Document ID: SEC-2015-0231-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: BATS Exchange, Inc.
Posted Date: 2015-02-09T05:00Z

[Federal Register Volume 80, Number 26 (Monday, February 9, 2015)]
[Notices]
[Pages 7066-7068]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-02501]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74193; File No. SR-BATS-2014-054]

Self-Regulatory Organizations; BATS Exchange, Inc.; Order 
Approving a Proposed Rule Change To List and Trade Shares of the 
iShares Short Maturity Municipal Bond ETF of the iShares U.S. ETF Trust 
Under Rule 14.11(i) of BATS Exchange, Inc.

February 3, 2015.

I. Introduction

    On December 12, 2014, BATS Exchange, Inc. (the ``Exchange'' or 
``BATS'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to list and trade shares 
(``Shares'') of the iShares Short Maturity Municipal Bond ETF (the 
``Fund'') under BATS Rule 14.11(i). The proposed rule change was 
published for comment in the Federal Register on December 29, 2014.\4\ 
The Commission received no comments on the proposed rule change. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 73895 (December 19, 
2014), 79 FR 78125 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to list and trade the Shares under BATS Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange. The Exchange deems the Shares to be equity securities, 
thus rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities.
    The Shares will be offered by the iShares U.S. ETF Trust (the 
``Trust''), a Delaware statutory trust. 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.\5\ BlackRock Fund 
Advisors is the investment adviser (``BFA'' or ``Adviser'') to the 
Fund.\6\ State Street Bank and Trust Company is the administrator, 
custodian, and transfer agent for the Trust. BlackRock Investments, LLC 
serves as the distributor for the Trust. The Exchange represents that 
the Adviser is not a registered broker-dealer, but is affiliated with 
multiple broker-dealers and has implemented fire walls with respect to 
such broker-dealers regarding access to information concerning the 
composition and/or changes to the Fund's portfolio.\7\ The Exchange 
further represents that Adviser personnel who make decisions regarding 
the Fund's portfolio are subject to procedures designed to prevent the 
use and dissemination of material nonpublic information regarding the 
Fund's portfolio.\8\
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    \5\ See Registration Statement on Form N-1A for the Trust, dated 
September 3, 2014 (File Nos. 333-179904 and 811-22649). See also 
Investment Company Act Release No. 29571 (January 24, 2011) (File 
No. 812-13601).
    \6\ BFA is an indirect wholly owned subsidiary of BlackRock, 
Inc.
    \7\ See Notice, supra note 4, at 78126.
    \8\ See id.; see also BATS Rule 14.11(i)(7). The Exchange also 
represents that in the event that (a) the Adviser becomes registered 
as a broker-dealer or newly affiliated with another broker-dealer, 
or (b) any new adviser or sub-adviser is a registered broker-dealer 
or becomes affiliated with a broker-dealer, it will implement a fire 
wall with respect to its relevant personnel or such broker-dealer 
affiliate, as applicable, regarding access to information concerning 
the composition and/or changes to the portfolio, and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding such portfolio.
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    The Exchange has made the following representations and statements 
regarding the Fund.\9\ The Fund will seek to maximize tax-free current 
income. Generally, the Fund's effective duration \10\ will be 1.2 years 
or less, and it is not expected to exceed 1.5 years.
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    \9\ The Commission notes that additional information regarding 
the Trust, the Fund, and the Shares, investment strategies, risks, 
net asset value (``NAV'') calculation, creation and redemption 
procedures, fees and expenses, portfolio holdings disclosure 
policies, distributions, and taxes, among other information, is 
included in the Notice and Registration Statement. See supra notes 4 
and 5, respectively.
    \10\ The Exchange states that effective duration is a measure of 
the Fund's price sensitivity to changes in yields or interest rates. 
See Notice, supra note 4, 79 FR at 78126, n.11.
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    To achieve its objective, the Fund will invest, under normal 
circumstances,\11\

[[Page 7067]]

at least 80% of its net assets in Municipal Securities \12\ that pay 
interest that is exempt from U.S. federal income taxes and the federal 
alternative minimum tax (the ``AMT''), along with short-term 
instruments and repurchase and reverse repurchase agreements for 
Municipal Securities. Under normal circumstances, less than 20% of the 
Fund's net assets may be invested in ``Other Investments,'' namely: 
Interest rate futures contracts and Municipal Securities that pay 
interest that is subject to the AMT.
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    \11\ The term ``under normal circumstances'' includes, but is 
not limited to, the absence of adverse market, economic, political, 
or other conditions, including extreme volatility or trading halts 
in the financial markets; operational issues causing dissemination 
of inaccurate market information; or force majeure type events such 
as systems failure, natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot, or labor disruption, or any 
similar intervening circumstance.
    \12\ ``Municipal Securities'' are fixed and floating rate 
securities issued in the U.S. by U.S. states and territories, 
municipalities and other political subdivisions, agencies, 
authorities, and instrumentalities of states and multi-state 
agencies and authorities and will include only the following 
instruments: General obligation bonds, limited obligation bonds (or 
revenue bonds), private activity bonds, municipal notes, municipal 
commercial paper, tender option bonds, variable rate demand 
obligations, municipal lease obligations, stripped securities, 
structured securities, when issued securities, and zero coupon 
securities. The Fund may also invest in exchange-listed and non-
exchange-listed investment companies that invest in Municipal 
Securities. The Exchange represents that structured securities, when 
combined with its ``Other Investments'' will not exceed 20% of the 
Fund's net assets. See Notice, supra note 4, 79 FR at 78127, n.21.
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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 Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act,\14\ 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.
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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    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 Exchange Act,\15\ 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. Quotation and last-sale 
information for the Shares will be available on the facilities of the 
Consolidated Tape Association (``CTA''). Information regarding market 
price and volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other 
electronic services. The previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers. The Web site for the Fund will include 
a form of the prospectus for the Fund and additional data relating to 
NAV and other applicable quantitative information.
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    \15\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    According to the Exchange, intraday, executable price quotations on 
assets held by the Fund are available from major broker-dealer firms, 
and for exchange-traded assets, such intraday information is available 
directly from the applicable listing exchange.\16\ All such intraday 
price information is available through subscription services, such as 
Bloomberg, Thomson Reuters and International Data Corporation, which 
can be accessed by authorized participants and other investors. Pricing 
information for repurchase agreements and securities not listed on an 
exchange or national securities market will be available from major 
broker-dealer firms and/or subscription services, such as Bloomberg, 
Thomson Reuters and International Data Corporation. Quotation and last-
sale information for the underlying exchange-listed investment 
companies will be available through CTA. Price information relating to 
all other securities held by the Fund will be available from major 
market data vendors.
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    \16\ See Notice, supra note 4, 79 FR at 78130.
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    On each business day, before commencement of trading in Shares 
during Regular Trading Hours on the Exchange, the Fund will disclose on 
its Web site the identities and quantities of the portfolio of 
securities and other assets (the ``Disclosed Portfolio'') held by the 
Fund that will form the basis for the Fund's calculation of NAV at the 
end of the business day.\17\ In addition, for the Fund, an estimated 
value, defined in BATS Rule 14.11(i)(3)(C) as the ``Intraday Indicative 
Value,'' that reflects an estimated intraday value of the Fund's 
portfolio, will be disseminated. The Intraday Indicative Value will be 
based upon the current value for the components of the Disclosed 
Portfolio and will be updated and widely disseminated by one or more 
major market data vendors at least every 15 seconds during the 
Exchange's Regular Trading Hours.\18\
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    \17\ The Disclosed Portfolio will include, as applicable, the 
names, quantity, percentage weighting and market value of securities 
and other assets held by the Fund and the characteristics of such 
assets. The Web site and information will be publicly available at 
no charge. Under accounting procedures to be followed by the Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
the Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.
    \18\ The Exchange represents that several major market data 
vendors display and/or make widely available Intraday Indicative 
Values published via the CTA or other data feeds. See id. at 78129, 
n.36.
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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. The Commission notes that the Exchange will obtain a 
representation from the issuer of the Shares that the NAV per Share 
will be calculated daily and that the NAV and the Disclosed Portfolio 
will be made available to all market participants at the same time.\19\ 
The Exchange will halt trading in the Shares under the conditions 
specified in BATS Rule 11.18. Trading may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. These may include: (1) The extent to 
which trading is not occurring in the securities and/or the financial 
instruments composing the Disclosed Portfolio of the Fund; or (2) 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present. Trading in the 
Shares also will be subject to Rule 14.11(i)(4)(B)(iv), which sets 
forth circumstances under which Shares of the Fund may be halted. The 
Exchange prohibits the distribution of material non-public information 
by its employees. The Exchange represents that the Adviser is not a 
registered broker-dealer, but is affiliated with multiple broker-
dealers and has implemented fire walls with respect to such broker-
dealers regarding access to information concerning the composition and/
or changes to the Fund's portfolio.\20\ The Exchange further represents 
that Adviser personnel who make decisions regarding the Fund's 
portfolio are subject to procedures designed to prevent the use and 
dissemination of material nonpublic

[[Page 7068]]

information regarding the Fund's portfolio.\21\ In addition, the 
Commission notes that, consistent with BATS Rule 14.11(i)(4)(B)(ii)(b), 
the Reporting Authority, as defined in BATS Rule 14.11(i)(3)(D), must 
implement and maintain, or be subject to, procedures designed to 
prevent the use and dissemination of material, non-public information 
regarding the actual components of the portfolio. The Exchange may 
obtain information regarding trading in the Shares and the underlying 
shares in exchange traded equity securities via the Intermarket 
Surveillance Group (``ISG''), from other exchanges that are members or 
affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.\22\ In addition, the 
Exchange is able to access, as needed, trade information for certain 
fixed income instruments reported to FINRA's Trade Reporting and 
Compliance Engine.
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    \19\ See id. at 78130.
    \20\ See supra note 7 and accompanying text.
    \21\ See Notice, supra note 4, 79 FR at 78131.
    \22\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Disclosed Portfolio for the Fund may trade on markets that are 
members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
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    In support of this proposal, the Exchange has made the following 
representations:
    (1) The Shares will be subject to BATS Rule 14.11(i), which sets 
forth the initial and continued listing criteria applicable to Managed 
Fund Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.
    (3) Trading of the Shares through the Exchange will be subject to 
the Exchange's surveillance procedures for derivative products, 
including Managed Fund Shares, and that these 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.
    (4) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) BATS Rule 3.7, which imposes 
suitability obligations on Exchange members with respect to 
recommending transactions in the Shares to customers; (c) how 
information regarding the Intraday Indicative Value is disseminated; 
(d) the risks involved in trading the Shares during the Pre-Opening 
\23\ and After Hours Trading Sessions \24\ when an updated Intraday 
Indicative Value will not be calculated or publicly disseminated; (e) 
the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (f) trading information.
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    \23\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. 
Eastern Time.
    \24\ The After Hours Trading Session is from 4:00 p.m. to 5:00 
p.m. Eastern Time.
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    (5) For initial and/or continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Act.\25\
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    \25\ See 17 CFR 240.10A-3.
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    (6) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), as 
deemed illiquid by the Adviser under the 1940 Act.
    (7) The Fund's exposure to reverse repurchase agreements will be 
covered by liquid assets having a value equal to or greater than such 
commitments.
    (8) Structured securities, when combined with those instruments 
held as part of the Other Investments described above, will not exceed 
20% of the Fund's net assets.
    (9) As it relates to exchange traded investment companies, the Fund 
will only invest in investment companies that trade on markets that are 
a member of the ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
    (10) To the extent that the Fund invests in futures contracts, the 
Fund will only invest in futures contracts that are traded on an 
exchange that is a member of the ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
    (11) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the Notice. For 
the foregoing reasons, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act \26\ and the rules 
and regulations thereunder applicable to a national securities 
exchange.
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    \26\ 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 
Exchange Act,\27\ that the proposed rule change (SR-BATS-2014-054) is 
hereby approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015-02501 Filed 2-6-15; 8:45 am]
BILLING CODE 8011-01-P