[Federal Register Volume 80, Number 133 (Monday, July 13, 2015)]
[Notices]
[Pages 40113-40115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-16977]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75376; File No. SR-NYSEArca-2015-18]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of Proposed Rule Change Relating to Listing and Trading Under 
NYSE Arca Equities Rule 5.2(j)(3), Commentary .02 of Shares of the 
Vanguard Tax-Exempt Bond Index Fund

July 7, 2015.

I. Introduction

    On April 6, 2015, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade under NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, 
the shares (``Shares'') of the Vanguard Tax-Exempt Bond Index Fund 
(``Fund''). The proposed rule change was published for comment in the 
Federal Register on April 16, 2015.\3\ On May 26, 2015, the Commission 
extended the time period in which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether the proposed rule change should be disapproved.\4\ 
The Commission received no comments on the proposed rule change. This 
order grants approval of 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. 74701 (April 10, 
2015), 80 FR 20529 (``Notice'').
    \4\ See Securities Exchange Act Release No. 75042, 80 FR 31090 
(June 1, 2015).
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II. Description of the Proposed Rule Change

    The Exchange proposes to list and trade Shares of the Fund under 
NYSE Arca Equities Rule 5.2(j)(3), Commentary .02, which governs the 
listing and trading of Investment Company Units (``Units'') based on 
fixed income securities indexes. The Fund is a series of the Vanguard 
Municipal Bond Funds Trust (``Trust'').\5\ The Vanguard Group, Inc. 
will be the investment adviser to the Fund (``Adviser''). State Street 
Bank and Trust Company will serve as custodian for the Fund. Vanguard 
Marketing Corporation will be the distributor for the Shares.
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    \5\ The Exchange represents that, on January 6, 2015, the Trust 
filed a registration statement (``Registration Statement'') on Form 
N-1A under the Securities Act of 1933 and the Investment Company Act 
of 1940 (``1940 Act'') (File Nos. 2-57689 and 811-02687). According 
to the Exchange, the Trust has obtained certain exemptive relief 
from the Commission under the 1940 Act. See Investment Company Act 
Release No. 27773 (April 2, 2007) (File No. 812-13336).
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A. Principal Investments of the Fund

    According to the Exchange, the Fund will seek to track the 
performance of a benchmark index that measures the investment-grade 
segment of the U.S. municipal bond market, as described below. The Fund 
will invest by sampling its benchmark index, meaning that it will hold 
a range of securities that, in the aggregate, approximates the full 
index in terms of key risk factors and other characteristics. All of 
the Fund's investments will be selected through the sampling process, 
and, under normal circumstances,\6\ at least 80% of the Fund's assets 
will be invested in securities held in its benchmark index. Under 
normal circumstances, at least 80% of the Fund's income will be exempt 
from federal income taxes.
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    \6\ According to the Exchange, term ``under normal 
circumstances'' includes, but is not limited to, the absence of 
extreme volatility or trading halts in the fixed income markets or 
the financial markets generally; 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.
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    According to the Exchange, the Fund has proposed to use the 
Standard & Poor's National AMT-Free Municipal Bond Index (``Index'') as 
its benchmark index.\7\ The Index includes municipal bonds from issuers 
that are primarily state or local governments or agencies whose 
interest is exempt from U.S. federal income taxes and the federal 
alternative minimum tax (``AMT''). To be eligible for inclusion in the 
Index, each bond must have a rating of at least investment-grade, as 
determined by a nationally recognized statistical rating organization 
(e.g., at least BBB-by Fitch Ratings, Inc.); be denominated in U.S.

[[Page 40114]]

dollars; and have a minimum par amount of $25 million. In addition, to 
be included in the Index, each bond must have a minimum term to 
maturity and/or pre-refunded or call date greater than or equal to one 
calendar month. The following bond types are specifically excluded from 
the Index: bonds subject to the AMT; commercial paper; derivative 
securities (inverse floaters, forwards, swaps); housing bonds; insured 
conduit bonds where the obligor is a for-profit institution; non-
insured conduit bonds; non-rated bonds; notes; taxable municipals; 
tobacco bonds; and variable rate debt. Each bond in the Index must be a 
constituent of a deal where the deal's original offering amount was at 
least $100 million. Index constituents normally undergo a review and 
rebalancing once a month. At each monthly rebalancing, no one issuer 
can represent more than 25% of the weight of the Index, and individual 
issuers that represent at least 5% of the weight of the Index cannot 
account for more than 50% of the weight of the Index in the aggregate.
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    \7\ S&P Dow Jones Indices (``S&P'') is the ``Index Provider'' 
with respect to the Index. According to the Exchange, the Index 
Provider is not a broker-dealer or affiliated with a broker-dealer 
and has implemented procedures designed to prevent the use and 
dissemination of material, non-public information regarding the 
Index.
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B. Other Investments

    According to the Exchange, while under normal circumstances, at 
least 80% of the Fund's assets will be invested in securities held in 
its benchmark index, as described above, the Fund may invest up to 20% 
of its assets in other securities and financial instruments. According 
to the Exchange, examples of these other securities and financial 
instruments are nonpublic, investment-grade securities, generally 
referred to as 144A securities, as well as smaller public issues or 
medium-term notes not included in its benchmark index because of the 
small size of the issue. The Fund may invest in non-investment-grade 
securities, variable and floating rate securities, exchange-traded 
funds, hybrid instruments, Build America Bonds, variable-rate demand-
preferred securities issued by closed-end municipal bond funds, and 
tender option bond programs. Other investments subject to the 20% limit 
also include U.S. Treasury futures contracts, exchange-traded and over-
the-counter (``OTC'') options on such futures contracts, exchange-
traded and OTC fixed income options, centrally cleared and non-
centrally cleared interest rate swaps, centrally cleared and non-
centrally cleared total return swaps, and centrally cleared and non-
centrally cleared credit default swaps.

C. Investment Restrictions

    According to the Exchange, the Fund may invest in other investment 
companies to the extent permitted by applicable law or Commission 
exemption and consistent with Section 12(d)(1) of the 1940 Act. The 
Fund may hold up to an aggregate amount of 15% of its net assets in 
illiquid assets (calculated at the time of investment), including Rule 
144A securities deemed illiquid by the Adviser, in accordance with 
Commission guidance. 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 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 held in 
illiquid securities.
    The Exchange states that the Fund is classified as diversified 
within the meaning of the 1940 Act \8\ and that the Fund intends to 
maintain the required level of diversification and otherwise conduct 
its operations so as to qualify as a ``regulated investment company'' 
for purposes of the Internal Revenue Code of 1986.\9\
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    \8\ The diversification standard is set forth in Section 5(b)(1) 
of the 1940 Act.
    \9\ 26 U.S.C. 851.
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D. NYSE Arca Equities Rule 5.2(j)(3)

    The Exchange submitted this proposed rule change because the Index 
for the Fund does not meet all of the ``generic'' listing requirements 
of Commentary .02 to NYSE Arca Equities Rule 5.2(j)(3) applicable to 
the listing of Units based on fixed income securities indexes. The 
Exchange represented that the Index meets all such requirements except 
for those set forth in Commentary .02(a)(2).\10\ Specifically, as of 
February 7, 2015, 33.69% of the weight of the Index components have a 
minimum original principal amount outstanding of $100 million or more.
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    \10\ Commentary .02(a)(2) to NYSE Arca Equities Rule 5.2(j)(3) 
provides that components that in the aggregate account for at least 
75% of the weight of the index or portfolio each shall have a 
minimum original principal amount outstanding of $100 million or 
more.
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    Additional information regarding the Trust, the Fund, and the 
Shares, including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings, distributions, and taxes, among 
other things, is included in the Notice and Registration Statement, as 
applicable.\11\
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    \11\ See Notice and Registration Statement, supra notes 3 and 5, 
respectively.
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III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \12\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b)(5) of the Act,\14\ which 
requires, among other things, that the Exchange's rules be designed 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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    \12\ 15 U.S.C. 78f.
    \13\ 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).
    \14\ 17 U.S.C. 78f(b)(5).
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    The Commission 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,\15\ which sets forth Congress' 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. Quotation and last-
sale information for the Shares will be available via the Consolidated 
Tape Association (``CTA'') high-speed line. The current value of the 
Index will be widely disseminated by one or more major market data 
vendors \16\ at least once per day, as required by NYSE Arca Equities 
Rule 5.2(j)(3), Commentary .02(b)(ii). In addition, an Intraday 
Indicative Value (``IIV'') for the Shares of the Fund will be 
disseminated by one or more major market data vendors and updated at 
least every 15 seconds during the Core Trading Session (9:30 a.m. to 
4:00 p.m. Eastern Time).\17\ 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. The Web site for the Fund will include the 
prospectus for the Fund and additional data relating to net asset

[[Page 40115]]

value (``NAV'') and other applicable quantitative information. The 
portfolio of securities held by the Fund will also be disclosed monthly 
on the Fund's Web site.
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    \15\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \16\ The Exchange further states that the components of the 
Index and their percentage weighting will be available from major 
market data vendors.
    \17\ See NYSE Arca Equities Rule 5.2(j)(3), Commentary .02(c). 
According to the Exchange, several major market data vendors display 
and/or make widely available IIVs taken from the CTA or other data 
feeds. See Notice, supra note 3, at n.17.
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    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 
Exchange states that the Index Provider is not a broker-dealer or 
affiliated with a broker-dealer, and has implemented procedures 
designed to prevent the use and dissemination of material, non-public 
information regarding the Index.\18\ Prior to the commencement of 
trading, the Exchange will inform its Equity Trading Permit Holders 
(``ETP Holders'') in an Information Bulletin of the special 
characteristics and risks associated with trading the Shares. With 
respect to trading halts, if the Exchange becomes aware that the NAV is 
not being disseminated to all market participants at the same time, it 
will halt trading in the Shares until such time as the NAV is available 
to all market participants. In addition, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund. Trading may be halted because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. The Exchange represents that, 
if the IIV or the Index value is not being disseminated as required, 
the Exchange may halt trading during the day in which the interruption 
to the dissemination of the IIV or Index value occurs. If the 
interruption to the dissemination of the IIV or Index value persists 
past the trading day in which it occurred, the Exchange will halt 
trading. Moreover, trading in Shares of the Fund will be halted if the 
circuit breaker parameters in NYSE Arca Equities Rule 7.12 have been 
reached or because of market conditions or for reasons that, in the 
view of the Exchange, make trading in the Shares inadvisable. Further, 
trading in the Shares will be subject to NYSE Arca Equities Rule 7.34, 
which sets forth additional circumstances under which Shares of the 
Fund may be halted.
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    \18\ See supra note 7 and accompanying text.
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    Based on the Exchange's representations, the Commission believes 
that the Index is sufficiently broad-based to deter potential 
manipulation. As of February 7, 2015, 98.72% of the weight of the Index 
components was composed of individual maturities that were part of an 
entire municipal bond offering with a minimum original principal amount 
outstanding of $100 million or more for all maturities of the offering. 
In addition, the total dollar amount outstanding of issues in the Index 
was approximately $2.424 billion and the average dollar amount 
outstanding of issues in the Index was approximately $60 million. 
Further, the Index is composed of approximately 10,015 component issues 
and 969 unique issuers, and the most heavily weighted component 
represents 0.27% of the weight of the Index and the five most heavily 
weighted components represent 0.96% of the weight of the Index. In 
addition, the average daily notional trading volume for Index 
components for the period from January 2, 2014 to December 31, 2014 was 
$1,272,356,609 and the sum of the notional trading volumes for the same 
period was $318,089,152,147.
    In support of this proposal, the Exchange has made representations, 
including:
    (1) Except for Commentary .02(a)(2) to NYSE Arca Equities Rule 
5.2(j)(3), the Shares of the Fund currently satisfy all of the generic 
listing standards under NYSE Arca Equities Rule 5.2(j)(3).
    (2) The initial and continued listing standards under NYSE Arca 
Equities Rules 5.2(j)(3) and 5.5(g)(2) applicable to Units shall apply 
to the Shares.
    (3) The Shares will comply with all other requirements applicable 
to Units including, but not limited to, requirements relating to the 
dissemination of key information, such as the value of the Index and 
IIV, rules governing the trading of equity securities, trading hours, 
trading halts, surveillance, and the Information Bulletin to ETP 
Holders (each as described in more detail in the Notice and 
Registration Statement, as applicable), as set forth in Exchange rules 
applicable to Units and prior Commission orders approving the generic 
listing rules applicable to the listing and trading of Units.
    (4) The Exchange represents that trading in the Shares will be 
subject to the existing trading surveillances, administered by the 
Financial Industry Regulatory Authority (``FINRA'') on behalf of the 
Exchange, which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\19\ 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 federal securities laws applicable to trading on 
the Exchange.
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    \19\ According to the Exchange, FINRA surveils trading on the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
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    (5) FINRA, on behalf of the Exchange, will communicate as needed 
regarding trading in the Shares with other markets or other entities 
that are members of the Intermarket Surveillance Group (``ISG''), and 
FINRA may obtain trading information regarding trading in the Shares 
from such markets or entities. FINRA also can access data obtained from 
the Municipal Securities Rulemaking Board relating to municipal bond 
trading activity for surveillance purposes in connection with trading 
in the Shares. The Exchange also may obtain information regarding 
trading in the Shares from markets or other entities that are members 
of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement.
    (6) For initial and continued listing of the Shares, the Trust is 
required to comply with Rule 10A-3 under the Act.\20\
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    \20\ See 17 CFR 240.10A-3.
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    (7) The Fund generally will invest at least 80% of its assets in 
the securities of the Index.
    (8) The Fund may at times invest up to 20% of its assets in other 
securities and financial instruments as described in further detail in 
the Notice.

This approval order is based on all of the Exchange's representations, 
including those set forth above and in the Notice, and the Exchange's 
description of the Fund.

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) of the Act \21\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.
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    \21\ 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,\22\ that the proposed rule change (SR-NYSEArca-2015-18) be, and it 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-16977 Filed 7-10-15; 8:45 am]
 BILLING CODE 8011-01-P