent that cash flows come into a
fund through a Mutual Fund class, a portfolio manager may be able to
deploy that cash strategically to rebalance the portfolio. Second,
cash flows through a Mutual Fund class may allow for greater
creation basket flexibility for creations and redemptions through
the ETF class, which could promote arbitrage efficiency and smaller
spreads on the trading of ETF Shares in the secondary market. With
respect to existing funds, ETF classes would permit investors that
prefer the ETF structure to gain access to established funds'
investment strategies. Additionally, the establishment of an ETF
class as part of an existing fund could lead to cost efficiencies.
Specifically, in terms of fund expenses, an ETF class could have
initial and ongoing advantages for its shareholders, where
shareholders of an ETF class of a fund that already has substantial
assets could immediately benefit from economies of scale. Finally,
the tax-free conversion of shares from the Mutual Fund class to the
ETF class may accelerate the development of an ETF shareholder base.
Subsequent secondary market transactions by the ETF class
shareholders could generate greater trading volume, resulting in
lower trading spreads and/or premiums or discounts in the market
prices of the ETF Shares to the benefit of ETF shareholders. The
Applicants also believe that an ETF class would benefit Mutual Fund
class shareholders because in-kind transactions through the ETF
class may contribute to lower portfolio transaction costs and
greater tax efficiency. Additionally, the conversion feature could
allow Mutual Fund shareholders to convert Mutual Fund Shares for ETF
Shares without adverse consequences to the Fund by allowing Mutual
Fund shareholders to convert their shares into the ETF class of the
same fund rather than redeeming their Mutual Fund Shares and buying
shares of another ETF. In doing so, the converting shareholder could
save on transaction costs and potential tax consequences that may
otherwise be incurred in redeeming their existing shares and buying
separate ETF Shares. The ETF class would also represent an
additional distribution channel for a fund that could lead to
additional asset grown and economies of scale; greater assets under
management may lead to additional cost efficiencies and an improved
tax profile for the fund may also assist the competitive position of
the Fund for attracting prospective shareholders. Last, the class of
ETF Shares could allow certain investors to engage in more frequent
trading without disrupting the fund's portfolio.
---------------------------------------------------------------------------
While Multi-class ETF Shares could potentially be listed under
existing Exchange Rules 14.11(c) or 14.11(i), doing so would
unnecessarily re-introduce the burdensome quantitative portfolio
requirements and ongoing compliance obligations associated therewith
that existed before the adoption of Rule 6c-11 and Exchange Rule
14.11(l).\10\ The Exchange is not
[[Page 92991]]
aware of any clear policy rationale as to why those quantitative
requirements should apply to Multi-class ETF Shares other than the
rules are already in place. As such, listing Multi-class ETF Shares
under these older rules would place undue burdens on both the Exchange
and fund issuers because of the quantitative portfolio requirements
that currently do not apply to ETFs meeting the requirements of Rule
6c-11 and Rule 14.11(l). Furthermore, while the Applicants generally
seek the same exemptive relief as granted under those previous
orders,\11\ several Applicants have proposed different conditions to
the relief that reflect the adoption of Rule 6c-11. Therefore, the
Exchange believes there is a reasonable relationship between the
Applications and the proposed rule change to allow for the Commission's
evaluation of whether the proposed rule change is consistent with the
Act. The Exchange also acknowledges that approval of this proposed rule
change would not necessarily result in the listing and trading of the
additional Multi-class ETF Shares under the proposed Rule until and
unless the necessary relief was granted by the Division of Investment
Management, but approving this proposal would address any potential
concerns the Commission's division of Trading and Markets might have as
it specifically relates to the listing and trading of Multi-class ETF
Shares under proposed Rule 14.11(l) and would allow for a smooth launch
process if an when such relief is granted.\12\
---------------------------------------------------------------------------
\10\ See e.g., Exchange Rule 14.11(c) and 14.11(i).
\11\ Supra note 6.
\12\ The Commission has in some instances historically approved
Exchange listing rules even when no products would necessarily be
permitted to list under those rules. Most recently, the Commission
approved Exchange proposals to list and trade shares of ether-based
exchange-traded products (``ETPs'') prior to any such products
having an effective registration statement. As those ether-based
ETPs could not trade on the Exchange without an effective
registration statement, which were separately considered by the
Commission's division of corporate finance, the Exchange could not
list and trade those products even with proper Exchange Rules in
place. The Exchange believes this example illustrates the
reasonability of the Exchange pursuing the adoption a proposed Rule
that would not immediately result in the listing and trading of the
applicable products thereunder. See Securities Exchange Act No.
100224 (May 23, 2024) 89 FR 46937 (May 30, 2024) (Order Granting
Accelerated Approval of Proposed Rule Changes, as Modified by
Amendments Thereto, To List and Trade Shares of Ether-Based
Exchange-Traded Products).
---------------------------------------------------------------------------
Proposal
The Exchange proposes to amend Rule 14.11(l)(4) to explicitly
provide that any series of ETF Shares that is eligible to operate under
exemptive relief under the Investment Company Act that permits the fund
to offer a class of ETF Shares in addition to classes of shares that
are not-exchange traded (i.e., Multi-class ETF Shares) may be approved
by the Exchange for listing and/or trading (including pursuant to
unlisted trading privileges) on the Exchange pursuant to Rule 19b-4(e)
under the Act. The Exchange also proposes to explicitly provide that
the requirements of any exemptive relief applicable to Multi-class ETF
Shares must be satisfied by a series of ETF Shares on an initial and
continued listing basis. Last, the Exchange proposes to amend Rule
14.11(l)(4)(B)(i)(a) to provide that any series of Multi-class ETF
Shares that fails to meet the requirements of the applicable exemptive
relief will be subject to the suspension of trading or removal
provisions of Rule 14.11(l)(4)(B)(i).
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Act and the rules and regulations thereunder applicable to the Exchange
and, in particular, the requirements of Section 6(b) of the Act.\13\
Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \14\ 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) \15\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
\15\ Id.
---------------------------------------------------------------------------
In particular, the Exchange believes that permitting Multi-class
ETF Shares to list on the Exchange is consistent with the applicable
exemptive relief and will help perfect the mechanism of a free and open
market and, in general, will protect investors and the public interest
in that it will permit the listing and trading of Multi-class ETF
Shares, consistent with the applicable exemptive relief, and in a
manner that will benefit investors. Specifically, the Exchange believes
that the relief proposed in the Applications and the expected benefits
of the Multi-class ETF Shares described above would be to the benefit
of investors. Eliminating any unnecessary delay for additional Multi-
class ETF Shares listing on the Exchange under Rule 14.11(l) will
simply help accrue those benefits to investors more expeditiously.
Further, the Exchange is only proposing to amend its rules to allow
such a series of Multi-class ETF Shares to list on the Exchange
pursuant to Rule 14.11(l), a change to its rules that will only be
meaningful if and when the Commission grants such relief to an
Applicant. To the extent that the Commission does not grant Multi-class
ETF Shares relief, the proposed change to Rule 14.11(l) will have no
impact on series of ETF Shares listed on the Exchange.
The Exchange also believes that amending Rule 14.11(l) to
explicitly provide that the initial and continued listing standards
applicable to ETF Shares, including the suspension of trading or
removal standards, would be applicable to Multi-class ETF Shares
operating under any applicable exemptive relief, are designed to
promote transparency and clarity in the Exchange's Rules. The Exchange
believes that with these changes, Rule 14.11(l)(4) would clearly allow
for the listing and trading of Multi-class ETF Shares upon the
Commission's order of exemptive relief.
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. The Exchange believes the
proposed rule change, by permitting the listing and trading of ETF
Shares operating under Multi-class ETF Shares 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
[[Page 92992]]
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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#b2c0c7ded79fd1dddfdfd7dcc6c1f2c1d7d19cd5ddc4"><span class="__cf_email__" data-cfemail="1260677e773f717d7f7f777c6661526177713c757d64">[email protected]</span></a>. Please include
file number SR-CboeBZX-2024-112 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-2024-112. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CboeBZX-2024-112 and should
be submitted on or before December 16, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\16\
---------------------------------------------------------------------------
\16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27477 Filed 11-22-24; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on November 25, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.