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[Federal Register Volume 89, Number 227 (Monday, November 25, 2024)]
[Notices]
[Pages 92989-92992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-27477]

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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.
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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. (``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 (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

[[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.
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    \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.
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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.
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    \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).
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    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\
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    \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.
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    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\
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    \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).
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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.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    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

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2024-112 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-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 (https://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 
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\
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    \16\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-27477 Filed 11-22-24; 8:45 am]
BILLING CODE 8011-01-P
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