Document ID: SEC-2016-1323-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2016-07-28T04:00Z

[Federal Register Volume 81, Number 145 (Thursday, July 28, 2016)]
[Notices]
[Pages 49698-49705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17824]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78396; File No. SR-BATS-2015-100]

Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 6, To 
Amend BATS Rule 14.11(i) To Adopt Generic Listing Standards for Managed 
Fund Shares

July 22, 2016.

I. Introduction

    On November 18, 2015, BATS Exchange, Inc. (now known as Bats BZX 
Exchange, Inc., ``Exchange'' or ``BZX'') \1\ filed with the Securities 
and Exchange Commission (``Commission''), pursuant to section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') 
\2\ and Rule 19b-4

[[Page 49699]]

thereunder,\3\ a proposed rule change to amend Rule 14.11(i) by, among 
other things, adopting generic listing standards for Managed Fund 
Shares. The proposed rule change was published for comment in the 
Federal Register on November 25, 2015.\4\
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    \1\ In March 2016, BATS changed its name from ``BATS Exchange, 
Inc.'' to ``Bats BZX Exchange, Inc.'' See Securities Exchange Act 
Release No. 77307 (Mar. 7, 2016), 81 FR 12996 (Mar. 11, 2016) (SR-
BATS-2016-25) (publishing notice of the name change to Bats BZX 
Exchange, Inc.).
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 76478 (Nov. 19, 
2015), 80 FR 73841.
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    On January 4, 2016, the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On February 9, 2016, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced the originally filed proposed rule change in its entirety. On 
February 11, 2016, the Exchange both filed and withdrew Amendment No. 2 
to the proposed rule change. On February 11, 2016, the Exchange also 
filed Amendment No. 3 to the proposed rule change.\6\ On February 17, 
2016, the Exchange filed Amendment No. 4 to the proposed rule 
change.\7\
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    \5\ See Securities Exchange Act Release No. 76820, 81 FR 989 
(Jan. 8, 2016). The Commission designated February 23, 2016 as the 
date by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change. See id.
    \6\ Amendment No. 3 deletes from the proposal the following two 
statements: (1) ``Such limitation will not apply to listed swaps 
because swaps are listed on swap execution facilities (``SEFs''), 
the majority of which are not members of ISG[;]'' and (2) ``Such 
limitation would not apply to listed swaps because swaps are listed 
on SEFs, the majority of which are not members of ISG.'' Amendment 
No. 3 also corrects an erroneous statement in Item 11 to indicate 
that an Exhibit 4 was included in Amendment No. 1. Amendment No. 3 
is available at: http://www.sec.gov/comments/sr-bats-2015-100/bats2015100-3.pdf.
    \7\ Amendment No. 4 deletes from the proposal the following 
sentence: ``Thus, if the limitation applied to swaps, there would 
effectively be a cap of 10% of the portfolio invested in listed 
swaps.'' Amendment No. 4 also amends two representations as follows 
(added language in brackets): The Exchange or FINRA, on behalf of 
the Exchange, will communicate as needed regarding trading in 
Managed Fund Shares [and their underlying components] with other 
markets that are members of the ISG, including all U.S. securities 
exchanges and futures exchanges on which the components are traded[, 
or with which the Exchange has in place a CSSA.] In addition, the 
Exchange or FINRA[,] on behalf of the Exchange[,] may obtain 
information regarding trading in Managed Fund Shares [and their 
underlying components] from other markets that are members of the 
ISG, including all U.S. securities exchanges and futures exchanges 
on which the components are traded, or with which the Exchange has 
in place a CSSA.'' Amendment No. 4 is available at: http://www.sec.gov/comments/sr-bats-2015-100/bats2015100-4.pdf.
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    On February 22, 2016, the Commission issued notice of filing of 
Amendments No. 1, 3, and 4 to the proposed rule change and instituted 
proceedings under section 19(b)(2)(B) of the Act \8\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendments No. 1, 3, and 4.\9\ In the Order Instituting Proceedings, 
the Commission solicited comments to specified matters related to the 
proposal.\10\ On May 20, 2016, the Commission designated a longer 
period for Commission action on the proposed rule change.\11\
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    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 77202, 81 FR 9889 
(Feb. 26, 2016) (``Order Instituting Proceedings''). Specifically, 
the Commission instituted proceedings to allow for additional 
analysis of the proposed rule change's consistency with section 
6(b)(5) of the Act, which requires, among other things, that the 
rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade,'' and ``to protect investors and the 
public interest.'' See id., 81 FR at 9897.
    \10\ See id.
    \11\ See Securities Exchange Act Release No. 77871, 81 FR 33567 
(May 26, 2016) (designating July 22, 2016 as the date by which the 
Commission must either approve or disapprove the proposed rule 
change).
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    On June 3, 2016, the Exchange filed Amendment No. 5 to the proposed 
rule change, which replaced Amendment No. 1 (as further modified by 
Amendments No. 3 & 4) to the proposed rule change.\12\ The Commission 
issued a notice of the filing of Amendment No. 5 on June 7, 2016 and 
solicited comments on the modified proposal.\13\ On July 21, 2016, the 
Exchange filed Amendment No. 6 to the proposed rule change,\14\ which 
amended and replaced the Amendment No. 5 to the proposed rule change.
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    \12\ See Securities Exchange Act Release No. 78005, 81 FR 38247, 
38248 (June 13, 2016) (``Notice''). Amendment No. 5 is available at: 
http://www.sec.gov/comments/sr-bats-2015-100/bats2015100-5.pdf.
    \13\ See Notice, supra note 12.
    \14\ In Amendment No. 6, the Exchange added the following 
representations: (1) On a periodic basis, and no less than annually, 
the Exchange will review the Managed Fund Shares generically listed 
and traded on the Exchange under BATS Rule 14.11(i) for compliance 
with that rule and will provide a report to its Regulatory Oversight 
Committee presenting the findings of its review; and (2) on a 
quarterly basis, the Exchange will provide a report to the 
Commission staff that contains, for each ETF whose shares are 
generically listed and traded under BATS Rule 14.11(i): (a) Symbol 
and date of listing; (b) the number of active authorized 
participants (``APs'') and a description of any failure by either a 
fund or an AP to deliver promised baskets of shares, cash, or cash 
and instruments in connection with creation or redemption orders; 
and (c) a description of any failure by an ETF to comply with BATS 
Rule 14.11(i). The Exchange also modified proposed BATS Rule 
14.11(i)(4)(C) to read: ``The Exchange may approve Managed Fund 
Shares for listing pursuant to Rule 19b-4(e) under the Act. 
Components of a series of Managed Fund Shares listed pursuant to 
Rule 19b-4(e) shall satisfy the criteria set forth within this Rule 
14.11(i) upon initial listing and on a continual basis. The Exchange 
will file separate proposals under Section 19(b) of the Act before 
the listing and trading of a series of Managed Fund Shares with 
components that do not satisfy the criteria set forth within this 
Rule 14.11(i) or components other than those specified below.'' In 
the Commission's view, the changes to proposed rule text of Rule 
14.11(i)(4)(C) are not substantive. Amendment No. 6 is available at: 
https://www.sec.gov/comments/sr-bats-2015-100/bats2015100-6.pdf. 
Because Amendment No. 6 does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
Amendment No. 6 is not subject to notice and comment.
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    The Commission has not received any comments on the proposed rule 
change, as modified by Amendment No. 5. This order approves the 
proposed rule change, as modified by Amendment No. 6.

II. Description of the Proposal, as Modified by Amendment No. 6

    BATS Rule 14.11(i) governs the listing and trading of Managed Fund 
Shares on the Exchange. Managed Fund Shares are issued by exchange-
traded funds (``ETFs'') that are actively managed and do not seek to 
replicate the performance of a specified index of securities.
    Under its current rules, the Exchange must file separate proposals 
under section 19(b) of the Act before listing a new series of Managed 
Fund Shares.\15\ The Exchange proposes to adopt generic listing 
standards so that the Exchange may list Managed Fund Shares that 
satisfy the applicable criteria by submitting notice pursuant to Rule 
19b-4(e) under the Act, rather than by filing a proposed rule change 
under section 19(b).\16\
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    \15\ See BATS Rule 14.11(i)(2)(A).
    \16\ 17 CFR 240.19b-4(e). Rule 19b-4(e) permits self-regulatory 
organizations to list and trade new derivatives products that comply 
with existing SRO trading rules, procedures, surveillance programs 
and listing standards, without submitting a proposed rule change 
under Section 19(b). See Securities Exchange Act Release No. 40761 
(Dec. 8, 1998), 63 FR 70952 (Dec. 22, 1998).
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A. The Proposed Generic Listing Standards

    The Exchange's proposed listing standards establish requirements 
for the various types of assets that may be held in the portfolio of a 
generically listed, actively managed ETF (``Portfolio'').
1. Equity Portfolio Components
    Proposed BATS Rule 14.11(i)(4)(C)(i) establishes the criteria 
applicable to the equity securities included in a Portfolio. Equity 
securities include the following securities: U.S. Component Stocks, 
which are defined in BATS Rule 14.11(c)(1)(D); Non-U.S. Component 
Stocks, which are defined in BATS Rule 14.11(c)(1)(E); Derivative 
Securities Products, which are defined in BATS Rule 
14.11(c)(3)(A)(i)(a); Linked

[[Page 49700]]

Securities, which are securities eligible for listing on the Exchange 
under BATS Rule 14.11(d), and each of the equivalent security types 
listed on another national securities exchange. Additionally, proposed 
Rule 14.11(i)(4)(C)(i) provides that no more than 25% of the equity 
weight of the Portfolio can include leveraged or inverse-leveraged 
Derivative Securities Products or Linked Securities and that, to the 
extent a Portfolio includes convertible securities, the equity 
securities into which such securities are converted must meet the 
criteria of this Rule 14.11(i)(4)(C)(i) after converting.
    Proposed BATS Rule 14.11(i)(4)(C)(i)(a) would require that U.S. 
Component Stocks (except as mentioned below) meet the following 
criteria initially and on a continuing basis:
    (1) Component stocks (excluding Derivative Securities Products and 
Linked Securities) that in the aggregate account for at least 90% of 
the equity weight of the Portfolio (excluding Derivative Securities 
Products and Linked Securities) each shall have a minimum market value 
of at least $75 million;
    (2) component stocks (excluding Derivative Securities Products and 
Linked Securities) that in the aggregate account for at least 70% of 
the equity weight of the Portfolio (excluding Derivative Securities 
Products and Linked Securities) each shall have a minimum monthly 
trading volume of 250,000 shares, or minimum notional volume traded per 
month of $25,000,000, averaged over the previous six months;
    (3) the most heavily weighted component stock (excluding Derivative 
Securities Products and Linked Securities) must not exceed 30% of the 
equity weight of the Portfolio, and, to the extent applicable, the five 
most heavily weighted component stocks (excluding Derivative Securities 
Products and Linked Securities) must not exceed 65% of the equity 
weight of the Portfolio;
    (4) where the equity portion of the Portfolio does not include Non-
U.S. Component Stocks, the equity portion of the Portfolio shall 
include a minimum of 13 component stocks; provided, however, that there 
would be no minimum number of component stocks if (a) one or more 
series of Derivative Securities Products or Linked Securities 
constitute, at least in part, components underlying a series of Managed 
Fund Shares, or (b) one or more series of Derivative Securities 
Products or Linked Securities account for 100% of the equity weight of 
the Portfolio of a series of Managed Fund Shares;
    (5) except as provided in proposed BATS Rule 14.11(i)(4)(C)(i)(a), 
equity securities in the Portfolio must be U.S. Component Stocks listed 
on a national securities exchange and must be NMS Stocks as defined in 
Rule 600 of Regulation NMS; and
    (6) American Depositary Receipts (``ADRs'') may be exchange traded 
or non-exchange traded, but no more than 10% of the equity weight of 
the Portfolio shall consist of non-exchange traded ADRs.
    Proposed BATS Rule 14.11(i)(4)(C)(i)(b) requires that Non-U.S. 
Component Stocks must meet the following criteria initially and on a 
continuing basis:
    (1) Non-U.S. Component Stocks each shall have a minimum market 
value of at least $100 million;
    (2) Non-U.S. Component Stocks each shall have a minimum global 
monthly trading volume of 250,000 shares, or minimum global notional 
volume traded per month of $25,000,000, averaged over the last six 
months;
    (3) the most heavily weighted Non-U.S. Component Stock shall not 
exceed 25% of the equity weight of the Portfolio, and, to the extent 
applicable, the five most heavily weighted Non-U.S. Component Stocks 
shall not exceed 60% of the equity weight of the Portfolio;
    (4) where the equity portion of the Portfolio includes Non-U.S. 
Component Stocks, the equity portion of the Portfolio shall include a 
minimum of 20 component stocks; provided, however, that there shall be 
no minimum number of component stocks if (a) one or more series of 
Derivative Securities Products or Linked Securities constitute, at 
least in part, components underlying a series of Managed Fund Shares, 
or (b) one or more series of Derivative Securities Products or Linked 
Securities account for 100% of the equity weight of the Portfolio of a 
series of Managed Fund Shares; and
    (5) each Non-U.S. Component Stock shall be listed and traded on an 
exchange that has last-sale reporting.
2. Fixed Income Portfolio Components
    Proposed BATS Rule 14.11(i)(4)(C)(ii) establishes criteria for 
fixed income securities that are included in a Portfolio. Fixed income 
securities are debt securities \17\ 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.\18\ To the extent that a Portfolio includes 
convertible securities, the fixed income securities into which such 
securities are converted shall meet the criteria of proposed BATS Rule 
14.11(i)(4)(C)(ii) after converting.\19\ Under proposed BATS Rule 
14.11(i)(4)(C)(ii), fixed income securities that are part of a 
Portfolio must satisfy the following criteria initially and on a 
continuing basis:
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    \17\ Debt securities include a variety of fixed income 
obligations, including, but not limited to, corporate debt 
securities, government securities, municipal securities, convertible 
securities, and mortgage-backed securities. Debt securities include 
investment-grade securities, non-investment-grade securities, and 
unrated securities. Debt securities also include variable and 
floating rate securities. See Amendment No. 6, supra note 14, at 52, 
n.27.
    \18\ See proposed BATS Rule 14.11(i)(4)(C)(ii).
    \19\ See id.
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    (1) Components that in the aggregate account for at least 75% of 
the fixed income weight of the Portfolio must each have a minimum 
original principal amount outstanding of $100 million or more;
    (2) no component fixed-income security (excluding Treasury 
Securities and GSE Securities) shall represent more than 30% of the 
fixed income weight of the Portfolio, and the five most heavily 
weighted fixed income securities in the Portfolio (excluding Treasury 
Securities and GSE Securities) shall not in the aggregate account for 
more than 65% of the fixed income weight of the Portfolio;
    (3) a Portfolio that includes fixed income securities (excluding 
exempted securities) shall include a minimum of 13 non-affiliated 
issuers, provided, however, that there shall be no minimum number of 
non-affiliated issuers required for fixed income securities if at least 
70% of the weight of the Portfolio consists of equity securities as 
described in BATS Rule 14.11(i)(4)(C)(i);
    (4) Component securities that in aggregate account for at least 90% 
of the fixed income weight of the Portfolio must be: (a) From issuers 
that are required to file reports pursuant to sections 13 and 15(d) of 
the Act; (b) from issuers each of which has a worldwide market value of 
its outstanding common equity held by non-affiliates of $700 million or 
more; (c) from issuers each of which has outstanding securities that 
are notes,

[[Page 49701]]

bonds, debentures, or evidence of indebtedness having a total remaining 
principal amount of at least $1 billion; (d) exempted securities as 
defined in section 3(a)(12) of the Act; or (e) from issuers that are a 
government of a foreign country or a political subdivision of a foreign 
country; and
    (5) non-agency, non-GSE, and privately issued mortgage-related and 
other asset-backed securities shall not account, in the aggregate, for 
more than 20% of the weight of the fixed income portion of the 
Portfolio.
3. Cash and Cash Equivalents in Portfolios
    Proposed BATS Rule 14.11(i)(4)(C)(iii) provides that a Portfolio 
may include cash and cash equivalents. Cash equivalents are defined as 
short-term instruments with maturities of less than 3 months.\20\ The 
Exchange defines short-term instruments to include the following: (1) 
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; (2) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (3) bankers' 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (4) repurchase agreements and reverse 
repurchase agreements; (5) 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; (6) commercial paper, which are 
short-term unsecured promissory notes; and (7) money market funds.\21\ 
BATS does not propose to limit to the amount of cash or cash 
equivalents that may be held in a Portfolio.\22\
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    \20\ See proposed BATS Rule 14.11(i)(4)(C)(iii).
    \21\ See proposed BATS Rule 14.11(i)(4)(C)(iii)(b).
    \22\ See proposed BATS Rule 14.11(i)(4)(C)(iii)(a).
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4. Derivative Portfolio Components
    Proposed BATS Rule 14.11(i)(4)(C)(iv) establishes listing criteria 
for the portion of a Portfolio that consists of listed derivatives such 
as futures, options, and swaps overlying commodities, currencies, 
financial instruments (e.g., stocks, fixed income securities, interest 
rates, and volatility), or a basket or index of any of the foregoing. 
The Exchange does not propose to limit the percentage of a Portfolio 
that may be composed of such holdings, provided that, in the aggregate, 
at least 90% of the weight of holdings in listed derivatives 
(calculated using the aggregate gross notional value) must, on both an 
initial and continuing basis, consist of futures, options, and swaps 
for which the Exchange may obtain information via the ISG from other 
members or affiliates or for which the principal market is a market 
with which the Exchange has a comprehensive surveillance sharing 
agreement (``CSSA'').\23\ Additionally, the aggregate gross notional 
value of listed derivatives based on any five or fewer underlying 
reference assets shall not exceed 65% of the weight of the Portfolio 
(including gross notional exposures), and the aggregate gross notional 
value of listed derivatives based on any single underlying reference 
asset shall not exceed 30% of the weight of the Portfolio (including 
gross notional exposures).\24\
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    \23\ See proposed BATS Rule 14.11(i)(4)(C)(iv)(a).
    \24\ See proposed BATS Rule 14.11(i)(4)(C)(iv)(b).
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    Proposed BATS Rule 14.11(i)(4)(C)(v) establishes a limit on OTC 
derivatives: No more than 20% of the weight of the Portfolio may be 
invested in OTC derivatives.\25\ The Exchange notes that, for purposes 
of calculation this limitation, a portfolio's investment in OTC 
derivatives will be calculated as the aggregate gross notional value of 
the OTC derivatives.
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    \25\ OTC derivatives include: Forwards, options, and swaps 
overlying commodities, currencies, financial instruments (e.g., 
stocks, fixed income securities, interest rates, and volatility), or 
a basket or index of any of the foregoing. See proposed BATS Rule 
14.11(i)(4)(C)(v).
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    Proposed BATS Rule 14.11(i)(4)(C)(vi) provides that, to the extent 
that listed or OTC derivatives are used to gain exposure to individual 
equities and/or fixed income securities, or to indexes of equities and/
or fixed income securities, the aggregate gross notional value of such 
exposure shall meet the criteria set forth in proposed BATS Rules 
14.11(i)(4)(C)(i) and 14.11(i)(4)(C)(ii), respectively.

B. Other Aspects of the Proposal

1. Disclosed Portfolio
    The daily dissemination of a Disclosed Portfolio \26\ is required 
under current BATS Rule 14.11(i)(4)(B)(ii)(a), but its contents are not 
specified. The Exchange proposes to amend the definition of ``Disclosed 
Portfolio'' to require that the Web site for each series of Managed 
Fund Shares listed on the Exchange, including all Managed Fund Shares 
currently listed and traded on the Exchange, disclose the following 
information in the Disclosed Portfolio, to the extent applicable: 
Ticker symbol, CUSIP or other identifier, a description of the holding, 
identity of the asset upon which the derivative is based, the strike 
price for any options, the quantity of each security or other asset 
held as measured by select metrics, maturity date, coupon rate, 
effective date, market value, and percentage weight of the holding in 
the portfolio.
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    \26\ BATS defines ``Disclosed Portfolio'' for purposes of its 
Managed Fund Shares listing rule as the identities and quantities of 
the securities and other assets held by the Investment Company that 
will form the basis for the Investment Company's calculation of net 
asset value at the end of the business day. See BATS Rule 
14.11(i)(3)(B).
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2. Investment Objective
    The Exchange proposes to add as an initial listing criterion 
applicable to all Managed Fund Shares (including those that are 
generically listed) the requirement that Managed Fund Shares must have 
a stated investment objective, which shall be adhered to under ``Normal 
Market Conditions.'' \27\ The Exchange would define ``Normal Market 
Conditions'' as circumstances including, but not limited to the absence 
of: Trading halts in the applicable financial markets generally; 
operational issues causing dissemination of inaccurate market 
information or systems failure; 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.\28\
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    \27\ See proposed BATS Rule 14.11(i)(4)(A)(iii).
    \28\ See proposed BATS Rule 14.11(i)(3)(E).
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3. Intraday Indicative Value (``IIV'')
    The Exchange proposes to modify a continued listing criterion for 
all Managed Fund Shares to require that the IIV be widely disseminated 
by one or more major market data vendors at least every 15 seconds 
during Regular Trading Hours, as defined in BATS Rule 1.5(w),\29\ 
rather than during all times that Managed Fund Shares trade on the 
Exchange.
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    \29\ See proposed BATS Rule 14.11(i)(4)(B)(i).
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C. Additional Representations of the Exchange Applicable to the Listing 
and Trading of Managed Fund Shares

    In support of the proposed rule change, the Exchange represents 
that:
    (1) Generically listed Managed Fund Shares will conform to the 
initial and continued listing criteria under Rule 14.11(i)(4)(A) and 
(B).\30\
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    \30\ See Amendment No. 6, supra note 14, at 24.
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    (2) The Exchange's surveillance procedures are adequate to continue 
to properly monitor the trading of the Managed Fund Shares in all 
trading sessions and to deter and detect violations of Exchange rules. 
Specifically, the Exchange intends to utilize its existing surveillance 
procedures applicable to derivative

[[Page 49702]]

products, which will include Managed Fund Shares, to monitor trading in 
the Managed Fund Shares.\31\
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    \31\ See id. at 24-25.
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    (3) Prior to the commencement of trading of a particular series of 
Managed Fund Shares, the Exchange will inform its Members in an 
information circular of the special characteristics and risks 
associated with trading the Managed Fund Shares, including procedures 
for purchases and redemptions of Managed Fund Shares, suitability 
requirements under Rule 3.7, the risks involved in trading the Managed 
Fund Shares during the Pre-Opening and After Hours Trading Sessions 
when an updated IIV will not be calculated or publicly disseminated, 
how information regarding the IIV and Disclosed Portfolio is 
disseminated, prospectus delivery requirements, and other trading 
information. In addition, the information circular will disclose that 
the Managed Fund Shares are subject to various fees and expenses, as 
described in the registration statement, and will discuss any 
exemptive, no-action, and interpretive relief granted by the Commission 
from any rules under the Act. Finally, the Bulletin will disclose that 
the NAV for the Managed Fund Shares will be calculated after 4 p.m. ET 
each trading day.\32\
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    \32\ See id. at 25.
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    (4) The issuer of a series of Managed Fund Shares will be required 
to comply with Rule 10A-3 under the Act for the initial and continued 
listing of Managed Fund Shares, as provided under Rule 14.10(c)(3).\33\
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    \33\ See id.
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    (5) BATS has represented that: (1) On a periodic basis, and no less 
than annually, the Exchange will review the Managed Fund Shares 
generically listed and traded on the Exchange under BATS Rule 14.11(i) 
for compliance with that rule and will provide a report to its 
Regulatory Oversight Committee presenting the findings of its review; 
and (2) on a quarterly basis, the Exchange will provide a report to the 
Commission staff that contains, for each ETF whose shares are 
generically listed and traded under BATS Rule 14.11(i): (a) Symbol and 
date of listing; (b) the number of active authorized participants 
(``APs'') and a description of any failure by either a fund or an AP to 
deliver promised baskets of shares, cash, or cash and instruments in 
connection with creation or redemption orders; and (c) a description of 
any failure by an ETF to comply with BATS Rule 14.11(i).\34\
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    \34\ See id. at 25-26.
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    (6) Prior to listing pursuant to proposed amended Rule 14.11(i), an 
issuer would be required to represent to the Exchange that it will 
advise the Exchange of any failure by a series of Managed Fund Shares 
to comply with the continued listing requirements, and, pursuant to its 
obligations under section 19(g)(1) of the Exchange Act, the Exchange 
will surveil for compliance with the continued listing requirements. If 
a series of Managed Fund Shares is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under Exchange Rule 14.12.\35\
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    \35\ See id. at 27-28.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the Exchange's 
proposal to amend its Rule 14.11(i) to, among other things, adopt 
generic listing criteria, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\36\ In particular, the Commission finds that the proposed 
rule change, as modified by Amendment No. 6, is consistent with section 
6(b)(5) of the Act,\37\ which requires, among other things, that the 
Exchange's rules be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \36\ 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).
    \37\ 15 U.S.C. 78f(b)(5).
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    In support of its proposal, the Exchange states that its proposed 
requirements for Managed Fund Shares are based in large part on the 
generic listing criteria currently applicable to Index Fund Shares.\38\ 
As a general matter, the Commission believes that this is an 
appropriate approach with respect to underlying asset classes covered 
by the existing generic standards, because the mere addition of active 
management to an ETF portfolio that would qualify for generic listing 
as an index-based ETF should not affect the portfolio's susceptibility 
to manipulation or the availability of arbitrage between the ETF and 
its underlying portfolio. Below, the Commission addresses the proposed 
criteria for each of the asset classes encompassed within the generic 
listing standards.
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    \38\ See Amendment No. 6, supra note 14, at 63.
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    Equity Holdings. With respect to the equity holdings of a 
Portfolio, the proposed criteria closely track the existing standards 
for Index Fund Shares, with four relevant differences. First, while the 
generic listing criteria for Index Fund Shares do not permit the 
inclusion of any non-exchange-traded ADRs in the underlying index,\39\ 
the proposed generic criteria for Managed Fund Shares would permit an 
ETF to hold up to 10% of the equity weight of the Portfolio in non-
exchange-traded ADRs. This proposed provision, however, is consistent 
with standards that the Commission has approved for specific ETFs 
listed and traded as Managed Fund Shares.\40\ Moreover, the Commission 
believes that the proposed requirement that at least 90% of the equity 
portion of a Portfolio consist of domestic equity securities (a 
category that includes ADRs) for which the Exchange may obtain 
transaction data should both deter manipulation of generically listed 
Managed Fund Shares and permit the Exchange to investigate any 
instances of manipulation.
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    \39\ The Commission notes, however, that a portfolio underlying 
Index Fund Shares nevertheless may contain non-exchange-listed ADRs 
because the portfolio need not consist only of index components.
    \40\ See, e.g., Securities Exchange Act Release No. 72679 (July 
28, 2014), 79 FR 44878 (Aug. 1, 2014) (SR-NYSEArca-2014-71); 
Securities Exchange Act Release No. 67277 (June 27, 2012), 77 FR 
39554 (July 3, 2012) (SR-NYSEArca-2012-39).
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    Second, the proposed standards would differ slightly from the 
existing generic standards for Index Fund Shares with respect to Non-
U.S. Component Stocks. The proposed standards would provide that all 
Non-U.S. Component Stocks in a Portfolio must have a minimum market 
value of at least $100 million. By contrast, the generic listing 
criterion for Index Fund Shares requires only 90% of the Non-U.S. 
Component Stocks (excluding Derivative Securities Products) included in 
an index to meet the same minimum market-value threshold.\41\ 
Additionally, under the proposal, all Non-U.S. Component Stocks 
included in a Portfolio must have a minimum global monthly trading 
volume of 250,000 shares, or minimum global notional volume traded per 
month of $25,000,000, averaged over the previous six months.\42\ By 
contrast, only 70% of the weight of an index (excluding Derivative 
Securities

[[Page 49703]]

Products) underlying generically listed Index Fund Shares must satisfy 
the same monthly volume thresholds.\43\ The Commission believes that 
the proposed provisions should reduce the extent to which Managed Fund 
Shares holding Non-U.S. Component Stocks may be susceptible to 
manipulation.
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    \41\ See BATS Rule 14.11(c)(A)(3)(ii)(a).
    \42\ The Commission approved a listing rule that contained these 
heightened market capitalization and trading volume requirements. 
See Securities Exchange Act Release No. 75023 (May 21, 2015), 80 FR 
30519 (May 28, 2015) (SR-NYSEArca-2014-100).
    \43\ See BATS Rule 14.11(c)(A)(3)(ii)(b).
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    Third, while the Exchange's existing generic listing standards for 
index-based ETFs do not apply concentration limits to an index's 
exposure to specified exchange-traded products (called ``Derivative 
Securities Products''), which have concentration limits or price 
transparency requirements within their own listing standards, proposed 
BATS Rule 14.11(i)(4)(C)(ii) would also deem Portfolio concentration 
limits not to apply to holdings of specified exchange-traded notes 
(called ``Linked Securities''). The Commission believes that this 
change should not increase the susceptibility of Managed Fund Shares to 
manipulation because Linked Securities, like Derivative Securities 
Products, have asset-exposure concentration limits and requirements 
promoting price transparency within their own listing standards, and 
both Derivative Securities Products and Linked Securities are listed 
and traded on national securities exchanges (which are all members of 
ISG), publicly provide information about listed Derivative Securities 
Products and Linked Securities, and provide trading and price 
information and other quantitative date for investors and other market 
participants.
    And fourth, under current generic listing standards, index-based 
ETFs cannot seek inverse returns greater than 300% of the performance 
of their reference index, and there is no limit on positive leverage 
versus an index. By contrast, the proposed standards would impose an 
absolute cap--25%--on the amount of an ETF's portfolio that could be 
invested in leveraged or inverse-leveraged ETPs. The Commission 
believes that a limitation on the overall use of leveraged ETFs is 
consistent with section 6(b)(5) of the Act because it will limit the 
extent to which the performance of a generically listed, actively 
managed ETF can be tied to a product whose performance over periods of 
longer than one day can differ significantly from its stated daily 
performance objective.\44\
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    \44\ Cf. SEC Invester Alert, Leveraged and Inverse ETFs: 
Specialized Products with Extra Risks for Buy-and-Hold Investors, 
available at https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm.
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    Fixed Income Holdings. With respect to the fixed income components 
of a Portfolio, the standards proposed by the Exchange are based in 
large part on the standards in BATS Rule 14.11(c)(4) for the components 
of fixed income indexes underlying Index Fund Shares, with three 
relevant differences. First, proposed BATS Rule 14.11(i)(4)(C)(ii)(c) 
does not require a minimum number of non-affiliated issuers for fixed 
income securities in the portfolio if at least 70% of the weight of the 
portfolio consists of equity securities as set forth in BATS Rule 
14.11(i)(4)(C)(i). Second, proposed BATS Rule 14.11(i)(4)(C)(ii)(e) 
would prohibit non-agency, non-GSE, and privately issued mortgage-
related and other asset-backed securities components of a Portfolio 
from constituting, in the aggregate, more than 20% of the weight of the 
fixed income portion of the Portfolio.\45\ And third, The proposed 
standards would make explicit that convertible bonds would both (a) 
have to meet the criteria for fixed-income holdings and (b) be 
convertible into equities that would meet the criteria for equity 
holdings.
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    \45\ The Commission notes that it has approved listing and 
trading rules for specific ETFs listed as Managed Fund Shares that 
limit holdings of non-agency asset-backed securities to 20% of the 
value of the fund's portfolio. See, e.g., Securities Exchange Act 
Release No. 74297 (Feb. 18, 2015), 80 FR 9788 (Feb. 24, 2015) (SR-
BATS-2014-056); Securities Exchange Act Release No. 75566 (July 30, 
2015), 80 FR 46612 (Aug. 5, 2015) (SR-NYSEArca-2015-42).
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    The Commission believes that, taken together, the proposed 
requirements for the fixed income portion of a Portfolio are reasonably 
designed to ensure that a substantial portion of a Portfolio consists 
of fixed income securities for which information is publicly available 
and, when applied in conjunction with the other applicable listing 
requirements, will permit the listing and trading only of Managed Fund 
Shares that are sufficiently broad-based to minimize the potential for 
manipulation. The Commission also believes that these provisions should 
help ensure that the fixed income portion of a Portfolio consists of 
assets for which available intra-day values allow market participants 
to identify and capitalize upon arbitrage opportunities, which in turn 
should help keep the intra-day prices of generically listed Managed 
Fund Shares reasonably aligned with the intra-day values of their 
underlying assets.
    Cash and Cash Equivalents. With respect to cash and cash 
equivalents to be held in a Portfolio, the Commission believes that the 
proposed standards appropriately define the type of short-term 
instruments that would qualify as such holdings.
    Derivatives Holdings. With respect to derivatives of any type 
included in a Portfolio, proposed BATS Rule 14.11(i)(4)(C)(vi) provides 
that, to the extent they are used to gain exposure to individual 
equities or fixed income securities, or to indexes of equities or fixed 
income securities, the total notional exposure to the underlying 
instruments--whether achieved through cash instruments or derivative 
instruments--must meet the numerical and other criteria set forth in 
proposed BATS Rule 14.11(i)(4)(C)(i) and 14.11(i)(4)(C)(ii), as 
applicable. The Commission believes that this provision should make 
Portfolios less susceptible to manipulation by preventing circumvention 
of the quantitative and other requirements applicable to equity and 
fixed income security components of a Portfolio.
    With respect to listed derivatives, the proposal would allow a 
generically listed ETF to use listed derivatives to achieve 100% of its 
Portfolio exposure, provided that, in the aggregate, at least 90% of 
the weight of holdings in futures, exchange-traded options, and listed 
swaps consists of futures, options, and swaps for which: (1) The 
Exchange may obtain information from other ISG members or affiliate 
members; or (2) the principal market is a market with which the 
Exchange has a CSSA.\46\ Additionally, BATS represents that it (or 
FINRA on its behalf) will communicate regarding, and obtain trade 
information as needed for, the underlying exchange-listed instruments 
whose principal market is either an ISG member or a market with which 
BATS has a CSSA.\47\ The Commission believes that these provisions 
should both deter potential manipulation and permit BATS to investigate 
suspected manipulation of generically listed Managed Fund Shares that 
use listed derivatives. Additionally, the Commission believes that the 
price transparency of listed derivatives should enable market 
participants to identify and execute arbitrage strategies

[[Page 49704]]

that will tend to equalize the market price of generically listed 
Managed Fund Shares with the value of the underlying Portfolios. The 
Commission also notes that proposed BATS Rule 14.11(i)(4)(C)(iv)(b) 
imposes concentration limits on the use of listed derivatives. The 
Commission believes that this limitation should make Portfolios that 
contain listed derivatives less susceptible to manipulation.
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    \46\ See Amendment No. 6, supra note 14, at 66. The Exchange 
also states that: (1) A fund's investments in derivatives, including 
listed derivatives, would be subject to limits on leverage imposed 
by the Investment Company Act of 1940, 15 U.S.C. 80a-1 (``1940 
Act''); (2) to limit the potential risk associated with a fund's use 
of derivatives, a fund will segregate or ``earmark'' assets 
determined to be liquid by a fund in accordance with the 1940 Act 
(or, as permitted by applicable regulation, enter into certain 
offsetting positions) to cover its obligations under derivative 
instruments; (3) a fund's investments will not be used to seek 
performance that is the multiple or inverse multiple (i.e., 2Xs or 
3Xs) of a fund's broad-based securities market index (as defined in 
Form N-1A). See id. at 70.
    \47\ See id. at 72.
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    With respect to OTC derivatives, proposed BATS Rule 
14.11(i)(4)(C)(v) would permit a Portfolio to include OTC derivatives, 
but would limit the amount of such derivatives to 20% of the fund's 
assets, thereby ensuring that the preponderance of a fund's investments 
would not be in derivatives that are not listed and centrally cleared. 
The Commission believes that this limit is sufficient to mitigate the 
risks associated with price manipulation because at least 80% of a 
Portfolio would consist of: Cash and cash equivalents; listed 
derivatives, of which 90% by portfolio weight would be traded on a 
principal market that is a member of ISG; and equity securities or 
fixed income instruments subject to numerous restrictions designed to 
prevent manipulation and ensure pricing transparency.
    The Commission notes that, in addition to proposing the listing 
criteria described above for specific asset classes, the Exchange has 
committed to conduct an ongoing compliance review of the ETFs that are 
generically listed as Managed Fund Shares. Specifically, the Exchange 
has represented that, no less than annually, it will review the Managed 
Fund Shares generically listed and traded on the Exchange under BATS 
Rule 14.11(i) for compliance with that rule and will provide a report 
to its Regulatory Oversight Committee presenting the findings of its 
review. The Exchange has also committed to provide, on a quarterly 
basis, a report to the Commission staff that contains, for each ETF 
whose shares are generically listed and traded under BATS Rule 
14.11(i): (a) The symbol and date of listing; (b) the number of active 
APs and a description of any failure by either a fund or an AP to 
deliver promised baskets of shares, cash, or cash and instruments in 
connection with creation or redemption orders; and (c) a description of 
any failure by an ETF to comply with BATS Rule 14.11(i).\48\ The 
Commission believes that the quarterly report provided by the Exchange 
will assist the Commission in using public data to review the trading 
characteristics of ETFs listed under these generic standards.\49\
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    \48\ See id. at 25-26.
    \49\ The Commission also notes that all Managed Fund Shares 
listed pursuant to BATS Rule 14.11(i), including generically listed 
Managed Fund Shares, are included within the definition of 
``security'' or ``securities'' as those terms are used in the BATS 
Rules. See BATS Rule 14.11(i)(2). Accordingly, Managed Fund Shares 
are subject to the full set of rules and procedures that govern the 
trading of securities on the Exchange. See Amendment No. 6, supra 
note 14, at 42.
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    The Commission also notes that, prior to listing pursuant to BATS 
Rule 14.11(i), an issuer would be required to represent to the Exchange 
that it will advise the Exchange of any failure by a series of Managed 
Fund Shares to comply with the continued listing requirements, and, 
pursuant to its obligations under section 19(g)(1) of the Act, the 
Exchange will surveil for compliance with the continued listing 
requirements. If a series of Managed Fund Shares is not in compliance 
with the applicable listing requirements, the Exchange will commence 
delisting procedures under Exchange Rule 14.12.\50\
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    \50\ See Amendment No. 6, supra note 14, at 27-28.
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    The Commission believes that the proposed generic listing criteria, 
taken together, should promote the listing only of Managed Fund Shares 
that are not susceptible to manipulation. Additionally, the proposed 
generic listing standards as a whole should ensure that Portfolios are 
composed predominantly of instruments for which available intra-day 
values allow market participants to identify and capitalize upon 
arbitrage opportunities, which in turn should help keep the intra-day 
prices of generically listed Managed Fund Shares reasonably aligned 
with the intra-day values of their underlying assets.
    For the reasons discussed above, the Commission finds that the 
proposed generic listing standards for Managed Fund Shares are 
consistent with section 6(b)(5) of the Act.\51\
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    \51\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In addition, BATS proposes changes to Rule 14.11(i) that apply to 
all Managed Fund Shares (i.e., both funds listed generically under the 
proposed standards and funds listed pursuant to individual 19b-4 
filings by the Exchange). Specifically, the Exchange proposes to 
specify the information that must be included in the Disclosed 
Portfolio disseminated by each actively managed ETF. Previously 
approved listing rules for specific ETFs listed as Managed Fund Shares 
have included identical disclosure requirements.\52\ The mandatory 
disclosures include information that market participants can use to 
value an actively managed ETF's holdings intra-day, which should 
facilitate arbitrage opportunities that should help keep the intra-day 
prices of Managed Fund Shares reasonably aligned with the intra-day 
values of their underlying assets.
---------------------------------------------------------------------------

    \52\ See, e.g., Securities Exchange Act Release No. 72666 (July 
3, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-2013-122).
---------------------------------------------------------------------------

    The Exchange also proposes to amend the continued listing 
requirement in BATS Rule 14.11(i)(4)(B)(i), which is applicable to all 
Managed Fund Shares, to require dissemination of an IIV at least every 
15 seconds during Regular Trading Hours, as defined in BATS Rule 
1.5(w). The Exchange states that this requirement would be consistent 
with the IIV dissemination requirement for Index Fund Shares as well as 
representations made in support of approved proposals to list and trade 
shares of specific ETFs listed and traded as Managed Fund Shares.\53\ 
The Commission also notes that the IIV dissemination during Regular 
Trading Hours is also required for all Managed Trust Securities.\54\
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    \53\ See Amendment No. 6, supra note 14, at 29.
    \54\ See BATS Rule 14.11(e)(10)(E)(ii)(a).
---------------------------------------------------------------------------

    Finally, the Exchange proposes to add as an initial listing 
criterion applicable to all Managed Fund Shares (including those that 
are generically listed) the requirement that Managed Fund Shares must 
have a stated investment objective, which shall be adhered to under 
``Normal Market Conditions,'' defined as circumstances including, but 
not limited to, the absence of: Trading halts in the applicable 
financial markets generally; operational issues causing dissemination 
of inaccurate market information or systems failure; 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.\55\ The Commission believes that this 
proposed change is consistent with previous Commission approvals of 
specific ETFs listed as Managed Fund Shares.
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    \55\ See proposed BATS Rule 14.11(i)(3)(E).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 6, is consistent with section 
6(b)(5) of the Act \56\ and the rules and regulations thereunder 
applicable to a national securities exchange.
---------------------------------------------------------------------------

    \56\ 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,\57\ that the proposed rule change (SR-BATS-2015-

[[Page 49705]]

100), as modified by Amendment No. 6 thereto, be, and it hereby is, 
approved.
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    \57\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\58\
Brent J. Fields,
Secretary.
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    \58\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-17824 Filed 7-27-16; 8:45 am]
 BILLING CODE 8011-01-P