Document ID: SEC-2016-1699-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2016-09-20T04:00Z

[Federal Register Volume 81, Number 182 (Tuesday, September 20, 2016)]
[Notices]
[Pages 64560-64563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22624]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78847; File No. SR-BatsBZX-2016-34]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 1, and Order Granting Accelerated Approval of a 
Proposed Rule Change, as Modified by Amendments No. 1 and No. 2, to BZX 
Rule 14.1(i), Managed Fund Shares, To List and Trade Shares of the 
ProShares Crude Oil Strategy ETF

September 15, 2016.

I. Introduction

    On July 1, 2016, Bats 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 list and trade shares (``Shares'') of the ProShares K-1 Free 
Crude Oil Strategy ETF (``Fund''), a series of ProShares Trust 
(``Trust''), under Rule 14.11(i) (``Managed Fund Shares''). The 
proposed rule change was published for comment in the Federal Register 
on July 21, 2016.\3\ The Commission received no comments on the 
proposed rule change. On August 19, 2016, the Exchange filed Amendment 
No. 1 to the proposed rule change, which amended and replaced the 
original proposal in its entirety.\4\ On August 23, 2016, pursuant to 
Section 19(b)(2) of the Exchange Act,\5\ 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.\6\ On 
September 15, 2016, the Exchange filed Amendment No. 2 to the proposed 
rule change.\7\ No comments have been received regarding the proposed 
rule change. The Commission is publishing this notice to solicit 
comments on Amendment No. 1 from interested persons, and is approving 
the proposed rule change, as modified by Amendments No. 1 and No. 2, on 
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78346 (July 15, 
2016), 81 FR 47475.
    \4\ In Amendment No. 1, the Exchange clarified certain details 
regarding the holdings of the Fund, clarified a point regarding 
surveillance over futures contracts held by the Fund, and added 
details about the Fund.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 78643, 81 FR 59253 
(August 29, 2016). The Commission designated October 19, 2016, as 
the date by which the Commission shall either approve or disapprove, 
or institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ In Amendment No. 2, the Exchange represented that: (1) All 
statements and representations made in the filing regarding the 
description of the portfolio, limitations on portfolio holdings or 
reference assets, or the applicability of Exchange rules and 
surveillance procedures constitute continued listing requirements 
for listing the Shares on the Exchange; (2) the issuer has 
represented to the Exchange that it will advise the Exchange of any 
failure by the Fund to comply with the continued listing 
requirements; (3) pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with 
the continued listing requirements; and (4) if the Fund is not in 
compliance with the applicable listing requirements, the Exchange 
will commence delisting procedures under BZX Rule 14.12. Amendments 
No. 1 and No. 2 are available at: https://www.sec.gov/comments/sr-batsbzx-2016-34/batsbzx201634.shtml. Because Amendment No. 2 does 
not materially alter the substance of the proposed rule change or 
raise unique or novel regulatory issues, it is not subject to notice 
and comment.
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II. The Exchange's Description of the Proposed Rule Change 8
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    \8\ The Commission notes that additional information regarding 
the Trust, the Fund, its investments, and the Shares, including 
investment strategies, risks, creation and redemption procedures, 
fees, portfolio holdings disclosure policies, calculation of net 
asset value (``NAV''), distributions, and taxes, among other things, 
can be found in the Amendment No. 1 and the Registration Statement, 
as applicable. See Amendment No. 1, supra note 4, and Registration 
Statement, infra note 10.
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    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange.\9\ The Fund will be an actively managed fund that 
seeks to provide exposure to the West Texas Intermediate (``WTI'') 
crude oil futures markets. The Fund's strategy seeks to improve 
performance over index based strategies by actively managing the 
rolling of WTI crude oil futures contracts.
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    \9\ The Commission approved BZX Rule 14.11(i) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
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    The Shares will be offered by the Trust. According to the Exchange, 
the Trust is registered with the Commission as an open-end investment 
company.\10\ ProShare Advisors LLC is the investment adviser 
(``Adviser'') \11\ to the

[[Page 64561]]

Fund and to the Subsidiary.\12\ JPMorgan Chase Bank, National 
Association is the administrator, custodian, fund account agent, index 
receipt agent, and transfer agent for the Trust. SEI Investments 
Distribution Co. serves as the distributor for the Trust.
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    \10\ The Exchange states that the Trust has filed a registration 
statement on behalf of the Fund with the Commission. See 
Registration Statement on Form N-1A for the Trust, dated May 3, 2016 
(File Nos. 333-89822 and 811-21114) (``Registration Statement''). 
The Exchange states that the Commission has issued an order granting 
certain exemptive relief to the Trust under the Investment Company 
Act of 1940 (``1940 Act''). See Investment Company Act Release No. 
30562 (June 18, 2013) (File No. 812-14041).
    \11\ The Exchange states that the Adviser has registered as a 
Commodity Pool Operator and will become a member of the National 
Futures Association (``NFA''). The Exchange also states that the 
Fund and its wholly-owned subsidiary (``Subsidiary'') will be 
subject to regulation by the Commodity Futures Trading Commission 
and NFA, as well as to additional disclosure, reporting, and 
recordkeeping rules imposed upon commodity pool operators.
    \12\ The Exchange states that the Adviser is not a registered 
broker-dealer, but is currently affiliated with a broker-dealer, 
and, in the future may be affiliated with other broker-dealers. The 
Adviser has implemented and will maintain a fire wall with respect 
to its broker-dealer affiliate regarding access to information 
concerning the composition and/or changes to the Fund's portfolio. 
The Adviser personnel who make decisions regarding the Fund's 
portfolio are subject to procedures designed to prevent the use and 
dissemination of material nonpublic information regarding the Fund's 
portfolio. In the event that (a) the Adviser becomes a broker-dealer 
or newly affiliated with a broker-dealer, or (b) any new adviser or 
sub-adviser is a broker-dealer or becomes affiliated with a broker-
dealer, it will implement a fire wall with respect to its relevant 
personnel or such broker-dealer affiliate, as applicable, regarding 
access to information concerning the composition and/or changes to 
the portfolio, and will be subject to procedures designed to prevent 
the use and dissemination of material non-public information 
regarding such portfolio.
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    According to the Exchange, the Fund includes only those WTI crude 
oil contracts traded on the New York Mercantile Exchange and ICE 
Futures Europe (``WTI Crude Oil Futures''). The Fund's strategy seeks 
to improve performance over index based strategies by actively managing 
the rolling of WTI Crude Oil Futures (e.g., selling a futures contract 
as it nears its expiration date and replacing it with a new futures 
contract that has a later expiration date). The Fund generally selects 
between front, second, and third month WTI Crude Oil Futures, based on 
an analysis of the liquidity and cost surrounding such positions.
    The Fund generally will not invest directly in WTI Crude Oil 
Futures. The Fund expects to gain exposure to these investments by 
investing a portion of its assets in the Subsidiary.\13\ The Fund will 
generally invest up to 25% of its total assets in the Subsidiary and, 
through such investment, generally remain fully exposed to WTI Crude 
Oil Futures, even during times of adverse market conditions. To achieve 
its investment objective, the Fund will, under Normal Market 
Conditions,\14\ invest in: (i) WTI Crude Oil Futures; and (ii) Cash 
Assets (which are used to collateralize the WTI Crude Oil Futures), 
which will be held in cash or cash equivalents such as U.S. Treasury 
securities or other high credit quality short-term fixed-income or 
similar securities (including US agency securities, shares of money 
market funds, certain variable rate-demand notes, and repurchase 
agreements collateralized by government securities).
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    \13\ The Subsidiary is not registered under the 1940 Act and is 
not directly subject to its investor protections, except as noted in 
the Registration Statement. However, the Subsidiary is wholly-owned 
and controlled by the Fund and is advised by the Adviser. Therefore, 
because of the Fund's ownership and control of the Subsidiary, the 
Subsidiary would not take action contrary to the interests of the 
Fund or its shareholders. The Fund's Board of Trustees has oversight 
responsibility for the investment activities of the Fund, including 
its expected investment in the Subsidiary, and the Fund's role as 
the sole shareholder of the Subsidiary. The Adviser receives no 
additional compensation for managing the assets of the Subsidiary. 
The Subsidiary will also enter into separate contracts for the 
provision of custody, transfer agency, and accounting agent services 
with the same or with affiliates of the same service providers that 
provide those services to the Fund.
    \14\ As defined in Rule 14.11(i)(3)(E), 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.
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    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.\15\
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    \15\ 26 U.S.C. 851.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the Exchange's 
proposal to list and trade the Shares is consistent with the Exchange 
Act and the rules and regulations thereunder applicable to a national 
securities exchange.\16\ In particular, the Commission finds that the 
proposed rule change, as modified by Amendments No. 1 and No. 2, is 
consistent with Section 6(b)(5) of the Exchange Act,\17\ which 
requires, among other things, that the Exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \16\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposal to list and trade the 
Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of 
the Exchange Act,\18\ which sets forth Congress's finding that it is in 
the public interest and appropriate for the protection of investors and 
the maintenance of fair and orderly markets to assure the availability 
to brokers, dealers, and investors of information with respect to 
quotations for, and transactions in, securities.
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    \18\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    According to the Exchange, quotation and last sale information for 
the Shares will be available on the facilities of the Consolidated Tape 
Association (``CTA''), and the previous day's closing price and trading 
volume information for the Shares will be generally available daily in 
the print and online financial press. Also, daily trading volume 
information for the Fund will be available in the financial section of 
newspapers, through subscription services such as Bloomberg, Thomson 
Reuters, and International Data Corporation, which can be accessed by 
authorized participants and other investors, as well as through other 
electronic services, including major public Web sites. Additionally, 
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.
    In addition, the Intraday Indicative Value \19\ (as defined in BZX 
Rule 14.11(i)(3)(C)) will be updated and widely disseminated by one or 
more major market data vendors at least every 15 seconds during the 
Exchange's Regular Trading Hours.\20\ On each business day, before 
commencement of trading in the Shares during Regular Trading Hours on 
the Exchange, the Fund will disclose on its Web site the identities and 
quantities of the portfolio WTI Crude Oil Futures and other assets 
(``Disclosed Portfolio'') \21\ that will form

[[Page 64562]]

the basis for the Fund's calculation of NAV at the end of the business 
day. The Web site for the Fund will also include a form of the 
prospectus for the Fund and additional data relating to NAV and other 
applicable quantitative information.
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    \19\ According to the Exchange, the Intraday Indicative Value 
will be based upon the current value for the components of the 
Disclosed Portfolio (as defined below). The Exchange states that 
quotations of certain of the Fund's holdings may not be updated for 
purposes of calculating Intraday Indicative Value during U.S. 
trading hours where the market on which the underlying asset is 
traded settles prior to the end of the Exchange's Regular Trading 
Hours. The Exchange's Regular Trading Hours are 9:30 a.m. to 4:00 
p.m. Eastern Time.
    \20\ The Exchange notes that several major market data vendors 
display or make widely available Intraday Indicative Values 
published via the CTA or other data feeds.
    \21\ As defined in BZX Rule 14.11(i)(3)(B), the Disclosed 
Portfolio will include for each portfolio holding of the Fund and 
the Subsidiary, as applicable: Ticker symbol or other identifier, a 
description of the holding, identity of the asset upon which the 
derivative is based, the quantity of each security or other asset 
held as measured by select metrics, maturity date, coupon rate, 
effective date, market value, and percentage weight of the holding 
in the portfolio. The Web site and information will be publicly 
available at no charge.
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    Intraday price quotations on cash equivalents of the type held by 
the Fund, with the exception of money market mutual funds, are 
available from major broker-dealer firms and from third parties, which 
may provide prices free with a time delay or ``live'' with a paid fee. 
For WTI Crude Oil Futures, such intraday information is available 
directly from the applicable listing exchange. Price information for 
money market fund shares will be available through issuer Web sites and 
publicly available quotation services such as Bloomberg, Markit, and 
Thomson Reuters.
    The Commission further believes that the proposal to list and trade 
the Shares is reasonably designed to promote fair disclosure of 
information that may be necessary to price the Shares appropriately and 
to prevent trading when a reasonable degree of transparency cannot be 
assured. The Exchange will obtain a representation from the issuer of 
the Shares that the NAV will be calculated daily and that the NAV and 
the Disclosed Portfolio will be made available to all market 
participants at the same time. Further, trading in the Shares will be 
subject to BZX Rules 11.18 and 14.11(i)(4)(B)(iv), which set forth 
circumstances under which trading in Shares of the Fund may be halted. 
Trading may be halted because of market conditions or for reasons that, 
in the view of the Exchange, make trading in the Shares inadvisable. 
These may include: (1) The extent to which trading is not occurring in 
the WTI Crude Oil Futures and other assets composing the Disclosed 
Portfolio of the Fund; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present.
    The Reporting Authority that provides the Disclosed 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 portfolio.\22\ The Exchange 
represents that it prohibits the distribution of material, non-public 
information by its employees. The Exchange also states that the Adviser 
is not a registered broker-dealer, but is affiliated with a broker-
dealer and has implemented a ``fire wall'' with respect to such broker-
dealer regarding access to information concerning the composition and/
or changes to the Fund's portfolio.\23\
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    \22\ See BZX Rule 14.11(i)(4)(B)(ii)(b).
    \23\ The Exchange represents that an investment adviser to an 
open-end fund is required to be registered under the Investment 
Advisers Act of 1940.
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    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. The Exchange represents that 
trading of the Shares through the Exchange will be subject to the 
Exchange's surveillance procedures for derivative products, including 
Managed Fund Shares, and that these surveillance procedures are 
adequate to properly monitor the trading of the Shares on the Exchange 
during all trading sessions and to deter and detect violations of 
Exchange rules and the applicable federal securities laws.
    The Exchange represents that all statements and representations 
made in the filing regarding (a) the description of the portfolio, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules and surveillance procedures constitute 
continued listing requirements for listing the Shares on the 
Exchange.\24\ In addition, the issuer has represented to the Exchange 
that it will advise the Exchange of any failure by the Fund to comply 
with the continued listing requirements, and that, 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 
the Fund is not in compliance with the applicable listing requirements, 
the Exchange will commence delisting procedures under BZX Rule 
14.12.\25\
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    \24\ See Amendment No. 2, supra note 7.
    \25\ See id.
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    The Commission notes that the Fund and the Shares must comply with 
the requirements of BZX Rule 14.11(i) to be initially and continuously 
listed and traded on the Exchange. The Exchange represents that it 
deems the Shares to be equity securities, thus rendering trading in the 
Shares subject to the Exchange's existing rules governing the trading 
of equity securities. In support of this proposal, the Exchange has 
made the following representations:
    (1) The Shares will be subject to BZX Rule 14.11(i), which sets 
forth the initial and continued listing criteria applicable to Managed 
Fund Shares.
    (2) The Exchange has appropriate rules to facilitate transactions 
in the Shares during all trading sessions.\26\
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    \26\ See Amendment No. 1, supra note 4, at 19.
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    (3) The Exchange may obtain information regarding trading in the 
Shares and the underlying futures via the Intermarket Surveillance 
Group (``ISG'') from other exchanges who are members or affiliate 
members of the ISG or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement. In addition, the Exchange 
is able to access, as needed, trade information for certain fixed 
income instruments reported to FINRA's Trade Reporting and Compliance 
Engine.\27\
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    \27\ See id. at 20.
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    (4) All of the futures contracts in the Disclosed Portfolio for the 
Fund will trade on markets that are a member or affiliate member of ISG 
or on markets with which the Exchange has in place a comprehensive 
surveillance sharing agreement.\28\
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    \28\ See id. at 20, n.17.
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    (5) Prior to the commencement of trading, the Exchange will inform 
its members in an Information Circular of the special characteristics 
and risks associated with trading the Shares. Specifically, the 
Information Circular will discuss the following: (a) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (b) Exchange Rule 3.7, which imposes 
suitability obligations on Exchange members with respect to 
recommending transactions in the Shares to customers; (c) how 
information regarding the Intraday Indicative Value is disseminated; 
(d) the risks involved in trading the Shares during the Pre-Opening and 
After Hours Trading Sessions when an updated Intraday Indicative Value 
will not be calculated or publicly disseminated; (e) the requirement 
that members deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction; 
and (f) trading information.
    (6) For initial and continued listing, the Fund must be in 
compliance with Rule 10A-3 under the Exchange Act.\29\
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    \29\ See 17 CFR 240.10A-3.
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    (7) The Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment) deemed 
illiquid by the Adviser under the 1940 Act. The 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

[[Page 64563]]

consider taking appropriate steps 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 held in illiquid assets.
    (8) A minimum of 100,000 Shares will be outstanding at the 
commencement of trading on the Exchange.
    This approval order is based on all of the Exchange's 
representations, including those set forth above and in the proposed 
rule change, as modified by Amendments No. 1 and No. 2. For the 
foregoing reasons, the Commission finds that the proposed rule change, 
as modified by Amendments No. 1 and No. 2, is consistent with Section 
6(b)(5) of the Exchange Act \30\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \30\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 is consistent with the 
Exchange 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-BatsBZX-2016-34 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsBZX-2016-34. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsBZX-2016-34 and should 
be submitted on or before October 11, 2016.

V. Accelerated Approval of Proposed Rule Change as Modified by 
Amendments No. 1 and No. 2

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendments No. 1 and No. 2, prior to the 
thirtieth day after the date of publication of notice of the filing of 
Amendment No. 1 in the Federal Register. Amendment No. 1 supplements 
the proposed rule change by clarifying the Fund's holdings, 
surveillance, and general Fund details. Accordingly, the Commission 
finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,\31\ 
to approve the proposed rule change, as modified by Amendments No. 1 
and No. 2, on an accelerated basis.
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    \31\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\32\ that the proposed rule change (SR-BatsBZX-2016-34), 
as modified by Amendments No. 1 and No. 2, be, and it hereby is, 
approved on an accelerated basis.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-22624 Filed 9-19-16; 8:45 am]
BILLING CODE 8011-01-P