Document ID: SEC-2018-0813-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2018-05-25T04:00Z

[Federal Register Volume 83, Number 102 (Friday, May 25, 2018)]
[Notices]
[Pages 24367-24372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11223]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83293; File No. SR-CboeBZX-2018-010]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Adopt BZX Rule 14.11(k) To Permit the Listing 
and Trading of Managed Portfolio Shares and To List and Trade Shares of 
the ClearBridge Appreciation ETF, ClearBridge Large Cap ETF, 
ClearBridge Mid Cap Growth ETF, ClearBridge Select ETF, and ClearBridge 
All Cap Value ETF

May 21, 2018.
    On February 5, 2018, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt BZX Rule 14.11(k) to 
permit the listing and trading of Managed Portfolio Shares, and to list 
and trade shares (``Shares'') of the ClearBridge Appreciation ETF, 
ClearBridge Large Cap ETF, ClearBridge Mid Cap Growth ETF, ClearBridge 
Select ETF, and ClearBridge All Cap Value ETF under proposed BZX Rule 
14.11(k). The proposed rule change was published for comment in the 
Federal Register on February 20, 2018.\3\ On April 3, 2018, pursuant to 
Section 19(b)(2) of the Exchange Act,\4\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to disapprove the proposed rule change.\5\ The 
Commission has received four comment letters on the proposed rule 
change.\6\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Exchange Act \7\ to determine whether to approve or disapprove 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82705 (February 13, 
2018), 83 FR 7256 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82984, 83 FR 15181 
(April 9, 2018). The Commission designated May 21, 2018, as the date 
by which the Commission shall approve or disapprove, or institute 
proceedings to determine whether to disapprove, the proposed rule 
change.
    \6\ See letters to Brent J. Fields, Secretary, Commission, from: 
(1) Todd J. Broms, Chief Executive Officer, Broms & Company LLC, 
dated March 13, 2018 (``Broms Letter''); (2) Simon P. Goulet, Co-
Founder, Blue Tractor Group, LLC, dated March 19, 2018 (``Blue 
Tractor Letter I''); (3) Terence W. Norman, Founder, Blue Tractor 
Group, LLC, dated March 20, 2018 (``Blue Tractor Letter II''); and 
(4) Terence W. Norman, Founder, Blue Tractor Group, LLC, dated May 
8, 2018 (``Blue Tractor Letter III''). The comment letters are 
available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Exchange's Description of the Proposed Rule Change 8
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    \8\ For a complete description of the Exchange's proposal, 
including a description of the Precidian ETF Trust II (``Trust''), 
see Notice, supra note 3.
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    The Exchange proposes to adopt BZX Rule 14.11(k), which would 
govern the listing and trading of Managed Portfolio Shares.\9\ The 
Exchange also proposes to list and trade Shares of the ClearBridge 
Appreciation ETF, ClearBridge Large Cap ETF, ClearBridge Mid Cap Growth 
ETF, ClearBridge Select ETF, and ClearBridge All Cap Value ETF under 
proposed BZX Rule 14.11(k) (each a ``Fund,'' and collectively the 
``Funds'').
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    \9\ Proposed BZX Rule 14.11(k)(3)(A) defines the term ``Managed 
Portfolio Share'' as a security that (a) represents an interest in a 
registered investment company (``Investment Company'') organized as 
an open-end management investment company or similar entity, that 
invests in a portfolio of securities selected by the Investment 
Company's investment adviser consistent with the Investment 
Company's investment objectives and policies; (b) is issued in a 
specified aggregate minimum number of shares equal to a Creation 
Unit (as defined in proposed BZX Rule 14.11(k)(3)(C)), or multiples 
thereof, in return for a designated portfolio of securities (and/or 
an amount of cash) with a value equal to the next determined net 
asset value (``NAV''); and (c) when aggregated in the same specified 
aggregate number of shares equal to a Redemption Unit (as defined in 
proposed BZX Rule 14.11(k)(3)(D)), or multiples thereof, may be 
redeemed at the request of an authorized participant, which 
authorized participant will be paid through a confidential account 
established for its benefit (``Confidential Account'') a portfolio 
of securities and/or cash with a value equal to the next determined 
NAV.
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A. Description of the Funds

    The portfolio for each Fund will consist primarily of long and/or 
short positions in U.S. exchange-listed securities and shares issued by 
other U.S. exchange-listed exchange-traded funds (``ETFs'').\10\ All 
exchange-listed equity securities in which the Funds will invest will 
be listed and traded on U.S. national securities exchanges.
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    \10\ The Exchange represents that, for purposes of describing 
the holdings of the Funds, ETFs include Portfolio Depository 
Receipts (as described in BZX Rule 14.11(b)); Index Fund Shares (as 
described in BZX Rule 14.11(c)); and Managed Fund Shares (as 
described in BZX Rule 14.11(i)). The ETFs in which a Fund will 
invest all will be listed and traded on national securities 
exchanges. While the Funds may invest in inverse ETFs, the Funds 
will not invest in leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs.
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1. ClearBridge Appreciation ETF
    The ClearBridge Appreciation ETF will seek to provide long-term 
appreciation of shareholders' capital.

[[Page 24368]]

The Fund will seek to achieve its investment objective by investing 
primarily in U.S. exchange-listed equity securities. The Fund will 
typically invest in medium and large capitalization companies, but may 
also invest in small capitalization companies.
2. ClearBridge Large Cap ETF
    The ClearBridge Large Cap ETF will seek long-term capital 
appreciation. The Fund will seek to achieve its investment objective by 
taking long and possibly short positions in equity securities or groups 
of equities that the portfolio managers believe will provide long term 
capital appreciation. The Fund will normally invest at least 80% of its 
net assets (plus borrowings for investment purposes) in stocks included 
in the Russell 1000 Index and ETFs that primarily invest in stocks in 
the Russell 1000 Index. The Fund will purchase securities that 
ClearBridge Investments, LLC (``Sub-Adviser'') believes are 
undervalued, and sell short securities that it believes are overvalued.
3. ClearBridge Mid Cap Growth ETF
    The ClearBridge Mid Cap Growth ETF will seek long-term growth of 
capital. The Fund will seek to achieve its investment objective by 
investing primarily in U.S. exchange-listed, publicly traded equity and 
equity-related securities of U.S. companies or other instruments with 
similar economic characteristics. The Fund may invest in securities of 
issuers of any market capitalization.
4. ClearBridge Select ETF
    The ClearBridge Select ETF will seek to provide long-term growth of 
capital. The Fund will seek to achieve its investment objective by 
investing primarily in U.S. exchange-listed, publicly traded equity and 
equity-related securities of U.S. companies or other instruments with 
similar economic characteristics. The Fund may invest in securities of 
issuers of any market capitalization.
5. ClearBridge All Cap Value ETF
    The ClearBridge All Cap Value ETF will seek long-term capital 
growth with current income as a secondary consideration. The Fund will 
seek to achieve its investment objective by investing primarily in 
common stocks and common stock equivalents, such as preferred stocks 
and securities convertible into common stocks, of companies the Sub-
Adviser believes are undervalued in the marketplace. The Fund may 
invest up to 25% of its net assets in equity securities of foreign 
issuers through U.S. exchange-listed depositary receipts.
6. Other Investments
    While each Fund, under normal market conditions,\11\ will invest 
primarily in U.S. exchange-listed securities, as described above, each 
Fund may invest its remaining assets in other securities and financial 
instruments, as described below.
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    \11\ Proposed BZX Rule 14.11(k)(3)(F) defines the term ``normal 
market conditions'' as including, but not limited to, the absence of 
trading halts in the applicable financial markets generally; 
operational issues (e.g., systems failure) causing dissemination of 
inaccurate market information; or force majeure type events such as 
natural or manmade disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption, or any similar intervening 
circumstance.
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    Each Fund may enter into repurchase agreements. It will be the 
policy of the Trust to enter into repurchase agreements only with 
recognized securities dealers, banks, and the Fixed Income Clearing 
Corporation, a securities clearing agency registered with the 
Commission.
    Each Fund may invest up to 5% of its total assets in warrants, 
rights, and options.
    Each Fund may invest a portion of its assets in cash or cash 
equivalents.\12\
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    \12\ For purposes of this filing, cash equivalents include 
short-term instruments (instruments with maturities of less than 3 
months) of the following types: (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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    Each Fund may invest in the securities of other investment 
companies (including money market funds) to the extent allowed by law.
7. Investment Restrictions
    Each Fund may invest up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment),\13\ 
consistent with Commission guidance. Each Fund will monitor its 
portfolio liquidity on an ongoing basis to determine whether, in light 
of current circumstances, an adequate level of liquidity is being 
maintained, and will consider taking appropriate steps in order to 
maintain adequate liquidity if, through a change in values, net assets, 
or other circumstances, more than 15% of the Fund's net assets are 
invested in illiquid assets. Illiquid assets include securities subject 
to contractual or other restrictions on resale and other instruments 
that lack readily available markets as determined in accordance with 
Commission staff guidance.
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    \13\ In reaching liquidity decisions, the Adviser may consider 
the following factors: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; and the nature of the 
security and the nature of the marketplace in which it trades (e.g., 
the time needed to dispose of the security, the method of soliciting 
offers and the mechanics of transfer).
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    Each Fund will seek to qualify for treatment as a Regulated 
Investment Company under the Internal Revenue Code.\14\
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    \14\ 26 U.S.C. 851.
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    The Funds will not invest in securities listed on non-U.S. 
exchanges. The Funds also will not invest in futures, forwards, or 
swaps.
    Each Fund's investments will be consistent with its investment 
objective and will not be used to enhance leverage. While a Fund may 
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X, 
-2X, 3X, or -3X) ETFs.

B. Key Features of Managed Portfolio Shares

    According to the Exchange, while funds issuing Managed Portfolio 
Shares would be actively-managed, and in that respect would be similar 
to Managed Fund Shares,\15\ Managed Portfolio Shares would differ from 
Managed Fund Shares in the following respects:
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    \15\ Managed Fund Shares are shares of actively-managed funds 
listed and traded under BZX Rule 14.11(i).
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     First, issues of Managed Fund Shares are required to 
disseminate their ``Disclosed Portfolio'' at least once daily.\16\ By 
contrast, the portfolio for an issue of Managed Portfolio Shares would 
be disclosed only quarterly.
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    \16\ BZX Rule 14.11(i)(3)(B) defines the term ``Disclosed 
Portfolio'' as the identities and quantities of the securities and 
other assets held by the Investment Company that will form the basis 
for the Investment Company's calculation of NAV at the end of the 
business day. BZX Rule 14.11(i)(4)(B)(ii)(a) requires that, for 
Managed Fund Shares, the Disclosed Portfolio be disseminated at 
least once daily and be made available to all market participants at 
the same time.
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     Second, in connection with the creation of shares in 
Creation Unit size or the redemption of shares in Redemption Unit size, 
the delivery or receipt of any portfolio securities in kind would be 
effected through an agent (``AP Representative'') in a Confidential 
Account established for the benefit of the creating or redeeming 
authorized participant without disclosing the

[[Page 24369]]

identity of the securities to the authorized participant.
     Third, for each series of Managed Portfolio Shares, a 
Verified Intraday Indicative Value (``VIIV'') would be widely 
disseminated by the Reporting Authority (as defined in proposed BZX 
Rule 14.11(k)(3)(E)) and/or by one or more major market data vendors 
every second during the Exchange's Regular Trading Hours (between 9:30 
a.m. and 4:00 p.m. Eastern Time).\17\ The Exchange states that the 
dissemination of the VIIV will allow investors to determine the 
estimated intraday value of the underlying portfolio of a series of 
Managed Portfolio Shares and will provide a close estimate of that 
value throughout the trading day.\18\
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    \17\ Proposed BZX Rule 14.11(k)(3)(B) defines the VIIV as the 
estimated indicative value of a Managed Portfolio Share based on all 
of the holdings of a series of Managed Portfolio Shares as of the 
close of business on the prior business day, and, for corporate 
actions, based on the applicable holdings as of the opening of 
business on the current business day, priced and disseminated in one 
second intervals during Regular Trading Hours.
    \18\ According to the Exchange, the VIIV should not be viewed as 
a ``real-time'' update of the NAV, because the VIIV may not be 
calculated in the same manner as the NAV, which will be computed 
once a day.
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C. Arbitrage of Managed Portfolio Shares

    The Exchange asserts that market makers will be able to make 
efficient and liquid markets in the Shares priced near the VIIV as long 
as the VIIV is disseminated every second and market makers employ 
market making techniques such as ``statistical arbitrage,'' including 
correlation hedging, beta hedging, and dispersion trading, which the 
Exchange represents is currently used throughout the financial services 
industry, to make efficient markets in exchange-traded products.\19\ 
According to the Exchange, if an authorized participant believes that 
the Shares are trading at a price that is higher than the value of the 
underlying portfolio--for example, if the market price for the Shares 
is higher than the VIIV--then the authorized participant may sell the 
Shares short and purchase securities that the authorized participant 
believes will track the movements of the Shares. When the spread 
narrows, the authorized participant would execute offsetting orders or 
enter an order with its AP Representative to create Shares. According 
to the Exchange, the AP Representative's execution of a Creation Unit 
in a Confidential Account, combined with the sale of the Shares, may 
create downward pressure on the price of the Shares and/or upward 
pressure on the price of the portfolio securities, bringing the market 
price of the Shares and the value of a Fund's portfolio securities 
closer together.
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    \19\ According to the Exchange, statistical arbitrage enables a 
trader to construct an accurate proxy for another instrument, 
allowing it to hedge the other instrument or buy or sell the 
instrument when it is cheap or expensive in relation to the proxy. 
The Exchange states that statistical analysis permits traders to 
discover correlations, based purely on trading data without regard 
to other fundamental drivers. The Exchange also states that these 
correlations are a function of differentials, over time, between one 
instrument or group of instruments and one or more other 
instruments, and that once the nature of these price deviations have 
been quantified, a universe of securities is searched in an effort 
to, in the case of a hedging strategy, minimize the differential. In 
addition, the Exchange states that, once a suitable hedging proxy 
has been identified, a trader can minimize portfolio risk by 
executing the hedging basket. According to the Exchange, the trader 
then can monitor the performance of this hedge throughout the trade 
period, making correction where warranted. The Exchange states that, 
in the case of correlation hedging, the analysis seeks to find a 
proxy that matches the pricing behavior of a Fund, and that in the 
case of beta hedging, the analysis seeks to determine the 
relationship between the price movement over time of a Fund and that 
of another stock.
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    Similarly, according to the Exchange, an authorized participant 
could buy the Shares and instruct the AP Representative to redeem them 
and then sell the underlying portfolio securities from its Confidential 
Account when the Shares trade at a discount to the portfolio 
securities. According to the Exchange, the authorized participant's 
purchase of the Shares in the secondary market, combined with the sale 
of the portfolio securities from its Confidential Account, may create 
upward pressure on the price of the Shares and/or downward pressure on 
the price of portfolio securities, driving the market price of the 
Shares and the value of a Fund's portfolio securities closer together. 
The Exchange states that, according to Precidian Funds LLC, the 
investment adviser to the Trust (``Adviser''), this process is 
identical to how many authorized participants currently arbitrage 
existing traditional ETFs, except for the use of the Confidential 
Account.

D. The Creation and Redemption Procedures

    The Exchange states that, generally, the Shares will be purchased 
and redeemed on an in-kind basis, so that, except where the purchase or 
redemption would include cash under the circumstances described in the 
applicable Fund's registration statement, purchasers will be required 
to purchase Creation Units by making an in-kind deposit of specified 
instruments (``Deposit Instruments''), and shareholders redeeming their 
Shares will receive an in-kind transfer of specified instruments 
(``Redemption Instruments'') in their Confidential Account through an 
AP Representative. On any given business day, the names and quantities 
of the instruments that constitute the Deposit Instruments and the 
names and quantities of the instruments that constitute the Redemption 
Instruments will be identical, and these instruments may be referred 
to, in the case of either a purchase or redemption, as the ``Creation 
Basket.''
    In the case of a redemption, the authorized participant will enter 
into an irrevocable redemption order and then immediately instruct the 
AP Representative to sell the underlying basket of securities that it 
will receive in the redemption. After receipt of a redemption order, a 
Fund's custodian (``Custodian'') will typically deliver securities to 
the Confidential Account on a pro rata basis with a value approximately 
equal to the value of the Shares tendered for redemption at the order 
cut-off time established by the Fund. The Custodian will make delivery 
of the securities by appropriate entries on its books and records, 
transferring ownership of the securities to the authorized 
participant's Confidential Account, subject to delivery of the Shares 
redeemed. The AP Representative will in turn liquidate the securities 
based on instructions from the authorized participant.\20\ The AP 
Representative will pay the liquidation proceeds net of expenses, plus 
or minus any cash balancing amount, to the authorized participant 
through the Depository Trust Company.\21\ The redemption securities 
that the Confidential Account receives are expected to mirror the 
portfolio holdings of a Fund pro rata.
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    \20\ The Exchange represents that an authorized participant will 
issue execution instructions to the AP Representative and be 
responsible for all associated profit or losses. Like a traditional 
ETF, the authorized participant has the ability to sell the basket 
securities at any point during normal trading hours.
    \21\ According to the Exchange, under applicable provisions of 
the Internal Revenue Code, the authorized participant is expected to 
be deemed a ``substantial owner'' of the Confidential Account 
because it receives distributions from the Confidential Account. As 
a result, the Exchange states, all income, gain, or loss realized by 
the Confidential Account will be directly attributed to the 
authorized participant. The Exchange also states that, in a 
redemption, the authorized participant will have a basis in the 
distributed securities equal to the fair market value at the time of 
the distribution, and any gain or loss realized on the sale of those 
Shares will be taxable income to the authorized participant.
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    In the case of a creation, the authorized participant will enter 
into an

[[Page 24370]]

irrevocable creation order with the Fund and then direct the AP 
Representative to purchase the necessary basket of portfolio 
securities. The AP Representative will then purchase the necessary 
securities in the Confidential Account. Once the necessary basket of 
securities has been acquired, the purchased securities held in the 
Confidential Account will be contributed in-kind to the Fund.
    The Exchange states that, in purchasing the necessary securities 
for creation purposes, and, conversely, in selling the portfolio 
securities for redemption purposes, the AP Representative will be 
required, by the terms of the Confidential Account agreement, to 
obfuscate the trades by use of tactics such as breaking the trades into 
multiple purchases or sales and transacting in multiple marketplaces.

E. Availability of Information

    Each Fund will be required to file with the Commission its complete 
portfolio schedules for the second and fourth fiscal quarters on Form 
N-CSR under the Investment Company Act of 1940 (``1940 Act''), and to 
file its complete portfolio schedules for the first and third fiscal 
quarters on Form N-Q under the 1940 Act, within 60 days of the end of 
the quarter. Form N-Q requires funds to file the same schedules of 
investments that are required in annual and semi-annual reports to 
shareholders. The Trust's SAI and each Fund's shareholder reports will 
be available free upon request from the Trust. These documents and 
forms may be viewed on-screen or downloaded from the Commission's 
website at www.sec.gov.
    In addition, the VIIV will be widely disseminated by the Reporting 
Authority and/or one or more major market data vendors every second 
during the Exchange's Regular Trading Hours. According to the Exchange, 
the VIIV will include all accrued income and expenses of a Fund, and 
any extraordinary expenses booked during the day that would be taken 
into account in calculating the Fund's NAV will also be taken into 
account in calculating the VIIV.
    For purposes of the VIIV, securities held by a Fund will be valued 
throughout the day based on the mid-point between the disseminated 
current national best bid and offer.\22\ According to the Exchange, by 
utilizing mid-point pricing for purposes of VIIV calculation, stale 
prices are eliminated and a more accurate representation of the real-
time value of the underlying securities is provided to the market. 
Specifically, according to the Exchange, quotations based on the mid-
point of bid/ask spreads more accurately reflect current market 
sentiment by providing real time information on where market 
participants are willing to buy or sell securities at that point in 
time. The Exchange also believes that the use of quotations will dampen 
the impact of any momentary spikes in the price of a portfolio 
security.
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    \22\ If the Adviser determines that the mid-point of the bid/ask 
spread is inaccurate, a Fund will use fair value pricing.
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    According to the Exchange, each Fund will utilize two separate 
pricing feeds to provide two separate sources of pricing information. 
Each Fund will also utilize a ``Pricing Verification Agent'' and 
establish a computer-based protocol that will permit the Pricing 
Verification Agent to continuously compare the multiple intraday 
indicative values on a real time basis.\23\ A single VIIV will be 
disseminated publicly for each Fund; however, the Pricing Verification 
Agent will continuously compare the public VIIV against a non-public 
alternative intraday indicative value to which the Pricing Verification 
Agent has access. Upon notification to the Exchange by the issuer of a 
series of Managed Portfolio Shares, or its agent, that the public VIIV 
and non-public alternative intraday indicative value differ by more 
than 25 basis points for 60 seconds, the Exchange will halt trading as 
soon as practicable in the Shares until the discrepancy is 
resolved.\24\ Each Fund's board of directors will review the procedures 
used to calculate the VIIV and maintain its accuracy as appropriate, 
but not less than annually. The specific methodology for calculating 
the VIIV will be disclosed on each Fund's website.
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    \23\ The Exchange states that a Fund's Custodian will provide, 
on a daily basis, the identities and quantities of portfolio 
securities that will form the basis for a Fund's calculation of NAV 
at the end of the business day, plus any cash in the portfolio, to 
the Pricing Verification Agent for purposes of pricing. According to 
the Exchange, the Pricing Verification Agent will utilize at least 
two separate calculation engines to calculate intraday indicative 
values, based on the mid-point between the disseminated current 
national best bid and offer, to provide the real-time value on a per 
Share basis of each Fund's holdings every second during Regular 
Trading Hours.
    \24\ According to the Exchange, a continuous deviation for 60 
seconds could indicate an error in the feed or in a calculation 
engine used to calculate the intraday indicative values. The 
Exchange states that the Trust reserves the right to change these 
thresholds to the extent deemed appropriate and approved by a Fund's 
board of directors.
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F. Surveillance

    The Exchange represents that trading in the Shares will be subject 
to the Exchange's surveillance procedures for derivative products. The 
Exchange represents that these procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws.\25\
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    \25\ The Exchange represents that the Exchange or the Financial 
Industry Regulatory Authority (``FINRA''), on behalf of the 
Exchange, or both, will communicate as needed regarding trading in 
the Shares, underlying stocks, ETFs, and exchange-listed options 
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 such securities from such markets and other entities. In 
addition, the Exchange may obtain information regarding trading in 
the Shares, underlying stocks, ETFs, and exchange-listed options 
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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    The Exchange represents that the Adviser will make available daily 
to FINRA and the Exchange the portfolio holdings of each Fund in order 
to facilitate the performance of the surveillances. In addition, the 
Exchange states that it has a general policy prohibiting the 
distribution of material, non-public information by its employees.

II. Summary of Comment Letters

    The Commission has received four comment letters on the proposed 
rule change, each of which expresses opposition to the proposed rule 
change.\26\ As of the date of this order instituting proceedings, the 
Exchange has not submitted a response to the comments.
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    \26\ See supra note 6.
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    A. Broms Letter.\27\ The commenter opposes the proposed rule change 
and raises the following concerns: \28\
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    \27\ The Broms Letter is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3254113-162031.pdf.
    \28\ The commenter also generally references concerns that it 
raised in its comment letter related to a similar, previous proposal 
filed by the Exchange to list and trade Managed Portfolio Shares, 
which the Exchange withdrew. See Securities Exchange Act Release No. 
80911 (June 13, 2017), 82 FR 27925 (June 19, 2017) (SR-BatsBZX-2017-
30) (``Prior Proposal''); and letter to Brent J. Fields, Secretary, 
Commission, from Todd J. Broms, Chief Executive Officer, Broms & 
Company LLC, dated July 10, 2017, available at https://www.sec.gov/comments/sr-batsbzx-2017-30/batsbzx201730-1842158-155104.pdf.
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     Selective disclosure of confidential portfolio information 
to AP Representatives for trading on behalf of authorized participants 
violates federal securities law and facilitates illegal insider 
trading;
     The portfolio holdings can be reverse engineered, 
resulting in harm to the Funds' shareholders;

[[Page 24371]]

     The Funds would serve no useful public purpose without 
clear protections against reverse engineering and every other plausible 
means by which confidential portfolio holdings information could be 
used by other market participants to harm the Funds' shareholders; and
     Authorized participants and other market makers cannot 
engage in bona fide arbitrage, and the Shares will not trade 
efficiently without an effective arbitrage mechanism, with particularly 
poor trading performance to be expected during periods of market stress 
and volatility.
    B. Blue Tractor Letter I.\29\ The commenter opposes the proposed 
rule change and expresses concern that the Funds can be reverse 
engineered to determine their composition and trading strategies, and 
that ``predatory traders'' can use such information in order to front 
run the Funds.
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    \29\ The Blue Tractor Letter I is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3287448-162066.pdf.
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    C. Blue Tractor Letter II.\30\ The commenter opposes the proposed 
rule change and raises the following concerns: \31\
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    \30\ The Blue Tractor Letter II is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3294085-162071.pdf.
    \31\ Although the commenter purports to comment on the Notice, 
the comments are more directly related to the Trust's December 4, 
2017, exemptive application. See Fifth Amended and Restated 
Application for an Order under Section 6(c) of the 1940 Act for 
exemptions from various provisions of the 1940 Act and rules 
thereunder (File No. 812-14405), dated December 4, 2017. The 
commenter also references concerns that it raised in its comment 
letters related to the Prior Proposal. See letters to Brent J. 
Fields, Secretary, Commission, from Terence W. Norman, Founder, Blue 
Tractor Group, LLC, dated August 1, 2017, available at https://www.sec.gov/comments/sr-batsbzx-2017-30/batsbzx201730-2161995-157800.pdf and Terence W. Norman, Founder, Blue Tractor Group, LLC, 
dated December 5, 2017, available at https://www.sec.gov/comments/sr-batsbzx-2017-30/batsbzx201730-2755179-161594.pdf.
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     Under the proposal, market participants will not be able 
to engage in bona fide arbitrage or efficient statistical arbitrage to 
keep the price of Shares close to a Fund's NAV; \32\
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    \32\ The commenter also notes that market makers will not be 
able to construct optimized tracking portfolios using the proposed 
fund structure and cites to comment letters that it submitted in 
response to a proposal filed by NYSE Arca, Inc. to list and trade 
Managed Portfolio Shares, which was withdrawn. See Securities 
Exchange Act Release No. 80553 (April 28, 2017), 82 FR 20932 (May 4, 
2017) (SR-NYSEArca-2017-36); and letters to Brent J. Fields, 
Secretary, Commission, from Simon P. Goulet, Co-Founder, Blue 
Tractor Group, LLC, dated November 22, 2017, available at https://www.sec.gov/comments/sr-nyseArca-2017-36/nysearca201736-2735961-161533.pdf and Terence W. Norman, Founder, Blue Tractor Group, LLC, 
dated October 31, 2017, available at https://www.sec.gov/comments/sr-nyseArca-2017-36/nysearca201736-2659706-161420.pdf.
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     Funds can be reverse engineered to determine the 
composition of the portfolio securities, which will make the Funds 
susceptible to front-running;
     The proposed fund structure will result in asymmetric 
disclosure of confidential portfolio information to selected parties;
     Details regarding the VIIV generation process, as well as 
calculation engine verification procedures, are inadequate for market 
participants and market makers;
     One second dissemination of VIIVs in a high frequency 
trading environment is inadequate for authorized participants and 
market makers and not of value to retail investors; and
     Requiring AP Representatives to obfuscate trades for 
creation and redemption purposes in an effort to keep portfolio 
composition confidential will delay execution and increase costs for 
authorized participants.
    D. Blue Tractor Letter III.\33\ The commenter reiterates that the 
Funds will be susceptible to reverse engineering resulting in predatory 
front-running, and will not have efficient primary and secondary market 
trading. The commenter again requests that the Commission include in 
its deliberation the comment letters it submitted on the Prior 
Proposal.
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    \33\ The Blue Tractor Letter III is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3604029-162352.pdf.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2018-010 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Exchange Act \34\ to determine whether the proposed 
rule change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \34\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\35\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of the proposed rule change's consistency with 
Section 6(b)(5) of the Exchange Act, which requires, among other 
things, that the rules of a national securities exchange be ``designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, . . . 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.'' \36\
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    \35\ Id.
    \36\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Exchange 
Act, or the rules and regulations thereunder. Although there do not 
appear to be any issues relevant to approval or disapproval that would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4 under the Exchange 
Act,\37\ any request for an opportunity to make an oral 
presentation.\38\
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    \37\ 17 CFR 240.19b-4.
    \38\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 15, 2018. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 29, 
2018.
    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\39\ the issues raised by the commenters, and any other 
issues raised by the proposed rule change under the Exchange Act. In 
particular, the Commission seeks commenters' views regarding the 
concerns raised with respect to selective disclosure of confidential 
portfolio information,

[[Page 24372]]

namely, whether such disclosure is consistent with the requirement of 
Section 6(b)(5) that the rules of the exchange be designed to prevent 
fraudulent and manipulative acts and practices. The Commission also 
seeks commenters' views regarding the various concerns raised about how 
the Shares may trade in the secondary market, including the calculation 
engine verification and trading halt procedures and the potential for 
poor trading performance during times of market stress and volatility. 
In this regard, the Commission specifically seeks commenters' views on 
whether the proposal is consistent with the maintenance of a fair and 
orderly market.
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    \39\ See supra note 3.
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2018-010 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-2018-010. 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-2018-010 and should be submitted 
by June 15, 2018. Rebuttal comments should be submitted by June 29, 
2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11223 Filed 5-24-18; 8:45 am]
 BILLING CODE 8011-01-P