Document ID: SEC-2017-1787-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2017-10-31T04:00Z

[Federal Register Volume 82, Number 209 (Tuesday, October 31, 2017)]
[Notices]
[Pages 50472-50475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23583]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81947; File No. SR-BatsBZX-2017-46]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of Amendments No. 2 and No. 3, and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendments No. 2 and 
No. 3, To List and Trade Shares of the Aptus Fortified Value ETF, a 
Series of ETF Series Solutions, Under Rule 14.11(c)

October 25, 2017.

I. Introduction

    On July 10, 2017, Bats BZX Exchange, Inc. (``Exchange'') 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 
shares (``Shares'') of the Aptus Fortified Value ETF (``Fund''), a 
series of ETF Series Solutions (``Trust''), under Rule 14.11(c). The 
proposed rule change was published for comment in the Federal Register 
on July 28, 2017.\3\ On August 31, 2017, the Exchange filed Amendment 
No. 1 to the proposed rule change. On September 8, 2017, pursuant to 
Section 19(b)(2) of the Act,\4\ 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 October 6, 2017, the 
Exchange filed Amendment No. 2 to the proposed rule change, which 
replaced the proposed rule change, as modified by Amendment No. 1, in 
its entirety.\6\ On October 24,

[[Page 50473]]

2017, the Exchange filed Amendment No. 3 to the proposed rule 
change.\7\ The Commission received no comments on the proposal. The 
Commission is publishing this notice to solicit comments on Amendments 
No. 2 and No. 3 from interested persons, and is approving the proposed 
rule change, as modified by Amendments No. 2 and No. 3, on an 
accelerated basis.
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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. 81191 (July 24, 
2017), 82 FR 35256.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 81558, 82 FR 43278 
(September 14, 2017).
    \6\ In Amendment No. 2, the Exchange: (1) Provided additional 
information regarding the Adviser (as defined below), the Index 
Provider (as defined below), and the index calculation agent; (2) 
amended and provided additional discussions regarding constituents 
of the Aptus Fortified Value Index (``Index'') and permitted 
holdings of the Fund; (3) clarified the types of statements and 
representations made in the proposal that will constitute continued 
listing requirements; and (4) made other technical, non-substantive, 
and conforming changes. Amendment No. 2 is available at: https://www.sec.gov/comments/sr-batsbzx-2017-46/batsbzx201746-2630920-161197.pdf.
    \7\ In Amendment No. 3, the Exchange: (1) Clarified that all 
securities included in the Index--rather than held by the Fund--are 
listed on U.S. securities exchanges that are members of the 
Intermarket Surveillance Group (``ISG''); and (2) clarified the 
Fund's compliance with various applicable requirements. Amendment 
No. 3 is available at: https://www.sec.gov/comments/sr-batsbzx-2017-46/batsbzx201746-2651203-161342.pdf.
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II. Description of the Proposed Rule Change, as Modified by Amendments 
No. 2 and No. 3

    The Exchange proposes to list and trade the Shares under Rule 
14.11(c)(3), which governs the listing and trading of Index Fund Shares 
on the Exchange. The Shares will be offered by the Trust, which was 
established as a Delaware statutory trust on February 9, 2012. The 
Trust is registered with the Commission as an open-end investment 
company and has filed a registration statement on behalf of the Fund on 
Form N-1A (``Registration Statement'') with the Commission.\8\ Aptus 
Capital Advisors, LLC (``Adviser'' or ``Index Provider'') serves as 
investment adviser and index provider to the Fund. The Index Provider 
is not a broker-dealer and is not affiliated with a broker-dealer. The 
Index Provider will implement and maintain a ``fire wall'' around the 
personnel who have access to information concerning changes and 
adjustments to the Index. The Index is calculated by an unaffiliated 
third party who is not a broker-dealer or fund advisor. In addition, 
any advisory committee, supervisory board, or similar entity that 
advises the Index Provider or that makes decisions on the Index or 
portfolio composition, methodology and related matters, will implement 
and maintain, or be subject to, procedures designed to prevent the use 
and dissemination of material non-public information regarding the 
Index.
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    \8\ See Registration Statement on Form N-1A for the Trust, dated 
June 8, 2017 (File Nos. 333-179562 and 811-22668). According to the 
Exchange, the Commission has issued an order, upon which the Trust 
may rely, granting certain exemptive relief under the Investment 
Company Act of 1940. See Investment Company Act Release No. 32110 
(May 10, 2016) (File No. 812-14604).
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    The Fund will seek to track the performance, before fees and 
expenses, of the Aptus Fortified Value Index. According to the 
Exchange, the Index does not meet all of the generic listing 
requirements of Rule 14.11(c)(3)(A)(i). Specifically, Rule 
14.11(c)(3)(A)(i) sets forth the requirements for components of an 
index or portfolio of U.S. Component Stocks, but the Index may include 
put options, which are not included in the definition of U.S. Component 
Stocks.\9\ The Index will otherwise conform to the initial and 
continued listing criteria under Rule 14.11(c).
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    \9\ A ``U.S. Component Stock'' is an equity security that is 
registered under Sections 12(b) or 12(g) of the Act, or an American 
Depositary Receipt, the underlying equity security of which is 
registered under Sections 12(b) or 12(g) of the Act. See Rule 
14.11(c)(1)(D).
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    According to the Exchange, the Index is a rules-based, equal-
weighted index that is designed to gain exposure to 50 of the most 
undervalued U.S.-listed common stocks and real estate investment trusts 
(``REITs''), while hedging against significant U.S. equity market 
declines when the market is overvalued. More specifically, the Index is 
composed of an equity component of 50 common stocks and REITs \10\ and, 
when the Index determines that the U.S. equity market is overvalued, a 
``tail hedge'' component of long put options on a large, highly liquid 
ETF \11\ listed on a national securities exchange that tracks the 
performance of the large-cap U.S. equity market (``Underlying 
ETF'').\12\ All of the securities included in the Index are and will be 
listed on U.S. exchanges, and all such exchanges are members of the 
ISG.
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    \10\ The equity component of the Index will meet the 
requirements of Rule 14.11(c)(3)(A)(i).
    \11\ ETF includes Portfolio Depositary Receipts and Index Fund 
Shares, as defined in Rules 14.11(b) and 14.11(c), respectively, or 
their equivalents on other national securities exchanges.
    \12\ The large-cap U.S. equity market tracking ETF with the 
highest average daily options volume (as determined annually by the 
Index rules) will be the Underlying ETF.
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    When the tail hedge is not in effect, the Index will be composed 
100% of the equity component. At the time the tail hedge is 
implemented, the Index will be composed 99.5% of the equity component 
and 0.50% the tail hedge (based on the theoretical dollar value of the 
Index at the time that the options are added to the Index). Any tail 
hedge implementation will occur on the last business day of the 
applicable month.\13\ At the time the tail hedge is implemented, the 
put options on the Underlying ETF will have an expiration date of 
approximately three months from the date the tail hedge is implemented, 
and the strike price will be approximately 30% less than the most 
recent closing price of the Underlying ETF.
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    \13\ On the last business day of each month, any options held by 
the Index are removed. If the tail hedge will not be in effect for 
the following month, the weight of such options, if any, will be 
reallocated pro rata to the securities in the Index's equity 
component. If the tail hedge will continue in effect for the 
following month, the Index is rebalanced such that the tail hedge 
(with new options purchased) has a weight of 0.50% and the equity 
component securities are adjusted up or down pro rata to have a 
weight of 99.5%.
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    According to the Exchange, the Fund may hold: (1) Securities that 
are possible constituents of the Index; (2) cash and cash equivalents; 
\14\ (3) 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; and (4) other ETFs.\15\
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    \14\ Cash equivalents include short-term instruments 
(instruments with maturities of less than 3 months) of the following 
types: (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.
    \15\ These ETFs include Portfolio Depository Receipts (as 
described in Rule 14.11(b)), Index Fund Shares (as described in Rule 
14.11(c)), and Managed Fund Shares (as described in Rule 14.11(i)). 
The ETFs in which the Fund may invest all will be listed and traded 
in the U.S. on national securities exchanges. The Fund may invest in 
inverse ETFs, but will not invest in leveraged (e.g., 2X, -2X, 3X, 
or -3X) ETFs.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendments No. 2 and No. 3, is consistent with 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\16\ In particular, the Commission finds 
that the proposal is consistent with Section 6(b)(5) of the

[[Page 50474]]

Act,\17\ 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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    \16\ 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).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, except for the options position that may 
be included in the Index (the aggregate market value of which is capped 
at 0.50% of the theoretical dollar value of the Index at the time that 
the options are added to the Index),\18\ the Index will satisfy, on an 
initial and continued listing basis, all of the generic listing 
standards under Rule 14.11(c)(3)(A)(i). All of the securities included 
in the Index are and will be listed on U.S. securities exchanges, and 
all such exchanges are members of the ISG. Moreover, the Fund may hold 
only the following: Securities that are possible constituents of the 
Index (all of which will be listed on U.S. securities exchanges); cash; 
cash equivalents; U.S. Government securities; and other ETFs (all of 
which will be listed on U.S. securities exchanges).
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    \18\ As noted above, the options will overlie a large, highly 
liquid ETF listed on a national securities exchange that tracks the 
performance of the large-cap U.S. equity market.
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    The Exchange states that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable Federal securities laws. The Exchange also 
states that it may obtain information regarding trading in the Shares 
and the underlying equities and options contracts held by the Fund and 
included in the Index via the ISG from other exchanges who are members 
or affiliates of the ISG or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
    The Fund will meet and be subject to the requirements of Rule 
14.11(c), and other applicable requirements for Index Fund Shares based 
on a U.S. equity index or portfolio, including, but not limited to, 
requirements relating to the dissemination of key information such as 
the Net Asset Value, the Intraday Indicative Value, rules governing the 
trading of equity securities, trading hours, trading halts, 
surveillance, and the information circular, as set forth in Exchange 
rules applicable to Index Fund Shares and the orders approving such 
rules. In addition, for initial and/or continued listing, the Fund must 
be in compliance with Rule 10A-3 under the Act.\19\
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    \19\ 17 CFR 240.10A-3.
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    The Exchange represents that all statements and representations 
regarding the index composition, the description of the portfolio or 
reference assets, limitations on portfolio holdings or reference 
assets, dissemination and availability of index, reference assets, and 
intraday indicative values, and the applicability of Exchange listing 
rules specified in the filing constitute continued listing requirements 
for the Fund. The issuer has represented to the Exchange that it will 
advise the Exchange of any failure by the Fund or the Shares to comply 
with the continued listing requirements. Pursuant to its obligations 
under Section 19(g)(1) of the Act, the Exchange will surveil for 
compliance with the continued listing requirements. If the Fund or the 
Shares are not in compliance with the applicable listing requirements, 
the Exchange will commence delisting procedures under Rule 14.12. This 
approval order is based on all of the Exchange's statements and 
representations, including those set forth above and in Amendments No. 
2 and No. 3.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendments No. 2 and No. 3, is consistent 
with Section 6(b)(5) of the Act \20\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \20\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendments No. 2 and No. 3 to the 
Proposed Rule Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendments No. 2 and No. 3 are consistent 
with the Act. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-BatsBZX-2017-46 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BatsBZX-2017-46. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change. Persons submitting 
comments are cautioned that we do not redact or edit personal 
identifying information from comment submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsBZX-2017-46, and should 
be submitted on or before November 21, 2017.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendments No. 2 and No. 3

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendments No. 2 and No. 3, prior to the 
thirtieth day after the date of publication of notice of the filing of 
Amendments No. 2 and No. 3 in the Federal Register. The Commission 
believes that Amendments No. 2 and No. 3 supplement the proposed rule 
change by providing clarification and additional information regarding 
the Index and the Fund.\21\ The changes and additional information 
helped the Commission to evaluate the Shares' susceptibility to 
manipulation, and whether the listing and trading of the Shares would 
be consistent with the protection of investors and the public interest. 
Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act,\22\ to approve the

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proposed rule change, as modified by Amendments No. 2 and No. 3, on an 
accelerated basis.
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    \21\ See supra notes 6 and 7.
    \22\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-BatsBZX-2017-46), as 
modified by Amendments No. 2 and No. 3 be, and it hereby is, approved 
on an accelerated basis.
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    \23\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-23583 Filed 10-30-17; 8:45 am]
 BILLING CODE 8011-01-P