Document ID: SEC-2017-0602-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Bats BZX Exchange, Inc.
Posted Date: 2017-04-13T04:00Z

[Federal Register Volume 82, Number 70 (Thursday, April 13, 2017)]
[Notices]
[Pages 17913-17916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07456]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80399; File No. SR-BatsBZX-2017-10]

Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendments No. 1 and 
No. 2, To List and Trade Shares of the iShares iBonds Dec 2024 AMT-Free 
Muni Bond ETF, iShares iBonds Dec 2025 AMT-Free Muni Bond ETF, and 
iShares iBonds Dec 2026 AMT-Free Muni Bond ETF of the iShares U.S. ETF 
Trust Under Exchange Rule 14.11(i)

April 7, 2017.

I. Introduction

    On January 31, 2017, Bats BZX Exchange, Inc. (``Exchange'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934 
(``Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule change to 
list and trade shares of the iShares iBonds Dec 2024 AMT-Free Muni Bond 
ETF, iShares iBonds Dec 2025 AMT-Free Muni Bond ETF, and iShares iBonds 
Dec 2026 AMT-Free Muni Bond ETF (each a ``Fund'' or, collectively, the 
``Funds'') of the iShares U.S. ETF Trust (``Trust'') under Exchange 
Rule 14.11(i).\4\ The proposed rule change was published for comment in 
the Federal Register on February 21, 2017.\5\ On March 28, 2017, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced the original proposal in its entirety, and on March 29, 2017, 
the Exchange filed Amendment No. 2 to the proposed rule change.\6\ The 
Commission has received no comment letters on the proposed rule change. 
The Commission is approving the proposed rule change, as modified by 
Amendments No. 1 and No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ The shares of the Funds are referred to herein as the 
``Shares.''
    \5\ See Securities Exchange Act Release No. 80036 (February 14, 
2017), 82 FR 11278.
    \6\ The amendments to the proposed rule change are available at: 
https://www.sec.gov/comments/sr-batsbzx-2017-10/batsbzx201710.htm. 
In Amendment No. 1, the Exchange clarified the operation of the 
portfolio diversification requirements and its description of how 
the Funds' net asset values will be calculated. In Amendment No. 2, 
the Exchange affirmed that: (1) All statements and representations 
made in the proposed rule change 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 shall 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 a 
Fund to comply with the continued listing requirements; (3) the 
Exchange will surveil for compliance with the continued listing 
requirements; and (4) if a Fund is not in compliance with the 
applicable listing requirements, the Exchange will commence 
delisting procedures under Exchange Rule 14.12. Each of the 
amendments is a technical amendment, and none of them is subject to 
notice and comment.
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II. The Exchange's Description of the Proposed Rule Change \7\
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    \7\ The Commission notes that additional information regarding 
the Trust, the Funds, their 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 Amendment No. 1 and the Registration Statement, as 
applicable. See Amendment No. 1, supra note 6, and Registration 
Statement, infra note 9.
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    The Exchange proposes to list and trade the Shares under Exchange 
Rule 14.11(i), which governs the listing and trading of Managed Fund 
Shares on the Exchange. The Exchange deems the Shares to be equity 
securities, thus rendering trading in the Shares subject to the 
Exchange's existing rules governing the trading of equity 
securities.\8\
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    \8\ See Amendment No. 1, supra note 6, at 39.
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    The Shares will be offered by the Trust,\9\ which is established as 
a

[[Page 17914]]

Delaware statutory trust. BlackRock Fund Advisors is the investment 
adviser (``BFA'' or ``Adviser'') to the Funds.\10\ State Street Bank 
and Trust Company is the administrator, custodian, and transfer agent 
for the Trust. BlackRock Investments, LLC serves as the distributor for 
the Trust.
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    \9\ The Trust is registered with the Commission as an open-end 
investment company and has filed a registration statement on behalf 
of the Funds on Form N-1A (``Registration Statement'') with the 
Commission. See Registration Statement on Form N-1A for the Trust, 
dated November 2, 2015 (File Nos. 333-179904 and 811-22649). See 
also Investment Company Act Release No. 29571 (January 24, 2011) 
(File No. 812-13601).
    \10\ The Exchange represents that the Adviser is not registered 
as a broker-dealer. The Adviser is affiliated with multiple broker-
dealers and has implemented fire walls with respect to such 
respective broker-dealer affiliate(s) regarding access to 
information concerning the composition of and/or changes to the 
portfolio. In the event (a) the Adviser becomes newly affiliated 
with a broker-dealer or registers as a broker-dealer, or (b) any new 
adviser or sub-adviser is a registered broker-dealer or becomes 
affiliated with a broker-dealer, it will implement a fire wall with 
respect to its relevant personnel and/or such broker-dealer 
affiliate, if applicable, regarding access to information concerning 
the composition of, 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. See 
Amendment No. 1, supra note 6, at 6; see also Exchange Rule 
14.11(i)(7).
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    According to the Exchange, the investment objective of each Fund 
will be to maximize tax-free current income and terminate on or around 
December 2024, December 2025 or December 2026, as applicable.

A. The Funds' Principal Investments

    Under normal circumstances,\11\ each Fund will invest at least 80% 
of its net assets in U.S.-dollar denominated investment-grade fixed-
rate Municipal Securities,\12\ as defined below, such that the interest 
on each security is exempt from U.S. federal income taxes and the 
federal alternative minimum tax (``AMT''). The Municipal Securities in 
which the Funds will invest are fixed and variable rate securities 
issued in the United States by U.S. states and territories, 
municipalities and other political subdivisions, agencies, authorities, 
and instrumentalities of states and multi-state agencies and 
authorities and will consist of only the following instruments: general 
obligation bonds, limited obligation bonds (or revenue bonds), 
municipal notes, municipal commercial paper, tender option bonds, 
variable rate demand obligations (``VRDOs''), municipal lease 
obligations, stripped securities, structured securities,\13\ when 
issued securities, zero coupon securities, and exchange-traded and non-
exchange-traded investment companies that invest in such Municipal 
Securities.
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    \11\ The term ``under normal circumstances'' includes, but is 
not limited to, the absence of adverse market, economic, political, 
or other conditions, including extreme volatility or trading halts 
in the financial markets; operational issues causing dissemination 
of inaccurate market information; or force majeure type events such 
as systems failure, natural or man-made disaster, act of God, armed 
conflict, act of terrorism, riot, or labor disruption, or any 
similar intervening circumstance.
    \12\ Investment-grade securities are rated a minimum of BBB- or 
higher by Standard & Poor's Ratings Services and/or Fitch, or Baa3 
or higher by Moody's, or if unrated, determined by the Adviser to be 
of equivalent quality. According to the Adviser, BFA may determine 
that unrated securities are of ``equivalent quality'' based on such 
credit quality factors that it deems appropriate, which may include 
among other things, performing an analysis similar, to the extent 
possible, to that performed by a nationally recognized statistical 
ratings organization when rating similar securities and issuers. In 
making such a determination, BFA may consider internal analyses and 
risk ratings, third party research and analysis, and other sources 
of information, as deemed appropriate by the Adviser. See Amendment 
No. 1, supra note 6, at 8, n.9.
    \13\ Structured securities, when combined with those instruments 
held as part of the other portfolio holdings described below, will 
not exceed 20% of the Fund's net assets. See id. at 9, n.19.
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    In each Fund's last year of operation, as the bonds held by the 
Fund mature, the proceeds will not be reinvested in bonds but instead 
will be held in cash and cash equivalents, including, without 
limitation, shares of affiliated money market funds, AMT-free tax-
exempt municipal notes, VRDOs, tender option bonds and municipal 
commercial paper. In or around December 2024, December 2025, or 
December 2026, as applicable, the Fund will wind up and terminate, and 
its net assets will be distributed to then current shareholders.

B. Other Portfolio Holdings of the Funds

    Under normal circumstances each Fund may also hold, to a limited 
extent (less than 20% of the Fund's net assets), interest rate futures, 
interest rate options, interest rate swaps, and swaps on Municipal 
Securities indexes.\14\
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    \14\ The derivatives will be centrally cleared and they will be 
collateralized. See Amendment No. 1, supra note 6, at 12, n.26.
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    A Fund may also enter into repurchase and reverse repurchase 
agreements for Municipal Securities. A Fund may also invest in short-
term instruments, which includes exchange-traded and non-exchange-
traded investment companies that invest in money market instruments.

C. The Funds' Investment Restrictions

    Each Fund will hold a minimum of 40 different Municipal Securities 
diversified among issuers in at least 8 different states with no more 
than 30% of the Fund's assets comprised of Municipal Bonds that provide 
exposure to any single state (collectively, ``Minimum Requirement 1''). 
Each Fund will hold a minimum of 75 different Municipal Securities when 
at least four creation units are outstanding (``Trigger Number 1A''). 
Each Fund will hold a minimum of 100 different Municipal Securities 
diversified among issuers in at least 20 different states when at least 
eight creation units are outstanding (``Trigger Number 1B''). No single 
Municipal Security held by any Fund will exceed 4% of the weight of the 
Fund's portfolio and no single issuer of Municipal Securities will 
account for more than 10% of the weight of any Fund's portfolio 
(collectively, ``Minimum Requirement 2''). Each Fund will hold 
Municipal Securities of at least 20 non-affiliated issuers (``Minimum 
Requirement 3''). Each Fund will hold Municipal Securities of at least 
30 non-affiliated issuers when at least four creation units are 
outstanding (``Trigger Number 2'').\15\ To the extent that a Fund at 
one point has sufficient creation units outstanding necessary to 
trigger a diversity requirement laid out above (each of Trigger Numbers 
1A, 1B and 2, a ``Trigger Number''), but subsequently has fewer 
creation units outstanding than the applicable Trigger Number, the Fund 
may no longer comply with the applicable diversity requirement. 
However, while a Fund may no longer comply with the diversity 
requirements applicable to the previously applicable Trigger Number, 
the Fund will continue to comply with any diversity requirement for 
which the number of creation units outstanding continues to exceed the 
Trigger Number (i.e., Trigger Number 1A), as well as each of Minimum 
Requirements 1, 2 and 3.\16\
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    \15\ The Exchange clarifies that each state and each separate 
political subdivision, agency, authority, or instrumentality of such 
state, each multi-state agency or authority, and each guarantor, if 
any, will be treated as separate issuers of Municipal Securities. 
See Amendment No. 1, supra note 6, at 11, n.23; at 18, n.47; and at 
26, n.71.
    \16\ Id. at 11, n.24; at 18, n.48; and at 26, n.72.
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    Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), as 
deemed illiquid by the Adviser. 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

[[Page 17915]]

Fund's net assets are held in illiquid assets.\17\
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    \17\ Id. at 13-14.
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    Each Fund may also invest up to 20% of its net assets in Municipal 
Securities that pay interest that is subject to the AMT.\18\
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    \18\ Id. at 14.
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III. Discussion and Commission's Findings

    The Commission has carefully reviewed the proposed rule change and 
finds that it is consistent with the requirements of Section 6 of the 
Act \19\ and the rules and regulations thereunder applicable to a 
national securities exchange.\20\ In particular, the Commission finds 
that the proposed rule change is consistent with Section 6(b)(5) of the 
Act,\21\ 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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    \19\ 15 U.S.C. 78f.
    \20\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \21\ 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 Act,\22\ which sets forth the finding of Congress 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. The Exchange provides 
that quotation and last-sale information for the Shares will be 
available on the facilities of the Consolidated Tape Association 
(``CTA''). In addition, for each Fund, an Intraday Indicative Value 
will be calculated and disseminated by one or more major market data 
vendors at least every 15 seconds during the Exchange's Regular Trading 
Hours.\23\
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    \22\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \23\ See Exchange Rule 14.11(i)(4)(B)(i). ``Regular Trading 
Hours'' means the time between 9:30 a.m. and 4:00 p.m. Eastern Time. 
See Exchange Rule 1.5(w). The Intraday Indicative Value will be 
based upon the current value for the components of the Disclosed 
Portfolio. See Exchange Rule 14.11(i)(3)(C).
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    According to the Exchange, each Fund's NAV will be determined as of 
the close of regular trading on the New York Stock Exchange (``NYSE'') 
(generally 4:00 p.m., E.T.) on each day the NYSE is open for trading. 
Information regarding market price and volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services. The previous 
day's closing price and trading volume information for the Shares will 
be published daily in the financial section of newspapers.
    The Exchange represents that intraday, executable price quotations 
on assets held by each Fund are available from major broker-dealer 
firms, and for exchange-traded assets such intraday information is 
available directly from the applicable listing exchange. All such 
intraday price information is available through subscription services, 
such as Bloomberg, Thomson Reuters and International Data Corporation, 
which can be accessed by authorized participants and other investors. 
Pricing information for repurchase agreements and securities not listed 
on an exchange or national securities market will be available from 
major broker-dealer firms and/or subscription services, such as 
Bloomberg, Thomson Reuters, and International Data Corporation. Price 
information relating to all other securities held by the Funds will be 
available from major market data vendors. The Funds' Web site, which 
will be publicly available prior to the public offering of Shares, will 
include a form of the prospectus for each Fund that may be downloaded. 
The Web site will also include additional quantitative information, 
updated on a daily basis, for each Fund.
    The Commission believes that the proposal to list and trade the 
Shares is reasonably designed to promote fair disclosure of information 
that may be necessary to price the Shares appropriately and to prevent 
trading when a reasonable degree of transparency cannot be assured. The 
Commission notes that the Exchange will obtain a representation from 
the issuer of the Shares that the NAV per Share will be calculated 
daily and that the NAV and the identities and quantities of the 
portfolio of securities and other assets (the ``Disclosed Portfolio'') 
held by the Fund that will form the basis for the Fund's calculation of 
NAV at the end of the business day, will be made available to all 
market participants at the same time. Trading in Shares of a Fund will 
be halted under the conditions specified in Exchange Rule 11.18. 
Trading may also be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. Finally, trading in the Shares will be subject to Exchange 
Rule 14.11(i)(4)(B)(iv), which sets forth circumstances under which 
trading in the Shares may be halted.
    The Exchange states that it prohibits the distribution of material, 
non-public information by its employees. In addition, the Exchange 
represents that the Adviser is not registered as a broker-dealer; 
however, the Adviser is affiliated with multiple broker-dealers, and 
has implemented a fire wall with respect to its respective broker-
dealer affiliates regarding access to information concerning the 
composition and/or changes to the portfolio.\24\
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    \24\ See Amendment No. 1, supra note 6, at 6. The Exchange 
further represents that an investment adviser to an open-end fund is 
required to be registered under the Investment Advisers Act of 1940 
(``Advisers Act''). As a result, the Adviser and its related 
personnel are subject to the provisions of Rule 204A-1 under the 
Advisers Act relating to codes of ethics. This Rule requires 
investment advisers to adopt a code of ethics that reflects the 
fiduciary nature of the relationship to clients as well as 
compliance with other applicable securities laws. Accordingly, 
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with 
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under 
the Advisers Act makes it unlawful for an investment adviser to 
provide investment advice to clients unless such investment adviser 
has (i) adopted and implemented written policies and procedures 
reasonably designed to prevent violation, by the investment adviser 
and its supervised persons, of the Advisers Act and the Commission 
rules adopted thereunder; (ii) implemented, at a minimum, an annual 
review regarding the adequacy of the policies and procedures 
established pursuant to subparagraph (i) above and the effectiveness 
of their implementation; and (iii) designated an individual (who is 
a supervised person) responsible for administering the policies and 
procedures adopted under subparagraph (i) above.
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    The Exchange represents that trading in the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Managed Fund Shares. The Exchange may 
obtain information regarding trading in the Shares and the underlying 
shares in exchange traded equity securities via the Intermarket 
Surveillance Group (``ISG''), from other exchanges that are members or 
affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.\25\ In addition, the 
Exchange is able to access, as needed, trade information for certain 
fixed income instruments reported to the Financial Industry Regulatory 
Authority's Trade Reporting and Compliance Engine (``TRACE'').
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    \25\ For a list of the current members of ISG, see 
www.isgportal.org.
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    The Exchange represents that all statements and representations 
made in the proposed rule change regarding (a) the description of the 
portfolio, (b)

[[Page 17916]]

limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange rules and surveillance procedures shall 
constitute continued listing requirements for listing the Shares on the 
Exchange. In addition, the issuer has represented to the Exchange that 
it will advise the Exchange of any failure by a Fund to comply with the 
continued listing requirements, and, pursuant to its obligations under 
Section 19(g)(1) of the Act, the Exchange will monitor for compliance 
with the continued listing requirements. If a Fund is not in compliance 
with the applicable listing requirements, the Exchange will commence 
delisting procedures under the Exchange Rule 14.12.\26\
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    \26\ See Amendment No. 2, supra note 6, at 3-4.
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    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. In support of this 
proposal, the Exchange has made representations, including the 
following:
    (1) The Shares will be subject to Exchange Rule 14.11(i), which 
sets forth the initial and continued listing criteria applicable to 
Managed Fund Shares.\27\
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    \27\ See Amendment No. 1, supra note 6, at 38.
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    (2) The Exchange's 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.\28\
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    \28\ See id. at 39.
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    (3) The Exchange may obtain information regarding trading in the 
Shares and the underlying shares in exchange traded equity securities 
via the ISG, from other exchanges that are members or affiliates of the 
ISG, or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement. In addition, the Exchange is able to 
access, as needed, trade information for certain fixed income 
instruments reported to TRACE.\29\
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    \29\ See id. at 43.
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    (4) Structured securities, when combined with instruments held as 
part of the other portfolio holdings as described above, will not 
exceed 20% of each Fund's net assets.\30\
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    \30\ See id. at 9, n.19.
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    (5) Each Fund will comply with Minimum Requirements 1, 2, and 3. If 
a Fund at any point has sufficient creation units outstanding necessary 
to trigger a diversity requirement and subsequently has fewer creation 
units outstanding than those applicable to the Trigger Number, the Fund 
will continue to comply with any diversity requirement for which the 
number of creation units outstanding continues to exceed the Trigger 
Number, as well as each of Minimum Requirements 1, 2 and 3.
    (6) Each Fund may hold up to an aggregate amount of 15% of its net 
assets in illiquid assets (calculated at the time of investment), as 
deemed illiquid by the Adviser.\31\
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    \31\ See id. at 11, 18 and 26.
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    (7) 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: (1) The procedures for 
purchases and redemptions of Shares in Creation Units (and that Shares 
are not individually redeemable); (2) Exchange Rule 3.7, which imposes 
suitability obligations on Exchange members with respect to 
recommending transactions in the Shares to customers; (3) how 
information regarding the Intraday Indicative Value is disseminated; 
(4) the risks involved in trading the Shares during the Pre-Opening 
\32\ and After Hours Trading Sessions \33\ when an updated Intraday 
Indicative Value will not be calculated or publicly disseminated; (5) 
the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (6) trading information. In 
addition, the Information Circular will advise members, prior to the 
commencement of trading, of the prospectus delivery requirements 
applicable to the Funds. Members purchasing Shares from the Funds for 
resale to investors will deliver a prospectus to such investors. The 
Information Circular will also discuss any exemptive, no-action, and 
interpretive relief granted by the Commission from any rules under the 
Act.\34\
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    \32\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. 
Eastern Time.
    \33\ The After Hours Trading Session is from 4:00 p.m. to 5:00 
p.m. Eastern Time.
    \34\ See Amendment No. 1, supra note 6, at 41.
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    (8) For initial and/or continued listing, each Fund must be in 
compliance with Rule 10A-3 under the Act.\35\
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    \35\ See id. at 38.
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    (9) A minimum of 100,000 Shares of each Fund will be outstanding at 
the commencement of trading on the Exchange.\36\
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    \36\ See id.
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    (10) The Exchange will obtain a representation from the issuer of 
the Shares that the NAV per Share will be calculated daily and that the 
NAV and the Disclosed Portfolio will be made available to all market 
participants at the same time.\37\
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    \37\ See id.
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    This approval order is based on all of the Exchange's 
representations, including those set forth above and in 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 Act \38\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \38\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-BatsBZX-2017-10), as 
modified by Amendments No. 1 and No. 2, be, and it hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    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)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-07456 Filed 4-12-17; 8:45 am]
 BILLING CODE 8011-01-P