Document ID: SEC-2019-1412-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2019-10-01T04:00Z

[Federal Register Volume 84, Number 190 (Tuesday, October 1, 2019)]
[Notices]
[Pages 52152-52155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-21246]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87108; File No. SR-CboeBZX-2019-067]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change, as Modified by Amendment 
Nos. 2 and 3, to List and Trade Shares of the Innovator-100 Buffer ETF 
Series, Innovator Russell 2000 Buffer ETF Series, Innovator-100 Power 
Buffer ETF Series, Innovator Russell 2000 Power Buffer ETF Series, 
Innovator-100 Ultra Buffer ETF Series, and Innovator Russell 2000 Ultra 
Buffer ETF Series Under Rule 14.11(i)

September 25, 2019.

I. Introduction

    On July 18, 2019, 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 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade the shares (``Shares'') of the Innovator-100 Buffer ETF 
Series and Innovator Russell 2000 Buffer ETF Series (collectively, the 
``Buffer Funds''), Innovator-100 Power Buffer ETF Series and Innovator 
Russell 2000 Power Buffer ETF Series (collectively, the ``Power Buffer 
Funds''), and Innovator-100 Ultra Buffer ETF Series and Innovator 
Russell 2000 Ultra Buffer ETF Series (collectively, the ``Ultra Buffer 
Funds,'' and together with the Buffer Funds and Power Buffer Funds, the 
``Funds'') under BZX Rule 14.11(i). The proposed rule change was 
published for comment in the Federal Register on August 5, 2019.\3\ On 
August 29, 2019, the Exchange filed Amendment No. 1 to the proposed 
rule change. On September 17, 2019, the Commission extended the time 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\4\ On September 19, 
2019, the Exchange filed Amendment No. 2 to the proposed rule change, 
which amended and superseded the proposed rule change as modified by 
Amendment No. 1.\5\ On September 24, 2019, the Exchange filed partial 
Amendment No. 3 to the proposed rule change.\6\ The Commission has 
received no comments on the proposed rule change. This order approves 
the proposed rule change, as modified by Amendment Nos. 2 and 3.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86511 (July 30, 
2019), 84 FR 38078.
    \4\ See Securities Exchange Act Release No. 86996, 84 FR 49779 
(September 23, 2019) (extending the time period to November 3, 
2019).
    \5\ In Amendment No. 2, the Exchange: (1) Deleted its 
representation about the index provider implementing and maintaining 
a firewall; (2) modified the downside protection in the Buffer Funds 
from 10% to 9%; (3) clarified descriptions about the investment 
methodology of the Funds; (4) modified descriptive terms on the 
liquidity and competitive market for options on the reference 
indexes; (5) identified options exchanges trading standardized and 
FLexible EXchange Options (``FLEX Options'') on the reference 
indexes (6) updated volume information on standardized options in 
the reference indexes; and (7) made other technical, non-substantive 
changes.
    \6\ The amendments to the proposed rule change are available at: 
https://www.sec.gov/comments/sr-cboebzx-2019-067/srcboebzx2019067.htm. In partial Amendment No. 3, the Exchange 
clarified a description related to the Buffer Funds. Because 
Amendment Nos. 2 and 3 do not materially alter the substance of the 
proposed rule change or raise unique or novel regulatory issues, 
Amendment Nos. 2 and 3 are not subject to notice and comment.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
Nos. 2 and 3

    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange. In total, the Exchange is proposing to list and trade 
Shares of up to twelve monthly series of each of the Funds. The Shares 
will be offered by Innovator ETFs Trust (``Trust''), a Delaware 
statutory trust.\7\ The

[[Page 52153]]

investment adviser to the Funds is Innovator Capital Management, LLC 
(``Adviser''), and the sub-adviser to the Funds is Milliman Financial 
Risk Management LLC (``Sub-Adviser'').
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    \7\ The Trust is registered with the Commission as an investment 
company and has filed a registration statement for each Fund with 
the Commission on Form N-1A (File Nos. 333-146827 and 811-22135) 
(``Registration Statement'') under the Securities Act of 1933 (15 
U.S.C. 77a), dated February 6, 2019. According to the Exchange, the 
description of the operation of the Funds and the Shares herein is 
based, in part, on the Registration Statement.
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    The investment objective of the Funds is to provide investors with 
returns that match those of the Nasdaq-100 Index (the ``Nasdaq-100 
Price Index'') or the Russell 2000 Price Index (the ``Russell 2000 
Price Index'') (collectively, the ``Reference Indexes'') over a period 
of approximately one year, while providing a level of protection from 
losses in the applicable Reference Index.

A. Buffer Funds

    The Buffer Funds are actively managed funds that seek to provide 
investment returns that match the gains of the applicable Reference 
Index, up to a maximized annual return (the ``Buffer Cap Level''),\8\ 
while guarding against a decline in the Reference Index for the first 
9%. Specifically, the Buffer Fund is designed to provide the following 
results during the outcome period:
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    \8\ The Exchange states that the Buffer Cap Level will be 
determined with respect to each Buffer Fund on the inception date of 
the Buffer Fund and at the beginning of each outcome period. See 
Amendment No. 2, supra note 5, at 10-11.
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     If the Reference Index appreciates over the outcome 
period: The Buffer Fund is designed to provide a total return that 
matches the total return of the applicable Reference Index, up to the 
applicable Buffer Cap Level;
     If the Reference Index decreases over the outcome period 
by 9% or less: The Buffer Fund is designed to provide a total return of 
zero; and
     If the Reference Index depreciates over the outcome period 
by greater than 9%: The Buffer Fund is designed to provide a total 
return loss that is 9% less than the percentage loss on the Reference 
Index with a maximum loss of approximately 91%.\9\
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    \9\ The Exchange states that the Buffer Funds do not offer any 
protection against declines in the Reference Index exceeding 9% on 
an annualized basis. See id. at 10. Shareholders will bear all 
Reference Index losses exceeding 9% on a one-to-one basis. See id.
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    The Buffer Fund is designed to produce these outcomes by including 
theoretically ``purchased'' and ``written'' FLEX Options that, when 
layered upon each other, are designed to buffer against losses of the 
applicable Reference Index and cap the level of possible gains.
    Under Normal Market Conditions,\10\ each Buffer Fund will attempt 
to achieve its investment objective by taking positions that provide 
performance exposure that match the gains of the applicable Reference 
Index. Each Buffer Fund will invest primarily in exchange-traded 
options contracts that reference either the Reference Index or exchange 
traded funds (``ETFs'') that track the Reference Index.\11\ Any FLEX 
Options written by a Buffer Fund that create an obligation to sell or 
buy an asset will be offset with a position in FLEX Options purchased 
by the Buffer Fund to create the right to buy or sell the same asset 
such that the Buffer Fund will always be in a net long position. As the 
FLEX Options mature at the end of each outcome period, they are 
replaced.
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    \10\ As defined in BZX Rule 14.11(i)(3)(E), the term ``Normal 
Market Conditions'' includes, but is not limited to, the absence of 
trading halts in the applicable financial markets generally; 
operational issues causing dissemination of inaccurate market 
information or system failures; or force majeure type events such as 
natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption, or any similar intervening 
circumstance.
    \11\ The FLEX Options owned by each of the Buffer Funds will 
have the same terms (i.e., same strike price and expiration) for all 
investors of a Buffer Fund within an outcome period. See Amendment 
No. 2, supra note 5, at 10.
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B. Power Buffer Funds

    The Power Buffer Funds are actively managed funds that seek to 
provide investment returns that match the gains of the applicable 
Reference Index, up to a maximized annual return (the ``Power Buffer 
Cap Level''),\12\ while guarding against a decline in the Reference 
Index for the first 15%. Specifically, the Power Buffer Fund is 
designed to provide the following results during the outcome period:
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    \12\ The Exchange states that the Power Buffer Cap Level will be 
determined with respect to each Power Buffer Fund on the inception 
date of the Power Buffer Fund and at the beginning of each outcome 
period. See Amendment No. 2, supra note 5, at 12-13.
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     If the Reference Index appreciates over the outcome 
period: The Power Buffer Fund is designed to provide a total return 
that matches the total return of the applicable Reference Index, up to 
the applicable Power Buffer Cap Level;
     If the Reference Index decreases over the outcome period 
by 15% or less: The Power Buffer Fund is designed to provide a total 
return of zero; and
     If the Reference Index depreciates over the outcome period 
by greater than 15%: The Power Buffer Fund is designed to provide a 
total return loss that is 15% less than the percentage loss on the 
Reference Index with a maximum loss of approximately 85%.\13\
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    \13\ The Exchange states that the Power Buffer Funds do not 
offer any protection against declines in the Reference Index 
exceeding 15% on an annualized basis. See id. at 12. Shareholders 
will bear all Reference Index losses exceeding 15% on a one-to-one 
basis. See id.
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    The Power Buffer Fund is designed to produce these outcomes by 
including theoretically ``purchased'' and ``written'' FLEX Options 
that, when layered upon each other, are designed to buffer against 
losses of the applicable Reference Index and cap the level of possible 
gains.
    Under Normal Market Conditions, each Power Buffer Fund will attempt 
to achieve its investment objective by taking positions that provide 
performance exposure that match the gains of the applicable Reference 
Index. Each Power Buffer Fund will invest primarily in exchange-traded 
options contracts that reference either the Reference Index or ETFs 
that track the Reference Index.\14\ Any FLEX Options written by a Power 
Buffer Fund that create an obligation to sell or buy an asset will be 
offset with a position in FLEX Options purchased by the Power Buffer 
Fund to create the right to buy or sell the same asset such that the 
Power Buffer Fund will always be in a net long position. As the FLEX 
Options mature at the end of each outcome period, they are replaced.
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    \14\ The FLEX Options owned by each of the Power Buffer Funds 
will have the same terms (i.e., same strike price and expiration) 
for all investors of a Power Buffer Fund within an outcome period. 
See id.
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C. Ultra Buffer Funds

    The Ultra Buffer Funds are actively managed funds that seek to 
provide investment returns that match the gains of the applicable 
Reference Index, up to a maximized annual return (the ``Ultra Buffer 
Cap Level''),\15\ while guarding against a decline in the Reference 
Index of between 5% and 35%. Specifically, the Ultra Buffer Fund is 
designed to provide the following results during the outcome period:
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    \15\ The Exchange states that the Ultra Buffer Cap Level will be 
determined with respect to each Ultra Buffer Fund on the inception 
date of the Ultra Buffer Fund and at the beginning of each outcome 
period. See Amendment No. 2, supra note 5, at 12-13.
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     If the Reference Index appreciates over the outcome 
period: The Ultra Buffer Fund is designed to provide a total return 
that matches the total return of the applicable Reference Index, up to 
the applicable Ultra Buffer Cap Level;
     If the Reference Index decreases over the outcome period 
by 5% or less: The Ultra Buffer Fund is designed to provide a total 
return loss that is equal

[[Page 52154]]

to the percentage loss on the Reference Index;
     If the Reference Index depreciates over the outcome period 
by 5%-35%: The Ultra Buffer Fund is designed to provide a total return 
loss of 5%; and
     If the Reference Index depreciates over the outcome period 
by more than 35%: The Ultra Buffer Fund is designed to provide a total 
return loss that is 30% less than the percentage loss on the Reference 
Index with a maximum loss of approximately 70%.\16\
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    \16\ The Exchange states that the Ultra Buffer Funds do not 
offer any protection against declines in the Reference Index 
exceeding 35% on an annualized basis. See id. at 14. Shareholders 
will bear all Reference Index losses exceeding 35% on a one-to-one 
basis. See id.
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    The Ultra Buffer Fund is designed to produce these outcomes by 
including theoretically ``purchased'' and ``written'' FLEX Options 
that, when layered upon each other, are designed to buffer against 
losses of the applicable Reference Index and cap the level of possible 
gains.
    Under Normal Market Conditions, each Ultra Buffer Fund will attempt 
to achieve its investment objective by taking positions that provide 
performance exposure that match the gains of the applicable Reference 
Index. Each Ultra Buffer Fund will invest primarily in exchange-traded 
options contracts that reference either the Reference Index or ETFs 
that track the Reference Index.\17\ Any FLEX Options written by a Ultra 
Buffer Fund that create an obligation to sell or buy an asset will be 
offset with a position in FLEX Options purchased by the Ultra Buffer 
Fund to create the right to buy or sell the same asset such that the 
Ultra Buffer Fund will always be in a net long position. As the FLEX 
Options mature at the end of each outcome period, they are replaced.
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    \17\ The FLEX Options owned by each of the Ultra Buffer Funds 
will have the same terms (i.e., same strike price and expiration) 
for all investors of an Ultra Buffer Fund within an outcome period. 
See id. at 15.
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D. Investment Methodology for the Funds

    As mentioned above, under Normal Market Conditions, each Fund would 
seek to achieve its respective investment objective by investing 
primarily in exchange-traded options contracts that reference either 
the Reference Index or ETFs that track the Reference Index. Each of the 
Funds might invest its net assets (in the aggregate) in other 
investments which the Adviser or Sub-Adviser believes would help each 
Fund meet its investment objective and that would be disclosed at the 
end of each trading day (``Other Assets'').\18\
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    \18\ Other Assets include only cash or cash equivalents, as 
defined in BZX Rule 14.11(i)(4)(C)(iii), and standardized options 
contracts listed on a U.S. securities exchange that reference either 
the Reference Index or that reference ETFs that track the Reference 
Index (``Reference ETFs''). As defined in BZX Rule 
14.11(i)(4)(C)(iii), cash equivalents include short-term instruments 
with maturities of less than three months, including: (i) U.S. 
Government securities, including bills, notes, and bonds differing 
as to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. Government agencies or 
instrumentalities; (ii) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (iii) bankers 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (iv) repurchase agreements and reverse 
repurchase agreements; (v) bank time deposits, which are monies kept 
on deposit with banks or savings and loan associations for a stated 
period of time at a fixed rate of interest; (vi) commercial paper, 
which are short-term unsecured promissory notes; and (vii) money 
market funds.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\19\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 2 and 3, is 
consistent with Section 6(b)(5) of the Act,\20\ which requires, among 
other things, that the Exchange's rules be designed 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. The 
Commission also finds that the proposal to list and trade the Shares on 
the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the 
Act,\21\ which sets forth Congress' finding that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers and investors of information with respect to 
quotations for and transactions in securities.
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    \19\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    According to the Exchange, quotation and last-sale information for 
U.S. exchange-listed options contracts cleared by The Options Clearing 
Corporation will be available via the Options Price Reporting 
Authority.\22\ RFQ information for FLEX Options will be available 
directly from the applicable options exchange. The intra-day, closing 
and settlement prices of exchange-traded options will be readily 
available from the options exchanges, automated quotation systems, 
published or other public sources, or online information services.\23\ 
In addition, price information about cash equivalents will be available 
from major broker-dealer firms or market data vendors, as well as from 
automated quotation systems, published or other public sources, or 
online information services.\24\
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    \22\ See Amendment No. 2, supra note 5, at 21.
    \23\ See id.
    \24\ See id.
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    The Commission also believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. Under BZX Rule 14.11(i)(4)(B)(iv), if the Exchange becomes 
aware that the Net Asset Value (``NAV'') or the Disclosed Portfolio is 
not disseminated to all market participants at the same time, the 
Exchange is required to halt trading in such series of Managed Fund 
Shares. In addition, the Exchange represents that if the Funds or the 
Shares are not in compliance with the applicable listing requirements 
for Managed Funds Shares under BZX Rule 14.11(i), the Exchange will 
commence delisting procedures under BZX Rule 14.12 (Failure to Meet 
Listing Standards).\25\ The Exchange also states that it has a general 
policy prohibiting the distribution of material, non-public information 
by its employees.\26\ Further, the Trust has represented that it will 
provide and maintain a publicly available tool on its website that will 
provide existing and prospective Fund shareholders with certain 
information for each of the Funds including, among other things, 
current NAV, start and end dates of the current outcome period, and the 
remaining buffer available for a shareholder purchasing Shares at the 
current NAV or the amount of losses that a shareholder purchasing 
Shares at the current NAV would incur before benefitting from the 
protection of the buffer.\27\
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    \25\ See id. at 25.
    \26\ See id.
    \27\ See id. at 22.
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    The Shares do not qualify for generic listing because the Funds 
will not satisfy the requirement of BZX Rule 14.11(i)(4)(C)(iv)(b) that 
the aggregate gross notional value of listed derivatives based on any 
five or fewer underlying reference assets shall not exceed 65% of

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the weight of the portfolio and the aggregate gross notional value of 
listed derivatives based on any single underlying reference asset not 
exceed 30% of the weight of the portfolio (including gross notional 
exposures). Instead, the Funds will hold listed derivatives primarily 
on a single reference asset, the Nasdaq-100 Index or the Russell 2000 
Price Index.\28\ Despite the exposure of the listed derivatives to a 
single reference asset, the Commission nevertheless believes that 
certain representations by the Exchange help to mitigate concerns about 
the prices of the Shares being susceptible to manipulation. 
Specifically, the Exchange represents that the market for options 
contracts for each Reference Index are liquid and derive their value 
from actively traded Reference Index components. Additionally, all of 
the options held by the Funds will trade on markets that are a member 
of ISG or affiliated with a member of ISG or with which the Exchange 
has in place a comprehensive surveillance sharing agreement.\29\
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    \28\ The Funds also may invest in options overlying Reference 
ETFs. See id. at 15. The Exchange states that each of the applicable 
Reference Indexes meet the generic listing standards applicable to 
indexes underlying series of Index Fund Shares listed on the 
Exchange, which include diversity, liquidity, and market cap 
requirements that are designed to ensure that an underlying index is 
not susceptible to manipulation. See id. at 17, n.14.
    \29\ For a list of the current members of ISG, see 
www.isgportal.org.
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    Additionally, in support of this proposal, the Exchange represents 
that:
    (1) The Funds and the Shares will satisfy all of the requirements 
applicable to Managed Fund Shares under BZX Rule 14.11(i), as well as 
the Generic Listing Standards other than BZX Rule 
14.11(i)(4)(C)(iv)(b).
    (2) Trading in the Shares will be subject to the existing trading 
surveillances administered by the Exchange, as well as cross-market 
surveillances administered by FINRA, on behalf of the Exchange, which 
are designed to detect violations of Exchange rules and applicable 
federal securities laws.
    (3) For initial and continued listing, the Funds will be in 
compliance with Rule 10A-3 under the Act.\30\
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    \30\ 17 CFR 240.10A-3.
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    (4) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.\31\
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    \31\ See Amendment No. 2, supra note 5, at 20.
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    This approval order is based on all of the Exchange's statements 
and representations, including those set forth above and in Amendment 
Nos. 2 and 3.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment Nos. 2 and 3 thereto, is 
consistent with Section 6(b)(5) of the Act \32\ and the rules and 
regulations thereunder applicable to a national securities exchange.
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    \32\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (SR-CboeBZX-2019-067), as 
modified by Amendment Nos. 2 and 3, be, and it hereby is, approved.
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    \33\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-21246 Filed 9-30-19; 8:45 am]
BILLING CODE 8011-01-P