Document ID: SEC-2021-1337-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2021-10-04T04:00Z

[Federal Register Volume 86, Number 189 (Monday, October 4, 2021)]
[Notices]
[Pages 54772-54774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21483]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93147; File No. SR-CboeBZX-2021-053]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Granting Approval of a Proposed Rule Change To Amend Rule 14.11(m) 
(Tracking Fund Shares) To Provide for the Use of Custom Baskets 
Consistent With the Exemptive Relief Issued Pursuant to the Investment 
Company Act of 1940 Applicable to a Series of Tracking Fund Shares

September 28, 2021.

I. Introduction

    On August 3, 2021, 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 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend BZX Rule 14.11(m) 
(Tracking Fund Shares) to provide for the use of custom baskets 
consistent with the exemptive relief issued pursuant to the Investment 
Company Act of 1940 (``1940 Act'') \3\ applicable to a series of 
Tracking Fund Shares. The proposed rule change was published for 
comment in the Federal Register on August 16, 2021.\4\ The Commission 
has received no comments on the proposed rule change. The Commission is 
approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 80a.
    \4\ See Securities Exchange Act Release No. 92626 (August 10, 
2021), 86 FR 45792.
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II. Description

    The Exchange proposes to amend BZX Rule 14.11(m), which permits the 
listing and trading of series of Tracking Fund Shares. BZX Rule 
14.11(m) currently requires that Tracking Fund Shares be issued and 
redeemed in a specified aggregate minimum number in return for the 
Tracking Basket \5\ and/or cash.\6\ The Exchange proposes to amend

[[Page 54773]]

the definition of ``Tracking Fund Share'' in BZX Rule 14.11(m)(3)(A) to 
permit creations and redemptions of shares in return for a Custom 
Basket in addition to the Tracking Basket, to the extent permitted by a 
fund's exemptive relief.\7\ Further, the Exchange proposes to define 
the term ``Custom Basket'' as a portfolio of securities that is 
different from the Tracking Basket and is otherwise consistent with the 
exemptive relief issued pursuant to the 1940 Act applicable to a series 
of Tracking Fund Shares.\8\ The Exchange also proposes to amend the 
definition of ``Reporting Authority'' in BZX Rule 14.11(m)(3)(C) to 
include Custom Baskets among the types of information for which the 
Reporting Authority designated for a particular series of Tracking Fund 
Shares will be the official source for calculating and reporting such 
information.\9\
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    \5\ The term ``Tracking Basket'' means the identities and 
quantities of the securities and other assets included in a basket 
that is designed to closely track the daily performance of the Fund 
Portfolio, as provided in the exemptive relief under the 1940 Act 
applicable to a series of Tracking Fund Shares. See BZX Rule 
14.11(m)(3)(E). The term ``Fund Portfolio'' means the identities and 
quantities of the securities and other assets held by the investment 
company registered under the 1940 Act (``Investment Company'') that 
will form the basis for the Investment Company's calculation of net 
asset value (``NAV'') at the end of the business day. See BZX Rule 
14.11(m)(3)(B).
    \6\ See BZX Rule 14.11(m)(3)(A) (defining the term ``Tracking 
Fund Share'').
    \7\ See proposed BZX Rule 14.11(m)(3)(A) (defining ``Tracking 
Fund Share'' as a security that: (i) Represents an interest in an 
Investment Company organized as an open-end management investment 
company, that invests in a portfolio of securities selected by the 
Investment Company's investment adviser consistent with the 
Investment Company's investment objectives and policies; (ii) is 
issued in a specified aggregate minimum number in return for a 
deposit of a specified Tracking Basket or Custom Basket, as 
applicable, and/or a cash amount with a value equal to the next 
determined NAV; (iii) when aggregated in the same specified minimum 
number, may be redeemed at a holder's request, which holder will be 
paid a specified Tracking Basket or Custom Basket, as applicable, 
and/or a cash amount with a value equal to the next determined NAV; 
and (iv) the portfolio holdings for which are disclosed within at 
least 60 days following the end of every fiscal quarter).
    \8\ See proposed BZX Rule 14.11(m)(3)(F).
    \9\ See proposed BZX Rule 14.11(m)(3)(C) (defining ``Reporting 
Authority'' in respect of a particular series of Tracking Fund 
Shares as the Exchange, an institution, or a reporting service 
designated by the Exchange or by the exchange that lists a 
particular series of Tracking Fund Shares (if the Exchange is 
trading such series pursuant to unlisted trading privileges) as the 
official source for calculating and reporting information relating 
to such series, including, but not limited to, the Tracking Basket; 
the Fund Portfolio; the Custom Basket; the amount of any cash 
distribution to holders of Tracking Fund Shares, NAV, or other 
information relating to the issuance, redemption or trading of 
Tracking Fund Shares).
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    The Exchange proposes to amend BZX Rule 14.11(m)(4) to incorporate 
specific initial and continued listing criteria relating to Custom 
Baskets. Specifically, the Exchange proposes to add a new initial 
listing requirement to stipulate that the Exchange will obtain a 
representation from the issuer of each series of Tracking Fund Shares 
that the issuer and any person acting on behalf of the series of 
Tracking Fund Shares will comply with Regulation Fair Disclosure under 
the Exchange Act (``Regulation FD''),\10\ including with respect to any 
Custom Basket.\11\ The Exchange also proposes to add a new continued 
listing requirement that, with respect to each Custom Basket utilized 
by a series of Tracking Fund Shares, each business day, before the 
opening of trading in Regular Trading Hours,\12\ the Investment Company 
shall make publicly available on its website the composition of any 
Custom Basket transacted on the previous business day, except a Custom 
Basket that differs from the applicable Tracking Basket only with 
respect to cash.\13\
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    \10\ 17 CFR 243.100.
    \11\ See proposed BZX Rule 14.11(m)(4)(A)(ii)(c). BZX Rule 
14.11(m)(4)(A)(ii) currently provides that the Exchange will obtain 
a representation from the issuer of each series of Tracking Fund 
Shares that the NAV per share for the series will be calculated 
daily and that the NAV, the Tracking Basket, and the Fund Portfolio 
will be made available to all market participants at the same time 
when disclosed. The current requirements would be designated as BZX 
Rule 14.11(m)(4)(A)(ii)(a) and (b).
    \12\ The term ``Regular Trading Hours'' means the time between 
9:30 a.m. and 4:00 p.m. Eastern Time. See BZX Rule 1.5(w).
    \13\ See proposed BZX Rule 14.11(m)(4)(B)(ii). The Exchange also 
proposes to renumber the remainder of BZX Rule 14.11(m)(4)(B).
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    Finally, the Exchange proposes to amend BZX Rules 14.11(m)(2)(E) 
and (F), which contain requirements that specified parties must erect 
and maintain ``fire walls'' with respect to access to information 
concerning the Fund Portfolio and Tracking Basket and enact procedures 
designed to prevent the use and dissemination of material nonpublic 
information regarding the Fund Portfolio and Tracking Basket, so that 
these requirements would also cover information concerning Custom 
Baskets. As proposed to be amended, BZX Rule 14.11(m)(2)(E) would 
require that, if the investment adviser to the Investment Company 
issuing Tracking Fund Shares is registered as a broker-dealer or is 
affiliated with a broker-dealer, such investment adviser will erect and 
maintain a ``fire wall'' between the investment adviser and personnel 
of the broker-dealer or broker-dealer affiliate, as applicable, with 
respect to access to information concerning the composition of and/or 
changes to the Fund Portfolio, the Tracking Basket, and/or the Custom 
Basket, as applicable. In addition, any person related to the 
investment adviser or Investment Company who makes decisions pertaining 
to the Investment Company's Fund Portfolio, the Tracking Basket, and/or 
the Custom Basket or has access to nonpublic information regarding the 
Fund Portfolio, the Tracking Basket, and/or the Custom Basket, as 
applicable, or changes thereto, must be subject to procedures designed 
to prevent the use and dissemination of material nonpublic information 
regarding the Fund Portfolio, the Tracking Basket, and/or the Custom 
Basket, as applicable, or changes thereto. Proposed BZX Rule 
14.11(m)(2)(F) would require that any person or entity, including a 
custodian, Reporting Authority, distributor, or administrator, who has 
access to nonpublic information regarding the Fund Portfolio, the 
Tracking Basket, or the Custom Basket, as applicable, or changes 
thereto, must be subject to procedures designed to prevent the use and 
dissemination of material nonpublic information regarding the 
applicable Fund Portfolio, the Tracking Basket, or the Custom Basket, 
as applicable, or changes thereto. Moreover, if any such person or 
entity is registered as a broker-dealer or affiliated with a broker-
dealer, such person or entity will erect and maintain a ``fire wall'' 
between the person or entity and the broker-dealer with respect to 
access to information concerning the composition and/or changes to such 
Fund Portfolio, Tracking Basket, or Custom Basket, as applicable.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Exchange Act and rules and regulations 
thereunder applicable to a national securities exchange.\14\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Exchange Act,\15\ 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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    \14\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission previously approved BZX Rule 14.11(m) to permit the 
listing and trading of Tracking Fund Shares.\16\

[[Page 54774]]

As discussed above, under the current rule, a series of Tracking Fund 
Shares must create or redeem shares in return for the Tracking Basket 
and/or cash. The Exchange is now proposing to amend BZX Rule 14.11(m) 
to allow a series of Tracking Fund Shares to create or redeem shares in 
return for a Custom Basket, which is a portfolio of securities that is 
different from the Tracking Basket, to the extent consistent with an 
issuer's exemptive relief under the 1940 Act.\17\ For the reasons 
discussed below, the Commission finds that the proposed amendments to 
BZX Rule 14.11(m) to provide for the use of Custom Baskets for Tracking 
Fund Shares, to the extent permitted by an issuer's exemptive relief 
under the 1940 Act, are consistent with Section 6(b)(5) of the Exchange 
Act.
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    \16\ See Securities Exchange Act Release No. 88887 (May 15, 
2020), 85 FR 30990 (May 21, 2020) (SR-CboeBZX-2019-107) (approving 
proposal to adopt Rule 14.11(m) to permit the listing and trading of 
Tracking Fund Shares and to list and trade shares of the Fidelity 
Blue Chip Value ETF, Fidelity Blue Chip Growth ETF, and Fidelity New 
Millennium ETF (``2020 Order'')). The Exchange must file a separate 
proposed rule change pursuant to Section 19(b) of the Exchange Act 
for each series of Tracking Fund Shares. See BZX Rule 
14.11(m)(2)(A).
    \17\ The Commission has granted exemptive relief under the 1940 
Act to certain series of Tracking Fund Shares to permit the creation 
or redemption of shares using a Custom Basket that includes 
instruments that are not included, or included with different 
weightings, in the fund's Tracking Basket. See, e.g., Fidelity Beach 
Street Trust, et al., Investment Company Act Release No. 34350 
(August 5, 2021).
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    The Commission believes that the proposed changes to BZX Rules 
14.11(m)(2)(E) and (F) are consistent with the Exchange Act and are 
reasonably designed to help prevent fraudulent and manipulative acts 
and practices. The Commission notes that, because Tracking Fund Shares 
do not publicly disclose on a daily basis information about the 
holdings of the Fund Portfolio, it is vital that key information 
relating to Tracking Fund Shares, including information relating to 
Custom Baskets, be kept confidential prior to its public disclosure and 
not be subject to misuse.\18\ Accordingly, the Commission believes that 
the Exchange's proposal to amend BZX Rules 14.11(m)(2)(E) and (F) \19\ 
to apply the current ``fire wall'' and other requirements contained 
therein to those that have access to information concerning, or make 
decisions pertaining to, the composition of and/or changes to the 
Custom Baskets, in addition to the existing requirements relating to 
the Fund Portfolio and the Tracking Basket, is designed to prevent 
fraud and manipulation with respect to Tracking Fund Shares.
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    \18\ See 2020 Order, supra note 16, 85 FR at 31002-03.
    \19\ See supra Section II, describing proposed BZX Rules 
14.11(m)(2)(E) and (F).
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    The Commission also believes that the proposed amendments to the 
initial and continued listing requirements for Tracking Fund Shares are 
adequate to ensure transparency of information relating to Custom 
Baskets utilized by a fund and to ensure that such information is 
available to the rest of the market participants at the same time. 
Specifically, prior to the opening of trading on each business day, the 
Investment Company will make publicly available on its website the 
composition of any Custom Basket transacted on the previous business 
day, except a Custom Basket that differs from the applicable Tracking 
Basket only with respect to cash.\20\ In addition, prior to the initial 
listing of the Tracking Fund Shares, the Exchange will be required to 
obtain a representation from the issuer of each series of Tracking Fund 
Shares that the issuer and any person acting on behalf of the series of 
Tracking Fund Shares will comply with Regulation FD, including with 
respect to any Custom Basket.\21\ These measures help to mitigate 
concerns that certain information regarding the funds will be available 
only to select market participants and thereby helps to prevent fraud 
and manipulation.
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    \20\ See proposed BZX Rule 14.11(m)(4)(B)(ii).
    \21\ See proposed BZX Rule 14.11(m)(4)(A)(ii)(c). The Commission 
notes that a fund's use of, or conversations with authorized 
participants about, Creation Baskets that would result in selective 
disclosure of nonpublic information would effectively be limited by 
the fund's obligation to comply with Regulation FD. See, e.g., 
Fidelity Beach Street Trust, et al., Investment Company Act Release 
No. 34326 (July 9, 2021).
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    The Commission notes that, as set forth in the definition of 
``Custom Basket,'' a series of Tracking Fund Shares may only utilize 
Custom Baskets to the extent consistent with the exemptive relief 
issued pursuant to the 1940 Act applicable to such series.\22\ The 
Commission further notes that all series of Tracking Fund Shares will 
continue to be subject to the existing rules and procedures that govern 
the listing and trading of Tracking Fund Shares and the trading of 
equity securities on the Exchange.
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    \22\ See proposed BZX Rule 14.11(m)(3)(F).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act \23\ that the proposed rule change (SR-CboeBZX-2021-053), 
be, and it hereby is, approved.
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    \23\ 15 U.S.C. 78s(b)(2).
    \24\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21483 Filed 10-1-21; 8:45 am]
BILLING CODE 8011-01-P