Document ID: SEC-2019-1995-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2019-12-31T05:00Z

[Federal Register Volume 84, Number 250 (Tuesday, December 31, 2019)]
[Notices]
[Pages 72414-72424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28217]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87856; File No. SR-CboeBZX-2019-107]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Adopt Rule 14.11(m), Portfolio Fund 
Shares, and To List and Trade Shares of the Fidelity Value ETF, 
Fidelity Growth ETF, and Fidelity Opportunistic ETF, Each a Series of 
the Fidelity Beach Street Trust, Under Proposed Rule 14.11(m)

December 23, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 12, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a rule change to adopt Rule 14.11(m), 
Portfolio Fund Shares, and to list and trade shares of the Fidelity 
Value ETF, Fidelity Growth ETF, and Fidelity Opportunistic ETF (each a 
``Fund'' and, collectively, the ``Funds''), each a series of the 
Fidelity Beach Street Trust (the ``Trust''), under such proposed Rule 
14.11(m). The shares of each Fund are referred to herein as the 
``Shares.'' The text of the proposed rule change is also available on 
the Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to add new Rule 14.11(m) \3\ for the purpose 
of permitting the listing and trading, or trading pursuant to unlisted 
trading privileges, of Portfolio Fund Shares, which are securities 
issued by an actively managed open-end management investment 
company.\4\
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    \3\ The Exchange notes that it is proposing new Rule 14.11(m) 
because it has also proposed a new Rule 14.11(k) and new Rule 
14.11(l) under two separate proposals. See Securities Exchange Act 
Release Nos. 87062 (September 23, 2019), 84 FR 51193 (September 27, 
2019) (SR-CboeBZX-2019-047) and 87560 (November 18, 2019), 84 FR 
64607 (November 22, 2019) (CboeBZX-2019-097).
    \4\ The basis of this proposal are several applications for 
exemptive relief that were filed with the Commission and for which 
public notice was issued on November 14, 2019 (the ``Notice'') and 
subsequent order granting certain exemptive relief to, among others, 
Fidelity Management & Research Company and FMR Co., Inc., Fidelity 
Beach Street Trust, and Fidelity Distributors Corporation (File No. 
812-14364), issued on December 10, 2019 (the ``Order'' and, 
collectively, with the Application and the Notice, the ``Exemptive 
Order''). See Investment Company Act Release Nos. 33683 and 33712. 
The Order specifically notes that ``granting the requested 
exemptions is appropriate in and consistent with the public interest 
and consistent with the protection of investors and the purposes 
fairly intended by the policy and provisions of the Act. It is 
further found that the terms of the proposed transactions, including 
the consideration to be paid or received, are reasonable and fair 
and do not involve overreaching on the part of any person concerned, 
and that the proposed transactions are consistent with the policy of 
each registered investment company concerned and with the general 
purposes of the Act.'' The Exchange notes that it also referred to 
the application for exemptive relief orders for T. Rowe Price 
Associates, Inc. and T. Rowe Price Equity Series, Inc. (File No. 
812-14214 and Investment Company Act Release Nos. 33685 and 33713), 
Natixis ETF Trust II, et al. (File No. 812-14870 and Investment 
Company Act Release Nos. 33684 and 33711), Blue Tractor ETF Trust 
and Blue Tractor Group, LLC (File No. 812-14625 and Investment 
Company Act Release Nos. 33682 and 33710), and Gabelli ETFs Trust, 
et al. (File No. 812-15036 and Investment Company Act Release Nos. 
33681 and 33708). While there are certain differences between the 
applications, the Exchange believes that each would qualify as 
Portfolio Fund Shares under proposed Rule 14.11(m).
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Proposed Rule 14.11(m)
    Proposed Rule 14.11(m)(3)(A) provides that the term ``Portfolio 
Fund Share'' means a security that: (i) Represents an interest in a 
registered investment company (``Investment Company'') organized as an 
open-end management investment company or

[[Page 72415]]

similar entity, that: (a) Invests in a portfolio of securities selected 
by the Investment Company's investment adviser consistent with the 
Investment Company's investment objectives and policies; and (b) will 
at a minimum disclose the Fund Portfolio within at least 60 days 
following the end of every fiscal quarter; (ii) is issued in a 
specified aggregate minimum number in return for a deposit of a 
specified portfolio of securities and/or a cash amount with a value 
equal to the next determined net asset value; and (iii) when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request, which holder will be paid a specified portfolio of securities 
and/or cash with a value equal to the next determined net asset value.
    Proposed Rule 14.11(m)(1) provides that the Exchange will consider 
for trading, whether by listing or pursuant to unlisted trading 
privileges, Portfolio Fund Shares that meet the criteria of this Rule.
    Proposed Rule 14.11(m)(2) provides that this proposed Rule is 
applicable only to Portfolio Fund Shares. Except to the extent 
inconsistent with this Rule, or unless the context otherwise requires, 
the rules and procedures of the Board of Directors shall be applicable 
to the trading on the Exchange of such securities. Portfolio Fund 
Shares are included within the definition of ``security'' or 
``securities'' as such terms are used in the Rules of the Exchange.
    Proposed Rule 14.11(m)(2)(A)-(D) provide that the Exchange will 
file separate proposals under Section 19(b) of the Act before the 
listing of Portfolio Fund Shares; that transactions in Portfolio Fund 
Shares will occur throughout the Exchange's trading hours; the minimum 
price variation for quoting and entry of orders in Portfolio Fund 
Shares is $0.01; and that the Exchange will implement written 
surveillance procedures for Portfolio Fund Shares.
    Proposed Rule 14.11(m)(3)(B) provides that the term ``Fund 
Portfolio'' means 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.
    Proposed Rule 14.11(m)(3)(C) provides that the term ``Reporting 
Authority'' in respect of a particular series of Portfolio Fund Shares 
means the Exchange, an institution, or a reporting service designated 
by the Exchange or by the exchange that lists a particular series of 
Portfolio 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 Proxy Basket; the Fund Portfolio; the amount of any 
cash distribution to holders of Portfolio Fund Shares, net asset value, 
or other information relating to the issuance, redemption or trading of 
Portfolio Fund Shares. A series of Portfolio Fund Shares may have more 
than one Reporting Authority, each having different functions.
    Proposed Rule 14.11(m)(3)(D) provides that the term ``Proxy 
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 holdings of a series of Portfolio Fund Shares, 
as provided in the exemptive relief applicable to a series of Portfolio 
Fund Shares. The Proxy Basket also serves as the creation and 
redemption basket for a series of Portfolio Fund Shares. The Proxy 
Basket will be constructed as provided in the applicable exemptive 
relief and will be fully described in the proposal required under Rule 
14.11(m)(2)(A). The website for each series of Portfolio Fund Shares 
shall disclose the following information regarding the Proxy Basket as 
required under this Rule 14.11(m), to the extent applicable: (i) Ticker 
symbol; (ii) CUSIP or other identifier; (iii) Description of the 
holding; (iv) Identity of the security, commodity, index, or other 
asset upon which the derivative is based; (v) The strike price for any 
options; (vi) The quantity of each security or other asset held as 
measured by: (a) Par value; (b) Notional value; (c) Number of shares; 
(d) Number of contracts; (e) Number of units; (vii) Maturity date; 
(viii) Coupon rate; (ix) Effective date; (x) Market value; and (xi) 
Percentage weighting of the holding in the portfolio.
    Proposed Rule 14.11(m)(4)(A) provides the initial listing criteria 
for a series of Portfolio Fund Shares, which include the following: (A) 
Each series of Portfolio Fund Shares will be listed and traded on the 
Exchange subject to application of the following initial listing 
criteria: (i) For each series, the Exchange will establish a minimum 
number of Portfolio Fund Shares required to be outstanding at the time 
of commencement of trading on the Exchange; (ii) the Exchange will 
obtain a representation from the issuer of each series of Portfolio 
Fund Shares that the net asset value per share for the series will be 
calculated daily and that each of the following will be made available 
to all market participants at the same time when disclosed: The net 
asset value, the Proxy Basket, and the Fund Portfolio.
    Proposed Rule 14.11(m)(4)(B) provides that each series of Portfolio 
Fund Shares will be listed and traded on the Exchange subject to 
application of the following continued listing criteria: (i)(a) The 
Proxy Basket will be disseminated at least once daily and will be made 
available to all market participants at the same time; and (b) the 
Reporting Authority that provides the Proxy Basket 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 Proxy Basket; (ii) the Fund Portfolio will at a 
minimum be disclosed within at least 60 days following the end of every 
fiscal quarter and will be made available to all market participants at 
the same time; and (b) the Reporting Authority that provides the Fund 
Portfolio 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 Fund Portfolio; 
(iii) upon termination of an Investment Company, the Exchange requires 
that Portfolio Fund Shares issued in connection with such entity be 
removed from listing on the Exchange; and (iv) voting rights shall be 
as set forth in the applicable Investment Company prospectus or 
Statement of Additional Information.
    Additionally, proposed Rule 14.11(m)(4)(B)(iv) provides that the 
Exchange will consider the suspension of trading in and will commence 
delisting proceedings for a series of Portfolio Fund Shares pursuant to 
Rule 14.12 under any of the following circumstances: (a) If, following 
the initial twelve-month period after commencement of trading on the 
Exchange of a series of Portfolio Fund Shares, there are fewer than 50 
beneficial holders of the series of Portfolio Fund Shares for 30 or 
more consecutive trading days; (b) if either the Proxy Basket or Fund 
Portfolio is not made available to all market participants at the same 
time; (c) if the Investment Company issuing the Portfolio Fund Shares 
has failed to file any filings required by the Commission or if the 
Exchange is aware that the Investment Company is not in compliance with 
the conditions of any exemptive order or no-action relief granted by 
the Commission to the Investment Company with respect to the series of 
Portfolio Fund Shares; (d) if any of the requirements set forth in this 
rule are not continuously maintained; (e) if any of the applicable 
Continued

[[Page 72416]]

Listing Representations for the issue of Portfolio Fund Shares are not 
continuously met; or (f) if such other event shall occur or condition 
exists which, in the opinion of the Exchange, makes further dealings on 
the Exchange inadvisable.
    Proposed Rule 14.11(m)(5) provides that neither the Exchange, the 
Reporting Authority, nor any agent of the Exchange shall have any 
liability for damages, claims, losses or expenses caused by any errors, 
omissions, or delays in calculating or disseminating any current 
portfolio value; the current value of the portfolio of securities 
required to be deposited to the open-end management investment company 
in connection with issuance of Portfolio Fund Shares; the amount of any 
dividend equivalent payment or cash distribution to holders of 
Portfolio Fund Shares; net asset value; or other information relating 
to the purchase, redemption, or trading of Portfolio Fund Shares, 
resulting from any negligent act or omission by the Exchange, the 
Reporting Authority or any agent of the Exchange, or any act, 
condition, or cause beyond the reasonable control of the Exchange, its 
agent, or the Reporting Authority, including, but not limited to, an 
act of God; fire; flood; extraordinary weather conditions; war; 
insurrection; riot; strike; accident; action of government; 
communications or power failure; equipment or software malfunction; or 
any error, omission, or delay in the reports of transactions in one or 
more underlying securities.
    Proposed Rule 14.11(m)(6) provides that the provisions of this 
subparagraph apply only to series of Portfolio Fund Shares that are the 
subject of an order by the Commission exempting such series from 
certain prospectus delivery requirements under Section 24(d) of the 
Investment Company Act of 1940 (the ``1940 Act'') and are not otherwise 
subject to prospectus delivery requirements under the Securities Act of 
1933. The Exchange will inform its members regarding application of 
these provisions of this subparagraph to a particular series of 
Portfolio Fund Shares by means of an information circular prior to 
commencement of trading in such series. The Exchange requires that 
members provide to all purchasers of a series of Portfolio Fund Shares 
a written description of the terms and characteristics of those 
securities, in a form prepared by the open-end management investment 
company issuing such securities, not later than the time a confirmation 
of the first transaction in such series is delivered to such purchaser. 
In addition, members shall include such a written description with any 
sales material relating to a series of Portfolio Fund Shares that is 
provided to customers or the public. Any other written materials 
provided by a member to customers or the public making specific 
reference to a series of Portfolio Fund Shares as an investment vehicle 
must include a statement in substantially the following form: ``A 
circular describing the terms and characteristics of (the series of 
Portfolio Fund Shares) has been prepared by the (open-end management 
investment company name) and is available from your broker. It is 
recommended that you obtain and review such circular before purchasing 
(the series of Portfolio Fund Shares).'' A member carrying an omnibus 
account for a non-member broker-dealer is required to inform such non-
member that execution of an order to purchase a series of Portfolio 
Fund Shares for such omnibus account will be deemed to constitute 
agreement by the non-member to make such written description available 
to its customers on the same terms as are directly applicable to 
members under this rule. Upon request of a customer, a member shall 
also provide a prospectus for the particular series of Portfolio Fund 
Shares.
    Proposed Rule 14.11(m)(7) provides that if the investment adviser 
to the Investment Company issuing Portfolio Fund Shares is affiliated 
with a broker-dealer, such investment adviser shall erect and maintain 
a ``fire wall'' between the investment adviser and the broker-dealer 
with respect to access to information concerning the composition and/or 
changes to such Investment Company portfolio and Proxy Basket. 
Personnel who make decisions on the Investment Company's portfolio 
composition and/or Proxy Basket must be subject to procedures designed 
to prevent the use and dissemination of material nonpublic information 
regarding the applicable Investment Company portfolio and/or Proxy 
Basket.
Policy Discussion--Proposed Rule 14.11(m)
    The purpose of the structure of Portfolio Fund Shares is to provide 
investors with the traditional benefits of ETFs while protecting funds 
from the potential for front running or free riding of portfolio 
transactions, which could adversely impact the performance of a fund. 
While each series of Portfolio Fund Shares will be actively managed 
and, to that extent, similar to Managed Fund Shares (as defined in Rule 
14.11(i)), Portfolio Fund Shares differ from Managed Fund Shares in one 
key way.\5\ A series of Portfolio Fund Shares will disclose the Proxy 
Basket on a daily basis which, as described above, is designed to 
closely track the performance of the holdings of the Investment 
Company, instead of the actual holdings of the Investment Company, as 
provided by a series of Managed Fund Shares.\6\
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    \5\ The Exchange notes that there are two additional differences 
between proposed Rule 14.11(m) and Rule 14.11(i): (i) Proposed Rule 
14.11(m) would require a rule filing under Section 19(b) prior to 
listing any product on the Exchange meaning that no series of 
Portfolio Fund Shares could be listed on the Exchange pursuant to 
Rule 19b-4(e) and there are no proposed rules comparable to the 
quantitative portfolio holdings standards from Rule 14.11(i); and 
(ii) proposed Rule 14.11(m) would not require the dissemination of 
an intraday indicative value. The Exchange has submitted a proposal 
to eliminate the requirement for series of Managed Fund Shares and 
generally agrees with the Commission's sentiment that the intraday 
indicative value is not necessary to support the arbitrage 
mechanism. See SR-CboeBZX-2019-104 and Investment Company Act 
Release No. 10695 (October 24, 2019) (84 FR 57162).
    \6\ Proposed Rule 14.11(m)(4)(B)(iii) will, however, require 
each series of Portfolio Fund Shares to at a minimum disclose the 
entirety of its portfolio holdings within at least 60 days following 
the end of every fiscal quarter in accordance with normal disclosure 
requirements otherwise applicable to open-end investment companies 
registered under the 1940 Act.
    Form N-PORT requires reporting of a fund's complete portfolio 
holdings on a position-by-position basis on a quarterly basis within 
60 days after fiscal quarter end. Investors can obtain a fund's 
Statement of Additional Information, its Shareholder Reports, its 
Form N-CSR, filed twice a year, and its Form N-CEN, filed annually. 
A fund's SAI and Shareholder Reports are available free upon request 
from the Investment Company, and those documents and the Form N-
PORT, Form N-CSR, and Form N-CEN may be viewed on-screen or 
downloaded from the Commission's website at www.sec.gov.
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    For the arbitrage mechanism for any ETF to function effectively, 
authorized participants, arbitrageurs, and other market participants 
(collectively, ``Market Makers'') need sufficient information to 
accurately value shares of a fund to transact in both the primary and 
secondary market. The Proxy Basket, constructed as provided in the 
applicable exemptive relief, is designed to closely track the daily 
performance of the holdings of a series of Portfolio Fund Shares.
    Given the correlation between the Proxy Basket and the Fund 
Portfolio,\7\

[[Page 72417]]

the Exchange believes that the Proxy Basket would serve as a pricing 
signal to identify arbitrage opportunities when its value and the 
secondary market price of the shares of a series of Portfolio Fund 
Shares diverge. If shares began trading at a discount to the Proxy 
Basket, an authorized participant could purchase the shares in 
secondary market transactions and, after accumulating enough shares to 
comprise a creation unit,\8\ redeem them in exchange for a redemption 
basket reflecting the Net Asset Value (``NAV'') per share of the fund's 
portfolio holdings. The purchases of Shares would reduce the supply of 
Shares in the market, and thus tend to drive up the Shares' market 
price closer to the fund's NAV. Alternatively, if shares are trading at 
a premium, the transactions in the arbitrage process are reversed. 
Market Makers also can engage in arbitrage without using the creation 
or redemption processes. For example, if a fund is trading at a premium 
to the Proxy Basket, Market Makers may sell shares short and take a 
long position in the Proxy Basket securities, wait for the trading 
prices to move toward parity, and then close out the positions in both 
the shares and the securities, to realize a profit from the relative 
movement of their trading prices. Similarly, a Market Maker could buy 
shares and take a short position in the Proxy Basket securities in an 
attempt to profit when shares are trading at a discount to the Proxy 
Basket.
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    \7\ As provided in the Notices, funds and their respective 
advisers will take remedial actions as necessary if the funds do not 
function as anticipated. For the first three years after a launch, a 
fund will establish certain thresholds for its level of tracking 
error, premiums/discounts, and spreads, so that, upon the fund's 
crossing a threshold, the adviser will promptly call a meeting of 
the fund's board of directors and will present the board or 
committee with recommendations for appropriate remedial measures. 
The board would then consider the continuing viability of the fund, 
whether shareholders are being harmed, and what, if any, action 
would be appropriate. Specifically, the Applications and Notices 
provide that such a meeting would occur: (1) If the tracking error 
exceeds 1%; or (2) if, for 30 or more days in any quarter or 15 days 
in a row (a) the absolute difference between either the market 
closing price or bid/ask price, on one hand, and NAV, on the other, 
exceeds 2%, or (b) the bid/ask spread exceeds 2%.
    \8\ Portfolio Fund Shares will be purchased or redeemed only in 
large aggregations, or ``creation units,'' and the Proxy Basket will 
constitute the names and quantities of instruments for both 
purchases and redemptions of Creation Units.
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    Overall, the Exchange believes that the arbitrage process would 
operate similarly to the arbitrage process in place today for existing 
ETFs that use in-kind baskets for creations and redemptions that do not 
reflect the ETF's complete holdings but nonetheless produce performance 
that is highly correlated to the performance of the ETF's actual 
portfolio. The Exchange has observed highly efficient trading of ETFs 
that invest in markets where security values are not fully known at the 
time of ETF trading, and where a perfect hedge is not possible, such as 
international equity and fixed-income ETFs. While the ability to value 
and hedge many of these existing ETFs in the market may be limited, 
such ETFs have generally maintained an effective arbitrage mechanism 
and traded efficiently.
    As provided in the Notice, the Commission believes that an 
arbitrage mechanism based largely on the combination of a daily 
disclosed Proxy Basket and at a minimum quarterly disclosure of the 
Fund Portfolio can work in an efficient manner to maintain a fund's 
secondary market prices close to its NAV.\9\ Consistent with the 
Commission's view, the Exchange believes that because the arbitrage 
mechanism for Portfolio Fund Shares will be sufficient to keep 
secondary market prices in line with NAV and because the proposed rules 
are except as described above nearly identical to the generic listing 
standards for Managed Fund Shares, proposed Rule 14.11(m) is consistent 
with the Act.
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    \9\ See Fidelity Notice at 17. The Commission also notes that as 
long as arbitrage continues to keep the Fund's secondary market 
price and NAV close, and does so efficiently so that spreads remain 
narrow, that investors would benefit from the opportunity to invest 
in active strategies through a vehicle that offers the traditional 
benefits of ETFs.
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    The Exchange notes that while the Proxy Basket does not reflect the 
1-for-1 holdings of each series of Portfolio Fund Shares, a significant 
amount of information about the holdings is publicly available at all 
times. Each series will disclose the Proxy Basket on a daily basis. 
Each series of Portfolio Fund Shares will at a minimum disclose the 
entirety of its portfolio holdings, including the name, identifier, 
market value and weight of each security and instrument in the 
portfolio within at least 60 days following the end of every fiscal 
quarter in a manner consistent with normal disclosure requirements 
otherwise applicable to open-end investment companies registered under 
the 1940 Act.
    While not providing daily disclosure of the Fund Portfolio could 
open the door to potential information leakage and misuse of material 
non-public information. However, the Exchange believes that proposed 
Rule 14.11(m)(7) provides sufficient safeguards to prevent such leakage 
and misuse because the fire wall requirement will act to make sure that 
no entity will be able to misuse the data for their own purposes and 
the requirement related to information protection will act as a 
deterrent to any misuse and improper dissemination of a fund's 
portfolio composition and other material non-public information.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of Portfolio Fund Shares on the 
Exchange during all trading sessions and to deter and detect violations 
of Exchange rules and the applicable federal securities laws. Trading 
of Portfolio Fund Shares through the Exchange will be subject to the 
Exchange's surveillance procedures for derivative products. The 
Exchange will require the issuer of each series of Portfolio Fund 
Shares listed on the Exchange to represent to the Exchange that it will 
advise the Exchange of any failure by a Fund 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 Fund is not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. In addition, 
the Exchange also has a general policy prohibiting the distribution of 
material, non-public information by its employees.
Trading Halts
    As described above, proposed Rule 14.11(m)(4)(B)(iv) provides that 
if the Exchange becomes aware that one of the following is not being 
made available to all market participants at the same time, 
respectively: The net asset value, the Proxy Basket, or the Fund 
Portfolio with respect to a series of Portfolio Fund Shares; then the 
Exchange will halt trading in such series until such time as the net 
asset value, the Proxy Basket, or the Fund Portfolio is available to 
all market participants, as applicable.
Availability of Information
    As noted above, Form N-PORT requires reporting of a fund's complete 
portfolio holdings on a position-by-position basis on a quarterly basis 
within 60 days after fiscal quarter end. Investors can obtain a fund's 
Statement of Additional Information, its Shareholder Reports, its Form 
N-CSR, filed twice a year, and its Form N-CEN, filed annually. A fund's 
SAI and Shareholder Reports are available free upon request from the 
Investment Company, and those documents and the Form N-PORT, Form N-
CSR, and Form N-CEN may be viewed on-screen or downloaded from the 
Commission's website at www.sec.gov.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will

[[Page 72418]]

be published daily in the financial section of newspapers. Quotation 
and last sale information for the Shares will be available via the 
Consolidated Tape Association (``CTA'') high-speed line.
Trading Rules
    The Exchange deems Portfolio Fund Shares to be equity securities, 
thus rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. As provided in 
proposed Rule 14.11(m)(2)(C), the minimum price variation for quoting 
and entry of orders in securities traded on the Exchange is $0.01.
Information Circular
    Prior to the commencement of trading of a series of Portfolio Fund 
Shares, the Exchange will inform its members in an Information Circular 
(``Circular'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Circular will discuss the 
following: (1) The procedures for purchases and redemptions of Shares; 
(2) BZX Rule 3.7, which imposes suitability obligations on Exchange 
members with respect to recommending transactions in the Shares to 
customers; (3) how information regarding the Proxy Basket is 
disseminated; (4) the requirement that members deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; (5) trading information; and (6) 
that the Fund Portfolio of the Shares are not disclosed on a daily 
basis.
    In addition, the Circular will reference that Funds are subject to 
various fees and expenses described in the Registration Statement. The 
Circular will discuss any exemptive, no-action, and interpretive relief 
granted by the Commission from any rules under the Act. The Circular 
will also disclose that the NAV for the Shares will be calculated after 
4:00 p.m., E.T. each trading day.
The Shares
    The Shares are offered by the Trust, which is organized as a 
business trust under the laws of The Commonwealth of Massachusetts. The 
Trust is registered with the Commission as an open-end investment 
company and will file a registration statement on behalf of the Funds 
on Form N-1A (``Registration Statement'') with the Commission.\10\ 
Fidelity Management & Research Company or FMR Co., Inc. (the 
``Adviser'') will be the investment adviser to the Funds. The Adviser 
is not registered as a broker-dealer, but is affiliated with numerous 
broker-dealers. The Adviser represents that a fire wall exists and will 
be maintained between the respective personnel at the Adviser and 
affiliated broker-dealers with respect to access to information 
concerning the composition and/or changes to each Fund's portfolio and 
Proxy Basket. Personnel who make decisions on a Fund's portfolio 
composition and/or Proxy Basket shall be subject to procedures designed 
to prevent the use and dissemination of material non-public information 
regarding such portfolio and/or Proxy Basket. The Funds' sub-advisers, 
FMR Investment Management (UK) Limited, Fidelity Management & Research 
(Hong Kong) Limited, and Fidelity Management & Research (Japan) Limited 
(each a ``Sub-Adviser'' and, collectively, the ``Sub-Advisers''), are 
not registered as a broker-dealer but are affiliated with numerous 
broker-dealers. Sub-Adviser personnel who make decisions regarding a 
Fund's portfolio and/or Proxy Basket are subject to procedures designed 
to prevent the use and dissemination of material nonpublic information 
regarding the Fund's portfolio and/or Proxy Basket. In the event that 
(a) the Adviser or a Sub-Adviser becomes registered as a broker-dealer 
or newly affiliated with a broker-dealer; or (b) any new adviser or 
sub-adviser is a registered broker-dealer or becomes newly affiliated 
with a broker-dealer; it will implement and maintain 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/or Proxy Basket, and will be 
subject to procedures designed to prevent the use and dissemination of 
material non-public information regarding such portfolio and/or Proxy 
Basket. Each Fund intends to qualify each year as a regulated 
investment company under Subchapter M of the Internal Revenue Code of 
1986, as amended.
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    \10\ The Trust intends to file a post-effective amendment to the 
Registration Statement in the near future. The descriptions of the 
Funds and the Shares contained herein are based, in part, on 
information that will be included in the Registration Statement. The 
Commission has issued an order granting certain exemptive relief to 
the Trust under the Investment Company Act of 1940 (15 U.S.C. 80a-
1).
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    The Shares will conform to the initial and continued listing 
criteria under Rule 14.11(l) as well as all terms in the Exemptive 
Order. The Exchange represents that, for initial and/or continued 
listing, each Fund will be in compliance with Rule 10A-3 under the 
Act.\11\ A minimum of 100,000 Shares of each Fund will be outstanding 
at the commencement of trading on the Exchange. The Exchange will 
obtain a representation from the issuer of the Shares of each Fund that 
the NAV per share of each Fund will be calculated daily and will be 
made available to all market participants at the same time.
---------------------------------------------------------------------------

    \11\ See 17 CFR 240.10A-3.
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Fidelity Value ETF
    The Fund seeks long-term growth of capital. In order to achieve its 
investment objective, under Normal Market Conditions,\12\ the Fund will 
primarily invest its assets in: (i) Securities that the Adviser 
believes are undervalued in the marketplace in relation to factors such 
as assets, sales, earnings, growth potential, or cash flow, or in 
relation to securities of other companies in the same industry (stocks 
of these companies are often called ``value'' stocks) listed on a U.S. 
national securities exchange or a foreign exchange that trade on such 
exchange contemporaneously with the Fund's Shares; and (ii) cash and 
Cash Equivalents.\13\
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    \12\ The term ``Normal Market Conditions'' includes, but is not 
limited to, the absence of trading halts in the applicable financial 
markets generally; operational issues causing dissemination of 
inaccurate market information or system failures; or force majeure 
type events such as natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot or labor disruption, or any similar 
intervening circumstance.
    \13\ For purposes of this proposal and as defined in Rule 
14.11(i)(4)(C)(iii), Cash Equivalents are short-term instruments 
with maturities of less than three months that are: (i) U.S. 
Government securities, including bills, notes, and bonds differing 
as to maturity and rates of interest, which are either issued or 
guaranteed by the U.S. Treasury or by U.S. Government agencies or 
instrumentalities; (ii) certificates of deposit issued against funds 
deposited in a bank or savings and loan association; (iii) bankers 
acceptances, which are short-term credit instruments used to finance 
commercial transactions; (iv) repurchase agreements and reverse 
repurchase agreements; (v) bank time deposits, which are monies kept 
on deposit with banks or savings and loan associations for a stated 
period of time at a fixed rate of interest; (vi) commercial paper, 
which are short-term unsecured promissory notes; and (vii) money 
market funds.
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    The Fund may also invest the Fund's assets in other securities and 
financial instruments, as summarized below. Under Normal Market 
Conditions, the Fund may invest up to 5% of its assets in each of U.S. 
exchange-traded index futures, preferred securities, and short-term US. 
Treasuries. The Fund may invest in ETFs to facilitate creations and 
redemptions using the Proxy Basket, as defined above. Except as 
described above, the Fund will not invest in derivative instruments or 
enter into short positions.\14\
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    \14\ The Adviser notes that the Fund may by virtue of its 
holdings be issued warrants and rights. The Fund will not purchase 
such instruments and will dispose of such holdings as the Adviser 
determines is in the best interest of the Fund's shareholders.

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[[Page 72419]]

    The Exchange notes that the Fund's holdings will meet the generic 
listing standards applicable to series of Managed Fund Shares under 
Rule 14.11(i)(4)(C). While such standards do not apply directly to 
series of Portfolio Fund Shares, the Exchange believes that the 
overarching policy issues related to liquidity, market cap, diversity, 
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is 
intended to address are equally applicable to series of Portfolio Fund 
Shares.
Fidelity Growth ETF
    The Fund seeks growth of capital over the long term. In order to 
achieve its investment objective, under Normal Market Conditions, the 
Fund will primarily invest its assets in: (i) Securities that the 
Adviser believes have above-average growth potential (stocks of these 
companies are often called ``growth'' stocks) that are listed on a U.S. 
national securities exchange or a foreign exchange that trade on such 
exchange contemporaneously with the Fund's Shares; and (ii) cash and 
Cash Equivalents.
    The Fund may also invest the Fund's assets in other securities and 
financial instruments, as summarized below. Under Normal Market 
Conditions, the Fund may invest up to 5% of its assets in each of U.S. 
exchange-traded index futures, preferred securities, and short-term US. 
Treasuries. The Fund may invest in ETFs to facilitate creations and 
redemptions using the Proxy Basket, as defined above. Except as 
described above, the Fund will not invest in derivative instruments or 
enter into short positions.\15\
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    \15\ The Adviser notes that the Fund may by virtue of its 
holdings be issued warrants and rights. The Fund will not purchase 
such instruments and will dispose of such holdings as the Adviser 
determines is in the best interest of the Fund's shareholders.
---------------------------------------------------------------------------

    The Exchange notes that the Fund's holdings will meet the generic 
listing standards applicable to series of Managed Fund Shares under 
Rule 14.11(i)(4)(C). While such standards do not apply directly to 
series of Portfolio Fund Shares, the Exchange believes that the 
overarching policy issues related to liquidity, market cap, diversity, 
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is 
intended to address are equally applicable to series of Portfolio Fund 
Shares.
Fidelity Opportunistic ETF
    The Fund seeks long-term growth of capital. In order to achieve its 
investment objective, under Normal Market Conditions, the Fund will 
primarily invest in (i) both ``growth'' and ``value'' stocks based on 
fundamental analysis of factors such as each issuer's financial 
condition and industry position, as well as market and economic 
conditions that are listed on a U.S. national securities exchange or a 
foreign exchange that trade on such exchange contemporaneously with the 
Fund's Shares; and (ii) cash and Cash Equivalents.
    The Fund may also invest the Fund's assets in other securities and 
financial instruments, as summarized below. Under Normal Market 
Conditions, the Fund may invest up to 5% of its assets in each of U.S. 
exchange-traded index futures, preferred securities, and short-term 
U.S. Treasuries. The Fund may invest in ETFs to facilitate creations 
and redemptions using the Proxy Basket, as defined above. Except as 
described above, the Fund will not invest in derivative instruments or 
enter into short positions.\16\
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    \16\ The Adviser notes that the Fund may by virtue of its 
holdings be issued warrants and rights. The Fund will not purchase 
such instruments and will dispose of such holdings as the Adviser 
determines is in the best interest of the Fund's shareholders.
---------------------------------------------------------------------------

    The Exchange notes that the Fund's holdings will meet the generic 
listing standards applicable to series of Managed Fund Shares under 
Rule 14.11(i)(4)(C). While such standards do not apply directly to 
series of Portfolio Fund Shares, the Exchange believes that the 
overarching policy issues related to liquidity, market cap, diversity, 
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is 
intended to address are equally applicable to series of Portfolio Fund 
Shares.
Proxy Basket for the Proposed Funds
    For the Funds, the Proxy Basket will consist of a combination of 
the Fund's recently disclosed portfolio holdings and representative 
ETFs.\17\ ETFs selected for inclusion in the Proxy Basket will be 
consistent with the Fund's objective and selected based on certain 
criteria, including, but not limited to, liquidity, assets under 
management, holding limits and compliance considerations. 
Representative ETFs can provide a useful mechanism to reflect a Fund's 
holdings' exposures within the Proxy Basket without revealing a Fund's 
exact positions.\18\ The Exchange notes that each Fund's NAV will form 
the basis for creations and redemptions for the Funds and creations and 
redemptions will work in a manner substantively identical to that of 
series of Managed Fund Shares. The Adviser expects that the Shares of 
the Funds will generally be created and redeemed in-kind, with limited 
exceptions. The names and quantities of the instruments that constitute 
the basket of securities for creations and redemptions will be the same 
as a Fund's Proxy Basket, except to the extent purchases and 
redemptions are made entirely or in part on a cash basis. In the event 
that the value of the Proxy Basket is not the same as a Fund's NAV, the 
creation and redemption baskets will consist of the securities included 
in the Proxy Basket plus or minus an amount of cash equal to the 
difference between the NAV and the value of the Proxy Basket, as 
further described below.
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    \17\ For purposes of this filing, the term ETF will include only 
Portfolio Depositary Receipts as defined in Rule 14.11(b), Index 
Fund Shares as defined in Rule 14.11(c), and Managed Fund Shares as 
defined in Rule 14.11(i), along with the equivalent products defined 
in the rules of other national securities exchanges.
    \18\ The set of ETFs that are ``representative'' to be used in 
the Proxy Basket will depend on certain factors, including the 
Fund's investment objective, past holdings, and benchmark, and may 
change from time to time. For example, a U.S. diversified fund 
benchmarked to a diversified U.S. index would use liquid U.S. 
exchange-traded ETFs to capture size (large, mid or small 
capitalization), style (growth or value) and/or sector exposures in 
the Fund's portfolio. Leveraged and inverse ETFs will not be 
included in the Proxy Basket. ETFs may constitute no more than 50% 
of the Proxy Basket's assets.
---------------------------------------------------------------------------

    The Proxy Basket will be constructed utilizing a covariance matrix 
based on an optimization process to minimize deviations in the return 
of the Proxy Basket relative to the Fund. The proprietary optimization 
process mathematically seeks to minimize three key parameters that the 
Adviser believes are important to the effectiveness of the Proxy Basket 
as a hedge: Tracking error (standard deviation of return differentials 
between the Proxy Basket and the Fund), turnover cost, and basket 
creation cost.\19\ Typically, the Proxy Basket is expected to be 
rebalanced on schedule with the public disclosure of the Fund's 
holdings; however, a new optimized Proxy Basket may be generated as 
frequently as daily, and therefore, rebalancing may occur more 
frequently at the Adviser's discretion. In determining whether to 
rebalance a new optimized Proxy Basket, the Adviser will consider 
various factors, including liquidity of the securities in the Proxy 
Basket, tracking error, and the cost to

[[Page 72420]]

create and trade the Proxy Basket.\20\ For example, if the Adviser 
determines that a new Proxy Basket would reduce the variability of 
return differentials between the Proxy Basket and the Fund when 
balanced against the cost to trade the new Proxy Basket, rebalancing 
may be appropriate. The Adviser will periodically review the Proxy 
Basket parameters and Proxy Basket performance and process.
---------------------------------------------------------------------------

    \19\ Tracking error measures the deviations between the Proxy 
Basket and Fund. Turnover cost and basket creation cost are measures 
of the cost to create and maintain the Proxy Basket as a hedge.
    \20\ The Adviser uses a trading cost model to develop estimates 
of costs to trade a new Proxy Basket. There are essentially two 
elements to this cost: (1) The cost to purchase securities 
constituting the Proxy Basket, i.e., the cost to put on the hedge 
for the Authorized Participant, and (2) the cost of any adjustments 
that need to be made to the composition of the Proxy Basket, i.e., 
the cost to the Authorized Participant to change or maintain the 
hedge position. The inclusion of the trading cost model in the 
optimization process is intended to result in a Proxy Basket that is 
cost effective and liquid without compromising its tracking ability.
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    As noted above, each Fund will also disclose the entirety of its 
portfolio holdings, including the name, identifier, market value and 
weight of each security and instrument in the portfolio, at a minimum 
within at least 60 days following the end of every fiscal quarter. As 
described above, the Exchange notes that the concept of the Proxy 
Basket employed under this structure is designed to provide investors 
with the traditional benefits of ETFs while protecting the Funds from 
the potential for front running or free riding of portfolio 
transactions, which could adversely impact the performance of a Fund.
Policy Discussion--Proposed Funds
    As discussed above, each Fund's holdings will meet the generic 
listing standards applicable to series of Managed Fund Shares under 
Rule 14.11(i)(4)(C). While such standards do not apply directly to 
series of Portfolio Fund Shares, the Exchange believes that the 
overarching policy issues related to liquidity, market cap, diversity, 
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is 
intended to address are equally applicable to series of Portfolio Fund 
Shares and, as such, any such concerns related to the portfolio are 
mitigated.
    Separately and in addition to the rationale supporting the 
arbitrage mechanism for Portfolio Fund Shares more broadly above, the 
Exchange also believes that the particular instruments that may be 
included in each Fund's portfolio and Proxy Basket do not raise any 
concerns related to the Proxy Baskets being able to closely track the 
NAV of the Funds because such instruments include only instruments that 
trade on an exchange contemporaneously with the Shares. In addition, a 
Fund's Proxy Basket will be optimized so that it reliably and 
consistently correlates to the performance of the Fund. The Notice 
specifically states that ``in order to facilitate arbitrage, each 
Fund's portfolio and Tracking Basket will only include certain 
securities that trade on an exchange contemporaneously with the Fund's 
Shares. Because the securities would be exchange traded, market 
participants would be able to accurately price and readily trade the 
securities in the Tracking Basket for purposes of assessing the 
intraday value of the Fund's portfolio holdings and to hedge their 
positions in the Fund's Shares.'' \21\ The Exchange and Adviser agree 
with the Commission's conclusion.
---------------------------------------------------------------------------

    \21\ The Exchange notes that the instruments enumerated herein 
are consistent with the investable universe contemplated in the 
Notice. Specifically, the Notice provides that ``Each Fund may 
invest only in ETFs, Exchange-traded notes, Exchange-traded common 
stocks, common stocks listed on a foreign exchange that trade on 
such exchange contemporaneously with the Shares, Exchange-traded 
preferred stocks, Exchange-traded American depositary receipts, 
Exchange-traded real estate investment trusts, Exchange-traded 
commodity pools, Exchange-traded metals trusts, Exchange-traded 
currency trusts, and exchange-traded futures that trade 
contemporaneously with the Shares, as well as cash and cash 
equivalents . . . All futures contracts that a Fund may invest in 
will be traded on a U.S. futures exchange. For these purposes, an 
``Exchange'' is a national securities exchange as defined in section 
2(a)(26) of the [1940] Act.'' See Notice at 10.
---------------------------------------------------------------------------

    The Adviser anticipates that the returns between a Fund and its 
respective Proxy Basket will have a consistent relationship and that 
the deviation in the returns between a Fund and its Proxy Basket will 
be sufficiently small such that the Proxy Basket will provide Market 
Makers with a reliable hedging vehicle that they can use to effectuate 
low-risk arbitrage trades in Fund Shares. The Exchange believes that 
the disclosures provided by the Funds will allow Market Makers to 
understand the relationship between the performance of a Fund and its 
Proxy Basket. Market Makers will be able to estimate the value of and 
hedge positions in a Fund's Shares, which the Exchange believes will 
facilitate the arbitrage process and help ensure that the Fund's Shares 
normally will trade at market prices close to their NAV. The Exchange 
also believes that competitive market making, where traders are looking 
to take advantage of differences in bid-ask spread, will aid in keeping 
spreads tight.
    While the Proxy Basket does not reflect the 1-for-1 holdings of 
each Fund, a significant amount of information about each Fund's 
holdings is publicly available at all times. Each Fund will disclose 
the Proxy Basket on a daily basis. Each series of Portfolio Fund Shares 
will at a minimum disclose the entirety of its portfolio holdings, 
including the name, identifier, market value and weight of each 
security and instrument in the portfolio within at least 60 days 
following the end of every fiscal quarter in a manner consistent with 
normal disclosure requirements otherwise applicable to open-end 
investment companies registered under the 1940 Act. The website will 
include additional quantitative information updated on a daily basis, 
including, on a per Share basis for each Fund, the prior Business Day's 
NAV and the Closing Price or Bid/Ask Price at the time of calculation 
of such NAV, and a calculation of the premium or discount of the 
Closing Price or Bid/Ask Price against such NAV. The website will also 
disclose any information regarding the bid/ask spread for each Fund as 
may be required for other ETFs under Rule 6c-11 under the 1940 Act, as 
amended.
Additional Information
    The Exchange represents that the Shares of the Funds will continue 
to comply with all other proposed requirements applicable to Portfolio 
Fund Shares, which also generally correspond to the requirements for 
Managed Fund Shares, including the dissemination of key information 
such as the Proxy Basket, the Fund Portfolio, and Net Asset Value, 
suspension of trading or removal, trading halts, surveillance, minimum 
price variation for quoting and order entry, the information circular, 
and firewalls as set forth in the proposed Exchange rules applicable to 
Portfolio Fund Shares and the orders approving such rules.
    Price information for the exchange-listed instruments held by the 
Funds, including both U.S. and non-U.S. listed equity securities and 
U.S. exchange-listed futures will be available through major market 
data vendors or securities exchanges listing and trading such 
securities. Moreover, U.S.-listed equity securities held by the Funds 
will trade on markets that are a member of Intermarket Surveillance 
Group (``ISG'') or affiliated with a member of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing 
agreement.\22\ All futures contracts that the Funds may invest in will 
be traded on a U.S. futures exchange. The Exchange or the Financial 
Industry

[[Page 72421]]

Regulatory Authority (``FINRA''), on behalf of the Exchange, or both, 
will communicate as needed regarding trading in the Shares, underlying 
U.S. exchange-listed equity securities, and U.S. exchange-listed 
futures with other markets and other entities that are members of the 
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on 
behalf of the Exchange, or both, may obtain trading information 
regarding trading such instruments from such markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares, underlying equity securities, and U.S. exchange-
listed futures from markets and other entities that are members of ISG 
or with which the Exchange has in place a comprehensive surveillance 
sharing agreement.
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    \22\ For a list of the current members of ISG, see 
www.isgportal.com. The Exchange notes that not all components of the 
Funds 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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    All statements and representations made in this filing regarding 
the description of the portfolio or reference assets, limitations on 
portfolio holdings or reference assets, dissemination and availability 
of reference asset and intraday indicative values (as applicable), or 
the applicability of Exchange listing rules specified in this filing 
shall constitute continued listing requirements for the Shares. The 
issuer has represented to the Exchange that it will advise the Exchange 
of any failure by the Funds or 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. FINRA conducts certain cross-market 
surveillances on behalf of the Exchange pursuant to a regulatory 
services agreement. The Exchange is responsible for FINRA's performance 
under this regulatory services agreement. If a Fund is not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures with respect to such Fund under Exchange 
Rule 14.12.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \23\ in general and Section 6(b)(5) of the Act \24\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, 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.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f.
    \24\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that proposed Rule 14.11(m) is designed to 
prevent fraudulent and manipulative acts and practices in that the 
proposed rules relating to listing and trading of Portfolio Fund Shares 
provide specific initial and continued listing criteria required to be 
met by such securities. Proposed Rule 14.11(m)(4)(A) provides the 
initial listing criteria for a series of Portfolio Fund Shares, which 
include the following: (A) Each series of Portfolio Fund Shares will be 
listed and traded on the Exchange subject to application of the 
following initial listing criteria: (i) For each series, the Exchange 
will establish a minimum number of Portfolio Fund Shares required to be 
outstanding at the time of commencement of trading on the Exchange; 
(ii) the Exchange will obtain a representation from the issuer of each 
series of Portfolio Fund Shares that the net asset value per share for 
the series will be calculated daily and that each of the following will 
be made available to all market participants at the same time when 
disclosed: The net asset value, the Proxy Basket, and the Fund 
Portfolio.
    Proposed Rule 14.11(m)(4)(B) provides that each series of Portfolio 
Fund Shares will be listed and traded on the Exchange subject to 
application of the following continued listing criteria: (i)(a) The 
Proxy Basket will be disseminated at least once daily and will be made 
available to all market participants at the same time; and (b) the 
Reporting Authority that provides the Proxy Basket 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 Proxy Basket; (ii) the Fund Portfolio will at a 
minimum be disclosed within at least 60 days following the end of every 
fiscal quarter and will be made available to all market participants at 
the same time; and (b) the Reporting Authority that provides the Fund 
Portfolio 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 Fund Portfolio; 
(iii) upon termination of an Investment Company, the Exchange requires 
that Portfolio Fund Shares issued in connection with such entity be 
removed from listing on the Exchange; and (iv) voting rights shall be 
as set forth in the applicable Investment Company prospectus or 
Statement of Additional Information.
    Additionally, proposed Rule 14.11(m)(4)(B)(iv) provides that the 
Exchange will consider the suspension of trading in and will commence 
delisting proceedings for a series of Portfolio Fund Shares pursuant to 
Rule 14.12 under any of the following circumstances: (a) If, following 
the initial twelve-month period after commencement of trading on the 
Exchange of a series of Portfolio Fund Shares, there are fewer than 50 
beneficial holders of the series of Portfolio Fund Shares for 30 or 
more consecutive trading days; (b) if either the Proxy Basket or Fund 
Portfolio is not made available to all market participants at the same 
time; (c) if the Investment Company issuing the Portfolio Fund Shares 
has failed to file any filings required by the Commission or if the 
Exchange is aware that the Investment Company is not in compliance with 
the conditions of any exemptive order or no-action relief granted by 
the Commission to the Investment Company with respect to the series of 
Portfolio Fund Shares; (d) if any of the requirements set forth in this 
rule are not continuously maintained; (e) if any of the applicable 
Continued Listing Representations for the issue of Portfolio Fund 
Shares are not continuously met; or (f) if such other event shall occur 
or condition exists which, in the opinion of the Exchange, makes 
further dealings on the Exchange inadvisable.
    Proposed Rule 14.11(m)(7) proposed Rule 14.11(m)(7) provides that 
if the investment adviser to the Investment Company issuing Portfolio 
Fund Shares is affiliated with a broker-dealer, such investment adviser 
shall erect and maintain a ``fire wall'' between the investment adviser 
and the broker-dealer with respect to access to information concerning 
the composition and/or changes to such Investment Company portfolio and 
Proxy Basket. Personnel who make decisions on the Investment Company's 
portfolio composition and/or Proxy Basket must be subject to procedures 
designed to prevent the use and dissemination of material nonpublic 
information regarding the applicable Investment Company portfolio and/
or Proxy Basket.
    The Exchange believes that these proposed rules are designed to 
prevent fraudulent and manipulative acts and practices related to the 
listing and trading of Portfolio Fund Shares because they provide 
meaningful requirements about both the data that will be made publicly 
available about the Shares (the Proxy Basket) as well as the 
information that will only be available to certain parties and the 
controls on such

[[Page 72422]]

information. Specifically, the Exchange believes that the requirements 
related to information protection enumerated under proposed Rule 
14.11(m)(7) will act as a strong safeguard against any misuse and 
improper dissemination of information related to the securities 
included in or changes made to the Fund Portfolio and/or the Proxy 
Basket. As such, the Exchange believes that this proposal is designed 
to prevent fraudulent and manipulative acts and practices.
    As noted above, the purpose of the structure of Portfolio Fund 
Shares is to provide investors with the traditional benefits of ETFs 
while protecting funds from the potential for front running or free 
riding of portfolio transactions, which could adversely impact the 
performance of a fund. While each series of Portfolio Fund Shares will 
be actively managed and, to that extent, similar to Managed Fund Shares 
(as defined in Rule 14.11(i)), Portfolio Fund Shares differ from 
Managed Fund Shares in one key way.\25\ A series of Portfolio Fund 
Shares will disclose the Proxy Basket on a daily basis which, as 
described above, is designed to closely track the performance of the 
holdings of the Investment Company, instead of the actual holdings of 
the Investment Company, as provided by a series of Managed Fund 
Shares.\26\
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    \25\ The Exchange notes that there are two additional 
differences between proposed Rule 14.11(m) and Rule 14.11(i): (i) 
Proposed Rule 14.11(m) would require a rule filing under Section 
19(b) prior to listing any product on the Exchange meaning that no 
series of Portfolio Fund Shares could be listed on the Exchange 
pursuant to Rule 19b-4(e) and there are no proposed rules comparable 
to the quantitative portfolio holdings standards from Rule 14.11(i); 
and (ii) proposed Rule 14.11(m) would not require the dissemination 
of an intraday indicative value. The Exchange has submitted a 
proposal to eliminate the requirement for series of Managed Fund 
Shares and generally agrees with the Commission's sentiment that the 
intraday indicative value is not necessary to support the arbitrage 
mechanism. See SR-CboeBZX-2019-104 and Investment Company Act 
Release No. 10695 (October 24, 2019) (84 FR 57162).
    \26\ Proposed Rule 14.11(m)(4)(B)(iii) will, however, require 
each series of Portfolio Fund Shares to at a minimum disclose the 
entirety of its portfolio holdings within at least 60 days following 
the end of every fiscal quarter in accordance with normal disclosure 
requirements otherwise applicable to open-end investment companies 
registered under the 1940 Act.
    Form N-PORT requires reporting of a fund's complete portfolio 
holdings on a position-by-position basis on a quarterly basis within 
60 days after fiscal quarter end. Investors can obtain a fund's 
Statement of Additional Information, its Shareholder Reports, its 
Form N-CSR, filed twice a year, and its Form N-CEN, filed annually. 
A fund's SAI and Shareholder Reports are available free upon request 
from the Investment Company, and those documents and the Form N-
PORT, Form N-CSR, and Form N-CEN may be viewed on-screen or 
downloaded from the Commission's website at www.sec.gov.
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    For the arbitrage mechanism for any ETF to function effectively, 
Market Makers need sufficient information to accurately value shares of 
a fund to transact in both the primary and secondary market. The Proxy 
Basket, constructed as provided in the applicable exemptive relief, is 
designed to closely track the daily performance of the holdings of a 
series of Portfolio Fund Shares.
    Given the correlation between the Proxy Basket and the Fund 
Portfolio,\27\ the Exchange believes that the Proxy Basket would serve 
as a pricing signal to identify arbitrage opportunities when its value 
and the secondary market price of the shares of a series of Portfolio 
Fund Shares diverge. If shares began trading at a discount to the Proxy 
Basket, an authorized participant could purchase the shares in 
secondary market transactions and, after accumulating enough shares to 
comprise a creation unit,\28\ redeem them in exchange for a redemption 
basket reflecting the NAV per share of the fund's portfolio holdings. 
The purchases of Shares would reduce the supply of Shares in the 
market, and thus tend to drive up the Shares' market price closer to 
the fund's NAV. Alternatively, if shares are trading at a premium, the 
transactions in the arbitrage process are reversed. Market Makers also 
can engage in arbitrage without using the creation or redemption 
processes. For example, if a fund is trading at a premium to the Proxy 
Basket, Market Makers may sell shares short and take a long position in 
the Proxy Basket securities, wait for the trading prices to move toward 
parity, and then close out the positions in both the shares and the 
securities, to realize a profit from the relative movement of their 
trading prices. Similarly, a Market Maker could buy shares and take a 
short position in the Proxy Basket securities in an attempt to profit 
when shares are trading at a discount to the Proxy Basket.
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    \27\ As provided in the Notices, funds and their respective 
advisers will take remedial actions as necessary if the funds do not 
function as anticipated. For the first three years after a launch, a 
fund will establish certain thresholds for its level of tracking 
error, premiums/discounts, and spreads, so that, upon the fund's 
crossing a threshold, the adviser will promptly call a meeting of 
the fund's board of directors and will present the board or 
committee with recommendations for appropriate remedial measures. 
The board would then consider the continuing viability of the fund, 
whether shareholders are being harmed, and what, if any, action 
would be appropriate. Specifically, the Applications and Notices 
provide that such a meeting would occur: (1) If the tracking error 
exceeds 1%; or (2) if, for 30 or more days in any quarter or 15 days 
in a row (a) the absolute difference between either the market 
closing price or bid/ask price, on one hand, and NAV, on the other, 
exceeds 2%, or (b) the bid/ask spread exceeds 2%.
    \28\ Portfolio Fund Shares will be purchased or redeemed only in 
large aggregations, or ``creation units,'' and the Proxy Basket will 
constitute the names and quantities of instruments for both 
purchases and redemptions of Creation Units.
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    Overall, the Exchange believes that the arbitrage process would 
operate similarly to the arbitrage process in place today for existing 
ETFs that use in-kind baskets for creations and redemptions that do not 
reflect the ETF's complete holdings but nonetheless produce performance 
that is highly correlated to the performance of the ETF's actual 
portfolio. The Exchange has observed highly efficient trading of ETFs 
that invest in markets where security values are not fully known at the 
time of ETF trading, and where a perfect hedge is not possible, such as 
international equity and fixed-income ETFs. While the ability to value 
and hedge many of these existing ETFs in the market may be limited, 
such ETFs have generally maintained an effective arbitrage mechanism 
and traded efficiently.
    As provided in the Notice, the Commission believes that an 
arbitrage mechanism based largely on the combination of a daily 
disclosed Proxy Basket and at a minimum quarterly disclosure of the 
Fund Portfolio can work in an efficient manner to maintain a fund's 
secondary market prices close to its NAV.\29\ Consistent with the 
Commission's view, the Exchange believes that the arbitrage mechanism 
for Portfolio Fund Shares will be sufficient to keep secondary market 
prices in line with NAV. This, combined with the fact that the proposed 
rules are, except as described above, nearly identical to the generic 
listing standards for Managed Fund Shares, leads the Exchange to 
believe that the proposed Rule 14.11(m) is consistent with the Act.
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    \29\ See Fidelity Notice at 17. The Commission also notes that 
as long as arbitrage continues to keep the Fund's secondary market 
price and NAV close, and does so efficiently so that spreads remain 
narrow, that investors would benefit from the opportunity to invest 
in active strategies through a vehicle that offers the traditional 
benefits of ETFs.
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    The Exchange notes that while the Proxy Basket does not reflect the 
1-for-1 holdings of each series of Portfolio Fund Shares, a significant 
amount of information about the holdings is publicly available at all 
times. Each series will disclose the Proxy Basket on a daily basis. 
Each series of Portfolio Fund Shares will at a minimum disclose the 
entirety of its portfolio holdings, including the name, identifier, 
market value and weight of each security and instrument in the 
portfolio within at least 60 days following the end of every

[[Page 72423]]

fiscal quarter in a manner consistent with normal disclosure 
requirements otherwise applicable to open-end investment companies 
registered under the 1940 Act.
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of Portfolio Fund Shares on the 
Exchange during all trading sessions and to deter and detect violations 
of Exchange rules and the applicable federal securities laws. Trading 
of Portfolio Fund Shares through the Exchange will be subject to the 
Exchange's surveillance procedures for derivative products. The 
Exchange will require the issuer of each series of Portfolio Fund 
Shares listed on the Exchange to represent to the Exchange that it will 
advise the Exchange of any failure by a Fund 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 Fund is not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. In addition, 
the Exchange also has a general policy prohibiting the distribution of 
material, non-public information by its employees.
    As noted above, Form N-PORT requires reporting of a fund's complete 
portfolio holdings on a position-by-position basis on a quarterly basis 
within 60 days after fiscal quarter end. Investors can obtain a fund's 
Statement of Additional Information, its Shareholder Reports, its Form 
N-CSR, filed twice a year, and its Form N-CEN, filed annually. A fund's 
SAI and Shareholder Reports are available free upon request from the 
Investment Company, and those documents and the Form N-PORT, Form N-
CSR, and Form N-CEN may be viewed on-screen or downloaded from the 
Commission's website at www.sec.gov.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last sale information for the 
Shares will be available via the CTA high-speed line. The Exchange 
deems Portfolio Fund Shares to be equity securities, thus rendering 
trading in the Shares subject to the Exchange's existing rules 
governing the trading of equity securities. As provided in proposed 
Rule 14.11(m)(2)(C), the minimum price variation for quoting and entry 
of orders in securities traded on the Exchange is $0.01.
The Funds
    As discussed above, each Fund's holdings will meet the generic 
listing standards applicable to series of Managed Fund Shares under 
Rule 14.11(i)(4)(C). While such standards do not apply directly to 
series of Portfolio Fund Shares, the Exchange believes that the 
overarching policy issues related to liquidity, market cap, diversity, 
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is 
intended to address are equally applicable to series of Portfolio Fund 
Shares and, as such, any such concerns related to the portfolio are 
mitigated.
    Separately and in addition to the rationale supporting the 
arbitrage mechanism for Portfolio Fund Shares more broadly above, the 
Exchange also believes that the particular instruments that may be 
included in each Fund's portfolio and Proxy Basket do not raise any 
concerns related to the Proxy Baskets being able to closely track the 
NAV of the Funds because such instruments include only instruments that 
trade on an exchange contemporaneously with the Shares. In addition, a 
Fund's Proxy Basket will be optimized so that it reliably and 
consistently correlates to the performance of the Fund. The Notice 
specifically states that ``in order to facilitate arbitrage, each 
Fund's portfolio and Tracking Basket will only include certain 
securities that trade on an exchange contemporaneously with the Fund's 
Shares. Because the securities would be exchange traded, market 
participants would be able to accurately price and readily trade the 
securities in the Tracking Basket for purposes of assessing the 
intraday value of the Fund's portfolio holdings and to hedge their 
positions in the Fund's Shares.'' \30\ The Exchange and Adviser agree 
with the Commission's conclusion.
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    \30\ The Exchange notes that the instruments enumerated herein 
are consistent with the investable universe contemplated in the 
Notice. Specifically, the Notice provides that ``Each Fund may 
invest only in ETFs, Exchange-traded notes, Exchange-traded common 
stocks, common stocks listed on a foreign exchange that trade on 
such exchange contemporaneously with the Shares, Exchange-traded 
preferred stocks, Exchange-traded American depositary receipts, 
Exchange-traded real estate investment trusts, Exchange-traded 
commodity pools, Exchange-traded metals trusts, Exchange-traded 
currency trusts, and exchange-traded futures that trade 
contemporaneously with the Shares, as well as cash and cash 
equivalents . . . All futures contracts that a Fund may invest in 
will be traded on a U.S. futures exchange. For these purposes, an 
``Exchange'' is a national securities exchange as defined in section 
2(a)(26) of the [1940] Act.'' See Notice at 10.
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    The Adviser anticipates that the returns between a Fund and its 
respective Proxy Basket will have a consistent relationship and that 
the deviation in the returns between a Fund and its Proxy Basket will 
be sufficiently small such that the Proxy Basket will provide Market 
Makers with a reliable hedging vehicle that they can use to effectuate 
low-risk arbitrage trades in Fund Shares. The Exchange believes that 
the disclosures provided by the Funds will allow Market Makers to 
understand the relationship between the performance of a Fund and its 
Proxy Basket. Market Makers will be able to estimate the value of and 
hedge positions in a Fund's Shares, which the Exchange believes will 
facilitate the arbitrage process and help ensure that the Fund's Shares 
normally will trade at market prices close to their NAV. The Exchange 
also believes that competitive market making, where traders are looking 
to take advantage of differences in bid-ask spread, will aid in keeping 
spreads tight.
    While the Proxy Basket does not reflect the 1-for-1 holdings of 
each Fund, a significant amount of information about each Fund's 
holdings is publicly available at all times. Each Fund will disclose 
the Proxy Basket on a daily basis. Each series of Portfolio Fund Shares 
will at a minimum disclose the entirety of its portfolio holdings, 
including the name, identifier, market value and weight of each 
security and instrument in the portfolio within at least 60 days 
following the end of every fiscal quarter in a manner consistent with 
normal disclosure requirements otherwise applicable to open-end 
investment companies registered under the 1940 Act. The website will 
include additional quantitative information updated on a daily basis, 
including, on a per Share basis for each Fund, the prior Business Day's 
NAV and the Closing Price or Bid/Ask Price at the time of calculation 
of such NAV, and a calculation of the premium or discount of the 
Closing Price or Bid/Ask Price against such NAV. The website will also 
disclose any information regarding the bid/ask spread for each Fund as 
may be required for other ETFs under Rule 6c-11 under the 1940 Act, as 
amended.
    The Exchange represents that the Shares of the Funds will continue 
to comply with all other proposed requirements applicable to Portfolio 
Fund Shares, which also generally correspond to the requirements for 
Managed Fund Shares, including the dissemination of key information 
such as the Proxy Basket, the Fund Portfolio,

[[Page 72424]]

and Net Asset Value, suspension of trading or removal, trading halts, 
surveillance, minimum price variation for quoting and order entry, the 
information circular, and firewalls as set forth in the proposed 
Exchange rules applicable to Portfolio Fund Shares and the orders 
approving such rules. Moreover, U.S.-listed equity securities held by 
the Funds will trade on markets that are a member of ISG or affiliated 
with a member of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.\31\ All statements and 
representations made in this filing regarding the description of the 
portfolio or reference assets, limitations on portfolio holdings or 
reference assets, dissemination and availability of reference asset and 
intraday indicative values (as applicable), or the applicability of 
Exchange listing rules specified in this filing shall constitute 
continued listing requirements for the Shares. The issuer has 
represented to the Exchange that it will advise the Exchange of any 
failure by a Fund or 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. FINRA conducts certain cross-market surveillances 
on behalf of the Exchange pursuant to a regulatory services agreement. 
The Exchange is responsible for FINRA's performance under this 
regulatory services agreement. If a Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures with respect to such Fund under Exchange Rule 14.12.
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    \31\ For a list of the current members of ISG, see 
www.isgportal.com. The Exchange notes that not all components of the 
Funds 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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    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. Rather, the Exchange notes 
that the proposed rule change will facilitate the listing of a new type 
of actively-managed exchange-traded products, thus enhancing 
competition among both market participants and listing venues, to the 
benefit of investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is 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 rule-comments@sec.gov. Please include 
File Number SR-CboeBZX-2019-107 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-CboeBZX-2019-107. 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 website (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 website 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-CboeBZX-2019-107, and should be 
submitted on or before January 21, 2020.
     
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    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-28217 Filed 12-30-19; 8:45 am]
BILLING CODE 8011-01-P