Document ID: SEC-2017-1678-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2017-10-11T04:00Z

[Federal Register Volume 82, Number 195 (Wednesday, October 11, 2017)]
[Notices]
[Pages 47265-47268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21813]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81815; File No. SR-BatsBZX-2017-58]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To List and Trade Shares of the CBOE 
S&P 500[supreg] Dividend Aristocrats[supreg] Target Income Index ETF 
Under the ETF Series Solutions Trust, Under Rule 14.11(c)(3), Index 
Fund Shares

October 4, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 19, 2017, Bats BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 filed a proposal to list and trade shares of the CBOE 
S&P 500 [supreg] Dividend Aristocrats[supreg] Target Income Index ETF 
under the ETF Series Solutions Trust (the ``Trust''), under Rule 
14.11(c)(3) (``Index Fund Shares'').
    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.com, at the principal office of the Exchange, 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

[[Page 47266]]

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 parts 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 list and trade shares (``Shares'') of CBOE 
S&P 500[supreg] Dividend Aristocrats[supreg] Target Income Index ETF 
(the ``Fund'') under Rule 14.11(c)(3), which governs the listing and 
trading of Index Fund Shares on the Exchange. The Fund will be an 
index-based exchange traded fund (``ETF''). The Fund will track the 
CBOE S&P 500[supreg] Dividend Aristocrats[supreg] Target Income Index 
(the ``Index'').
    The Shares will be offered by the Trust, which was established as a 
Delaware statutory trust on February 9, 2012. The Trust is registered 
with the Commission as an open-end investment company and plans to file 
a registration statement on behalf of the Fund on Form N-1A with the 
Commission.\3\ The Fund's index provider, Chicago Board Options 
Exchange (``CBOE'' or the ``Index Provider''), is not a broker-dealer, 
but is affiliated with a broker-dealer. The Exchange also notes that 
the adviser, CBOE Vest Financial, LLC, is a BZX Affiliate as defined in 
Rule 14.3(e)(1)(A),\4\ but is not an Affiliate Security, as defined in 
Rule 14.11(e)(1)(B),\5\ and is therefore not subject to the additional 
requirements applicable to Affiliate Securities because such definition 
explicitly excludes Index Fund Shares. The 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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    \3\ While the Trust has not yet filed a registration statement 
on behalf of the Fund, the Exchange will not allow the Fund to list 
and trade on the Exchange until the registration statement for the 
Fund is effective.
    \4\ As defined in Rule 14.3(e)(1)(A), the term ``BZX Affiliate'' 
means the Exchange and any entity that directly or indirectly, 
through one or more intermediaries, controls, is controlled by, or 
is under common control with the Exchange, where ``control'' means 
that one entity possesses, directly or indirectly, voting control of 
the other entity either through ownership of capital stock or other 
equity securities or through majority representation on the board of 
directors or other management body of such entity.
    \5\ As defined in Rule 14.3(e)(1)(B), the term ``Affiliate 
Security'' means any security issued by a BZX Affiliate or any 
Exchange-listed option on any such security, with the exception of 
Portfolio Depository Receipts as defined in Rule 14.11(b) and Index 
Fund Shares as defined in Rule 14.11(c).
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    The Exchange is submitting this proposed rule change because the 
Index does not meet all of the ``generic'' listing requirements of Rule 
14.11(c)(3)(A)(i), applicable to the listing of Index Fund Shares based 
upon an index of ``U.S. Component Stocks.'' \6\ Specifically, Rule 
14.11(c)(3)(A)(i) sets forth the requirements to be met by components 
of an index or portfolio of U.S. Component Stocks. Because the Index 
includes derivatives, rather than exclusively holding ``U.S. Component 
Stocks'' as defined in Rule 14.11(c)(1)(D), it does not satisfy the 
requirements of Rule 14.11(c)(3)(A)(i).\7\
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    \6\ As defined in Rule 14.11(c)(1)(D), the term ``U.S. Component 
Stock'' shall mean an equity security that is registered under 
Sections 12(b) or 12(g) of the Act, or an American Depositary 
Receipt, the underlying equity security of which is registered under 
Sections 12(b) or 12(g) of the Act.
    \7\ Rule 14.11(c)(3)(A)(i)(e) provides that all securities in 
the applicable index or portfolio shall be U.S. Component Stocks 
listed on a national securities exchange and shall be NMS Stocks as 
defined in Rule 600 under Regulation NMS of the Act. Each component 
stock of the S&P 500 is a U.S. Component Stock that is listed on a 
national securities exchange and is an NMS Stock. Options are 
excluded from the definition of NMS Stock. The Fund and the Index 
meet all of the requirements of the listing standards for Index Fund 
Shares in Rule 14.11(c)(3), except the requirements in Rule 
14.11(c)(3)(A)(i)(a)-(e), as the Index consists of options on U.S. 
Component Stocks. The S&P 500 consists of U.S. Component Stocks and 
satisfies the requirements of Rule 14.11(c)(3)(A)(i)(a)-(e).
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    The Shares will conform to the initial and continued listing 
criteria under Rule 14.11(c), except that the Index will not meet the 
requirements of Rule 14.11(c)(3)(A)(i)(a)-(e) in that the Index will be 
composed of U.S. Component Stocks and options based on U.S. Component 
Stocks (i.e., FLEX Options and/or standardized options that reference a 
single U.S. Component Stock), rather than exclusively holding U.S. 
Component Stocks.
    The Fund uses a ``passive management'' (or indexing) approach to 
track the total return performance, before fees and expenses, of the 
CBOE S&P 500[supreg] Dividend Aristocrats[supreg] Target Income Index 
(the ``Index'' for purposes of this section). The Index is a rules-
based buy-write index created by the Index Provider, an affiliate of 
the Fund's investment adviser, and designed with the primary goal of 
generating an annualized level of income that is approximately 3.5% 
over the annual dividend yield of the S&P 500 Index and a secondary 
goal of generating price returns that are proportional to the price 
returns of the S&P 500 Index.
    The Index is composed of two parts: (1) An equal-weighted portfolio 
of the stocks contained in the S&P 500 Dividend Aristocrats Index (the 
``Aristocrat Stocks'') that have options that trade on a national 
securities exchange and (2) a rolling series of short call options on 
each of the Aristocrat Stocks (the ``Covered Calls''). The S&P 500 
Dividend Aristocrats Index generally includes companies in the S&P 500 
Index that have increased dividend payments each year for at least 25 
consecutive years and meet certain market capitalization and liquidity 
requirements.
    The Covered Calls are written (sold) \8\ on the last trading day of 
each week with an expiration typically on the Friday of the following 
week and a strike price as close as possible to the closing price of 
the underlying Aristocrat Stock at the time the Covered Call is 
written. The Index employs a ``partial covered call strategy,'' meaning 
that Covered Calls will be written on a notional value of no more than 
20% of the value of the underlying Aristocrat Stock, such that the 
short position in the call option is ``covered'' by a portion of the 
long underlying asset. The exact amount of Covered Calls written is 
based on a calculation designed to result in the Index generating a 
total yield from (i) dividends from the Aristocrat Stocks and (ii) 
premiums from writing Covered Calls that is 3.5% higher annually than 
the yield from dividends of the S&P 500 Index constituents.
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    \8\ The Index is a hypothetical portfolio of options and equity 
securities. As such, the Index cannot actually buy or sell an option 
or equity security, but the Index reflects the value of such 
transactions as if the Index could actually engage in them. The 
Index is described as ``buying'' and ``selling'' options to aid 
investors in understanding how the Fund will act in tracking the 
Index.
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    The equity component of the Index is rebalanced (i.e., weights are 
reset to equal-weighted) quarterly effective after the close of the 
last business day of each January, April, July, and October and 
reconstituted (i.e., Aristocrat Stocks are added and deleted according 
to the Index rules) annually effective after the close of the last 
business day of each January.
    The Fund attempts to invest all, or substantially all, of its 
assets in the component securities that make up the Index. Under Normal 
Market Conditions,\9\ at least 80% of the Fund's total assets 
(exclusive of any collateral held from securities lending) will be

[[Page 47267]]

invested in the component securities of the Index. The Fund will hold 
only U.S. exchange-listed equity securities, FLEX and/or standardized 
exchange-listed options on exchange-listed equity securities, FLEX and/
or standardized exchange-listed options on U.S. equity indexes, and 
cash and cash equivalents.\10\
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    \9\ 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.
    \10\ As defined in Rule 14.11(i)(4)(C)(iii), cash equivalents 
include short-term instruments with maturities of less than three 
months, including: (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 Exchange notes that, while the Fund will be a series of Index 
Fund Shares listed on the Exchange under Rule 14.11(c), the Fund will 
meet the generic listing standards applicable to Managed Fund Shares 
under Rule 14.11(i), which would allow a series of Managed Fund Shares 
with the exact same holdings as the Fund to list on the Exchange 
without requiring the submission and SEC approval of a rule filing 
pursuant to Section 19(b)(2) of the Act. While Index Fund Shares track 
the value of an index and Managed Fund Shares are based on an actively 
managed portfolio and are not generally designed to track an underlying 
reference asset, the Exchange believes that there are no substantive 
issues that are unique to Index Fund Shares that were not considered in 
the Commission's approval of the generic listing rules for Managed Fund 
Shares.\11\ As such, the Exchange believes that this proposal similarly 
does not raise any substantive issues that were not otherwise addressed 
in the Commission's approval of the generic listing rules for Managed 
Fund Shares and that the Commission should act expeditiously to approve 
this proposal.
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    \11\ The Commission originally 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) and subsequently 
approved generic listing standards for Managed Fund Shares under 
Rule 14.11(i) in Securities Exchange Act Release No. 78396 (July 22, 
2016), 81 FR 49698 (July 28, 2016) (SR-BATS-2015-100).
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    In addition, the Exchange represents that, except as described 
above, the Fund will meet each of the initial and continued listing 
criteria in BZX Rule 14.11(c) with the exception Rule 
14.11(c)(3)(A)(i), applicable to the listing of Index Fund Shares based 
upon an index of ``U.S. Component Stocks.'' The Trust is required to 
comply with Rule 10A-3 under the Act for the initial and continued 
listing of the Shares of the Fund. In addition, the Exchange represents 
that the Shares of the Fund will comply with all other requirements 
applicable to Index Fund Shares including, but not limited to, 
requirements relating to the dissemination of key information such as 
the Disclosed Portfolio, Net Asset Value, and the Intraday Indicative 
Value, rules governing the trading of equity securities, trading hours, 
trading halts, surveillance, and the information circular, as set forth 
in Exchange rules applicable to Index Fund Shares and the orders 
approving such rules. Moreover, all of the options contracts held by 
the Fund 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.\12\ All statements and representations made in this filing 
regarding the index composition, the description of the portfolio or 
reference assets, limitations on portfolio holdings or reference 
assets, dissemination and availability of index, reference asset, and 
intraday indicative values, and the applicability of Exchange rules 
specified in this filing shall constitute continued listing 
requirements for the Fund. The issuer has represented to the Exchange 
that it will advise the Exchange of any failure by the Fund or the 
Shares to comply with the continued listing requirements, and, pursuant 
to its obligations under Section 19(g)(1) of the Act, the Exchange will 
surveil for compliance with the continued listing requirements. If the 
Fund or the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12.
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    \12\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange notes that not all 
components of the Disclosed Portfolio for the Fund may trade on 
markets that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \13\ in general and Section 6(b)(5) of the Act \14\ 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.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change 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 in that the Shares of the 
Fund will meet each of the initial and continued listing criteria in 
BZX Rule 14.11(c) with the exception Rule 14.11(c)(3)(A)(i), applicable 
to the listing of Index Fund Shares based upon an index of ``U.S. 
Component Stocks.'' Specifically, Rule 14.11(c)(3)(A)(i) sets forth the 
requirements to be met by components of an index or portfolio of U.S. 
Component Stocks. Because the Index contains options, rather than 
exclusively containing ``U.S. Component Stocks'' as defined in Rule 
14.11(c)(1)(D), the Index does not satisfy the requirements of Rule 
14.11(c)(3)(A)(i),\15\ however, the generic listing rules for Managed 
Fund Shares do allow for a portfolio to hold listed derivatives. The 
Exchange notes that, while the Fund will be a series of Index Fund 
Shares listed on the Exchange under Rule 14.11(c), the Fund will comply 
with the generic listing standards applicable to Managed Fund Shares 
under Rule 14.11(i) that would allow a series of Managed Fund Shares 
with the exact same holdings as are included in both the Index and the 
Fund to list on the Exchange without requiring the submission and SEC 
approval of a rule filing pursuant to Section 19(b)(2) of the Act. 
While Index Fund Shares track the value of an index and Managed Fund 
Shares are based on an actively managed portfolio and are not generally 
designed to track an underlying reference asset, the Exchange believes 
that there are no substantive issues that are unique to Index Fund 
Shares that were not considered in the Commission's approval of the 
generic listing rules for

[[Page 47268]]

Managed Fund Shares. As such, the Exchange believes that this proposal 
similarly does not raise any substantive issues that were not otherwise 
addressed in the Commission's approval of the generic listing rules for 
Managed Fund Shares and that the Commission should act expeditiously to 
approve this proposal.
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    \15\ Rule 14.11(c)(3)(A)(i)(e) provides that all securities in 
the applicable index or portfolio shall be U.S. Component Stocks 
listed on a national securities exchange and shall be NMS Stocks as 
defined in Rule 600 under Regulation NMS of the Act.
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    The Exchange also represents that, except as described above, the 
Fund will satisfy, on an initial and continued listing basis, all of 
the generic listing standards under BZX Rule 14.11(c)(3)(A)(i) and all 
other applicable requirements for Index Fund Shares under Rule 
14.11(c). The Trust is required to comply with Rule 10A-3 under the Act 
for the initial and continued listing of the Shares of the Fund. In 
addition, the Exchange represents that the Shares of the Fund will 
comply with all other requirements applicable to Index Fund Shares 
including, but not limited to, requirements relating to the 
dissemination of key information such as the Disclosed Portfolio, Net 
Asset Value, and the Intraday Indicative Value, rules governing the 
trading of equity securities, trading hours, trading halts, 
surveillance, and the information circular, as set forth in Exchange 
rules applicable to Index Fund Shares and the orders approving such 
rules. Moreover, all of the options contracts held by the Fund 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.\16\ All statements and representations 
made in this filing regarding the index composition, the description of 
the portfolio or reference assets, limitations on portfolio holdings or 
reference assets, dissemination and availability of index, reference 
asset, and intraday indicative values, and the applicability of 
Exchange rules specified in this filing shall constitute continued 
listing requirements for the Fund. The issuer has represented to the 
Exchange that it will advise the Exchange of any failure by the Fund or 
the Shares to comply with the continued listing requirements, and, 
pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will surveil for compliance with the continued listing 
requirements. If the Fund or the Shares are not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under Exchange Rule 14.12.
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    \16\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange notes that not all 
components of the Disclosed Portfolio for the Fund may trade on 
markets that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
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    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. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional type of Index Fund Shares that will enhance competition 
among market participants, 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 self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the 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 proposal 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 No. SR-BatsBZX-2017-58 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 No. SR-BatsBZX-2017-58. 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 such filing will also 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 No. SR-BatsBZX-2017-58 and should be 
submitted on or before November 1, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21813 Filed 10-10-17; 8:45 am]
BILLING CODE 8011-01-P