Document ID: SEC-2019-1231-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2019-08-27T04:00Z

[Federal Register Volume 84, Number 166 (Tuesday, August 27, 2019)]
[Notices]
[Pages 44957-44960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18384]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86724; File No. SR-CboeBZX-2019-075]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change, as 
Modified by Amendment No. 1, To Amend Rule 14.11(i) Relating to Generic 
Listing Standards for Managed Fund Shares

August 21, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 7, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
filed with the Securities and Exchange Commission (``Commission'') a 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange filed the proposal as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act and Rule 19b-4(f)(6) thereunder.\3\ On 
August 20, 2019, the Exchange filed Amendment No. 1 to the proposed 
rule change.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii); 17 CFR 240.19b-4(f)(6).
    \4\ In Amendment No. 1, the Exchange amended Item 2(a) of the 
proposed rule change to state that ``The Exchange's President (or 
designee) pursuant to delegated authority approved the proposed rule 
change on August 7, 2019.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a rule change to Rule 14.11(i), (``Managed 
Fund Shares'') specifically relating to generic listing standards for 
Managed Fund Shares applicable to holdings in fixed income securities.
    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
    Rule 14.11(i), Managed Fund Shares, sets forth generic listing 
standards for listing and trading of Managed Fund Shares on the 
Exchange.\5\ The Exchange specifically proposes to amend Rule 
14.11(i)(4)(C)(ii)(e), as described below in a manner substantively 
identical to a proposal that has already been approved by the 
Commission.\6\
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    \5\ The Commission approved Rule 14.11(i) in Securities Exchange 
Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 
2011) (SR-BATS-2011-018) and subsequently approved generic listing 
standards for Managed Fund Shares under Rule 14.11(i) in Securities 
Exchange Act Release No. 78396 (July 22, 2016), 81 FR 49698 (July 
28, 2016) (SR-BATS-2015-100).
    \6\ See Securities Exchange Act Release No. 86017 (June 3, 
2019), 84 FR 26711 (June 7, 2019) (SR-NYSEArca-2019-06) (Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, To 
Amend Certain Generic Listing Standards for Managed Fund Shares 
Applicable to Holdings of Fixed Income Securities) (the ``Prior 
Approval'').

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[[Page 44958]]

Proposed Amendment to Rule 14.11(i)(4)(C)(ii)(e)
    Exchange Rule 14.11(i)(4)(C)(ii) sets forth generic listing 
standards applicable to fixed income securities included in the 
portfolio of a series of Managed Fund Shares.\7\ Exchange Rule 
14.11(i)(4)(C)(ii)(e) provides that non-agency, non-GSE and privately-
issued mortgage-related and other asset-backed securities (``ABS'' and, 
collectively, ``non-agency ABS'') components of a portfolio shall not 
account, in the aggregate, for more than 20% of the weight of the fixed 
income portion of the portfolio. The Exchange proposes to amend Rule 
14.11(i)(4)(C)(ii)(e) by deleting the words ``fixed income portion'' to 
provide that such 20% limitation would apply to the entire portfolio 
rather than to only the fixed income portion of the portfolio. Thus, 
Rule 14.11(i)(4)(C)(ii)(e) would provide that non-agency, non-GSE and 
privately-issued mortgage-related and other ABS components of a 
portfolio shall not account, in the aggregate, for more than 20% of the 
weight of the portfolio.
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    \7\ Rule 14.11(i)(4)(C)(ii) provides that fixed income 
securities are debt securities that are notes, bonds, debentures or 
evidence of indebtedness that include, but are not limited to, U.S. 
Department of Treasury securities (``Treasury Securities''), 
government-sponsored entity securities (``GSE Securities''), 
municipal securities, trust preferred securities, supranational debt 
and debt of a foreign country or a subdivision thereof, investment 
grade and high yield corporate debt, bank loans, mortgage and asset 
backed securities, and commercial paper.
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    The Exchange believes this amendment is appropriate because the 
investment of a series of Managed Fund Shares in non-agency, non-GSE 
and privately-issued mortgage-related and other ABS may provide a fund 
with benefits associated with increased diversification, as such 
investments may be less correlated to interest rates than many other 
fixed income securities. The Exchange notes that application of the 20% 
limitation only to the fixed income portion of a fund's portfolio may 
impose a much more restrictive percentage limit on permitted holdings 
of non-agency ABS for funds that have a more diversified investment 
portfolio than for funds that hold principally or exclusively fixed 
income securities. For example, a fund holding 100% of its assets in 
fixed income securities can hold 20% of its entire portfolio's weight 
in non-agency ABS. In contrast, a fund holding 25% of its assets in 
fixed income securities, 25% in U.S Component Stocks, and 50% in cash 
and cash equivalents is limited to a 5% (25% * 20% = 5%) allocation to 
non-agency ABS. The Exchange, therefore, believes application of the 
20% limitation to a fund's entire portfolio would be more equitable for 
Managed Fund Shares issuers with different investment objectives and 
holdings.
    The Exchange notes that the Commission has previously approved the 
listing of actively managed exchange-traded funds that can invest 20% 
of their total assets in non-agency, non-GSE and other privately issued 
ABS and mortgage-backed securities (``MBS'').\8\ In addition, the 
Commission has previously approved listing and trading of shares of an 
issue of Managed Fund Shares where such fund's investments in non-
agency, non-GSE and other privately issued ABS will, in the aggregate, 
not exceed 20% of the total assets of the fund, rather than the weight 
of the fixed income portion of the fund's portfolio.\9\ Therefore, the 
Exchange believes it is appropriate to apply the 20% limitation to a 
fund's investment in non-agency, non-GSE and privately-issued mortgage-
related and other ABS components of a portfolio in Rule 
14.11(i)(4)(C)(ii)(e) to a fund's total assets. Non-agency ABS would 
otherwise satisfy all generic listing requirements of Exchange Rule 
14.11(i)(4)(C)(ii).
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    \8\ See, e.g., Securities Exchange Act Release Nos. 80946 (June 
15, 2017) 82 FR 28126 (June 20, 2017) (SR-NASDAQ-2017-039) 
(permitting the Guggenheim Limited Duration ETF to invest up to 20% 
of its total assets in privately-issued, non-agency and non-GSE ABS 
and MBS); 76412 (November 10, 2015), 80 FR 71880 (November 17, 2015) 
(SR-NYSEArca-2015-111) (permitting the RiverFront Strategic Income 
Fund to invest up to 20% of its assets in privately-issued, non-
agency and non-GSE ABS and MBS); 74814 (April 27, 2015), 80 FR 24986 
(May 1, 2015) (SR-NYSEArca-2014-107) (permitting the Guggenheim 
Enhanced Short Duration ETF to invest up to 20% of its assets in 
privately-issued, non-agency and non-GSE ABS and MBS); 74109 
(January 21, 2015), 80 FR 4327 (January 27, 2015) (SR-NYSEArca-2014-
134) (permitting the IQ Wilshire Alternative Strategies ETF to 
invest up to 20% of its total assets in MBS and other ABS, without 
any limit on the type of such MBS and ABS).
    \9\ See Securities Exchange Act Release No. 83319 (May 24, 
2018), 83 FR 25097 (May 31, 2018) (SR-NYSEArca-2018-15) (Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, to Continue Listing and Trading Shares of the PGIM Ultra 
Short Bond ETF Under NYSE Arca Rule 8.600-E).
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    The Exchange believes the proposed amendments will provide issuers 
of Managed Fund Shares with additional investment choices for fund 
portfolios for issues permitted to list and trade on the Exchange 
pursuant to Rule 19b-4(e), which would enhance competition among market 
participants, to the benefit of investors and the marketplace.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\11\ in particular, because it 
is 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 mechanisms of, a free and open market and a national market 
system and, in general, to protect investors and the public interest 
and because it is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Exchange has in place surveillance procedures that are adequate 
to properly monitor trading in series of Managed Fund Shares in all 
trading sessions and to deter and detect violations of Exchange rules 
and applicable federal securities laws. The Exchange notes that the 
Exchange or Financial Industry Regulatory Authority (``FINRA''), on 
behalf of the Exchange, or both, would communicate as needed regarding 
trading in Managed Fund Shares with other markets and other entities 
that are members of the Intermarket Surveillance Group, and the 
Exchange or FINRA, on behalf of the Exchange, or both, could obtain 
trading information regarding trading in Managed Fund Shares from such 
markets and other entities. In addition, the Exchange could obtain 
information regarding trading in Managed Fund Shares from markets and 
other entities that are members of ISG or with which the Exchange has 
in place a comprehensive surveillance sharing agreement.
    With respect to the proposed amendment to Rule 
14.11(i)(4)(C)(ii)(e), the Exchange believes this amendment is 
appropriate because a fund's investment in non-agency, non-GSE and 
privately-issued mortgage-related and other ABS may provide a fund with 
benefits associated with increased diversification, as such investments 
may be less correlated to interest rates than many other fixed income 
securities. As noted above, application of the 20% limitation to only 
the fixed income portion of a fund's portfolio may impose a much lower 
percentage limit on permitted holdings of non-agency ABS

[[Page 44959]]

for funds that have a more diversified investment portfolio than for 
funds that hold principally or exclusively fixed income securities. The 
Exchange, therefore, believes application of the 20% limitation to a 
fund's entire portfolio would be more equitable for Managed Fund Shares 
issuers with different investment objectives and holdings.
    The Exchange notes that the Commission has previously approved the 
listing of actively managed exchange-traded funds that can invest 20% 
of their total assets in non-agency, non-GSE and other privately issued 
ABS and MBS.\12\ In addition, the Commission has previously approved 
listing and trading of shares of an issue of Managed Fund Shares where 
such fund's investments in non-agency, non-GSE and other privately 
issued ABS will, in the aggregate, not exceed more than 20% of the 
total assets of the fund, rather than the weight of the fixed income 
portion of the fund's portfolio.\13\ Therefore, the Exchange believes 
it is appropriate to apply the 20% limitation to a fund's investment in 
non-agency, non-GSE and privately-issued mortgage-related and other ABS 
components of a portfolio in Exchange Rule 14.11(i)(4)(C)(ii)(e) to a 
fund's total assets. Non-agency ABS would otherwise satisfy all generic 
listing requirements of Exchange Rule 14.11(i)(4)(C)(ii).
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    \12\ See note 8, supra.
    \13\ See note 9, supra.
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    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
additional types of Managed Fund Shares that will enhance competition 
among market participants, to the benefit of investors and the 
marketplace.

B. Self-Regulatory Organization's Statement on Burden on Competition

    In accordance with Section 6(b)(8) of the Act,\14\ the Exchange 
believes that the proposed rule change would not impose any burden on 
competition that is not necessary or appropriate in furtherance of the 
purposes of the Act. The proposed rule change would permit Exchange 
listing and trading under Rule 19b-4(e) of additional types of Managed 
Fund Shares, which would enhance competition among market participants, 
to the benefit of investors and the marketplace.
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    \14\ 15 U.S.C. 78f(b)(8).
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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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \17\ normally 
does not become operative for 30 days after the date of the filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\18\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. The Exchange has 
requested that the Commission waive the 30-day operative delay so that 
the proposal may become operative upon filing, which would allow the 
Exchange to immediately apply the proposed rule to Managed Fund Shares 
generically-listed on the Exchange. The Exchange also noted that the 
Commission has previously approved a substantively identical proposal 
by another national securities exchange.\19\ The Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest. Accordingly, the 
Commission waives the 30-day operative delay and designates the 
proposed rule change, as modified by Amendment No. 1, operative upon 
filing.\20\
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    \17\ 17 CFR 240.19b-4(f)(6).
    \18\ 17 CFR 240.19b-4(f)(6)(iii).
    \19\ See supra note 6.
    \20\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission will institute proceedings to 
determine whether the proposed rule change should be approved or 
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-2019-075 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-2019-075. 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

[[Page 44960]]

comment submissions. You should submit only information that you wish 
to make available publicly. All submissions should refer to File Number 
SR-CboeBZX-2019-075 and should be submitted on or before September 17, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18384 Filed 8-26-19; 8:45 am]
BILLING CODE 8011-01-P