[Federal Register Volume 82, Number 33 (Tuesday, February 21, 2017)]
[Notices]
[Pages 11278-11289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-03301]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80036; File No. SR-BatsBZX-2017-10]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of 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 of the iShares U.S. ETF Trust Under Bats Rule 14.11(i), Managed 
Fund Shares

February 14, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on January 31, 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 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 (the ``Trust'' or the ``Issuer'') under Bats 
Rule 14.11(i) (``Managed Fund Shares''). The shares of the Funds are 
referred to herein as the ``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 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 the Shares under Bats Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange.\3\ The Funds will be actively

[[Page 11279]]

managed funds. The Shares will be offered by the Trust, which was 
established as a Delaware statutory trust on June 21, 2011. 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.\4\
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    \3\ The Commission approved Bats Rule 14.11(i) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \4\ See Registration Statement on Form N-1A for the Trust, dated 
November 2, 2015 (File Nos. 333-179904 and 811-22649). The 
descriptions of the Funds and the Shares contained herein are based, 
in part, on information in the Registration Statement. The 
Commission has issued an order granting certain exemptive relief to 
the Trust under the Investment Company Act of 1940 (15 U.S.C. 80a-1) 
(``1940 Act'') (the ``Exemptive Order''). See Investment Company Act 
Release No. 29571 (January 24, 2011) (File No. 812-13601).
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Description of the Shares and the Funds
    BlackRock Fund Advisors is the investment adviser (``BFA'' or 
``Adviser'') to the Funds.\5\ State Street Bank and Trust Company is 
the administrator, custodian, and transfer agent (``Administrator,'' 
``Custodian,'' and ``Transfer Agent,'' respectively) for the Trust. 
BlackRock Investments, LLC serves as the distributor (``Distributor'') 
for the Trust.
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    \5\ BFA is an indirect wholly owned subsidiary of BlackRock, 
Inc.
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    Bats Rule 14.11(i)(7) provides that, if the investment adviser to 
the investment company issuing Managed Fund Shares is affiliated with a 
broker-dealer, such investment adviser shall erect a ``fire wall'' 
between the investment adviser and the broker-dealer with respect to 
access to information concerning the composition and/or changes to such 
investment company portfolio.\6\ In addition, Rule 14.11(i)(7) further 
requires that personnel who make decisions on the investment company's 
portfolio composition must be subject to procedures designed to prevent 
the use and dissemination of material nonpublic information regarding 
the applicable investment company portfolio. Rule 14.11(i)(7) is 
similar to Bats Rule 14.11(b)(5)(A)(i), however, Rule 14.11(i)(7) in 
connection with the establishment of a ``fire wall'' between the 
investment adviser and the broker-dealer reflects the applicable open-
end fund's portfolio, not an underlying benchmark index, as is the case 
with index-based funds. The Adviser is not a registered broker-dealer, 
but is affiliated with multiple broker-dealers and has implemented 
``fire walls'' with respect to such broker-dealers regarding access to 
information concerning the composition and/or changes to a Fund's 
portfolio. In addition, Adviser personnel who make decisions regarding 
a 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 registered 
as a broker-dealer or newly affiliated with another 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 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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    \6\ An investment adviser to an open-end fund is required to be 
registered under the Investment Advisers Act of 1940 (the ``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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iShares iBonds Dec 2024 AMT-Free Muni Bond ETF
    According to the Registration Statement, the Fund will seek to 
maximize tax-free current income and terminate on or around December 
2024. To achieve its objective, the Fund will invest, under normal 
circumstances,\7\ at least 80% of its net assets in Municipal 
Securities, as defined below, such that the interest on each security 
is exempt from U.S. federal income taxes and the federal alternative 
minimum tax (the ``AMT''). The Fund is not a money market fund and does 
not seek to maintain a stable net asset value of $1.00 per share. The 
Fund will be classified as a ``non-diversified'' investment company 
under the 1940 Act.\8\
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    \7\ 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.
    \8\ The diversification standard is set forth in Section 5(b)(1) 
of the 1940 Act.
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    The Fund intends to qualify each year as a regulated investment 
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended. The Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification and distribution requirements 
necessary to establish and maintain RIC qualification under Subchapter 
M.
Principal Holdings--Municipal Securities
    To achieve its objective, the Fund will invest, under normal 
circumstances, in U.S.-dollar denominated investment-grade fixed-rate 
Municipal Securities, as defined below. The Fund will invest in both 
callable and non-callable municipal bonds. 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.\9\ Under normal 
circumstances, the Fund's effective duration will vary within one year 
(plus or minus) of the effective duration of the securities comprising 
the S&P AMT-Free Municipal Series Dec 2024 Index, which, as of December 
15, 2015, was 7.24 years.\10\
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    \9\ 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.
    \10\ Effective duration is a measure of the Fund's price 
sensitivity to changes in yields or interest rates.
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    Municipal securities (``Municipal Securities'') are fixed and 
variable rate securities issued in the U.S. 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 include only the following instruments: 
General obligation bonds,\11\ limited obligation

[[Page 11280]]

bonds (or revenue bonds),\12\ municipal notes,\13\ municipal commercial 
paper,\14\ tender option bonds,\15\ variable rate demand obligations 
(``VRDOs''),\16\ municipal lease obligations,\17\ stripped 
securities,\18\ structured securities,\19\ when issued securities,\20\ 
zero coupon securities,\21\ and exchange traded and non-exchange traded 
investment companies (including investment companies advised by BFA or 
its affiliates) that invest in such Municipal Securities.\22\
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    \11\ General obligation bonds are obligations involving the 
credit of an issuer possessing taxing power and are payable from 
such issuer's general revenues and not from any particular source.
    \12\ Limited obligation bonds are payable only from the revenues 
derived from a particular facility or class of facilities or, in 
some cases, from the proceeds of a special excise or other specific 
revenue source, and also include industrial development bonds issued 
pursuant to former U.S. federal tax law. Industrial development 
bonds generally are also revenue bonds and thus are not payable from 
the issuer's general revenues. The credit and quality of industrial 
development bonds are usually related to the credit of the corporate 
user of the facilities. Payment of interest on and repayment of 
principal of such bonds is the responsibility of the corporate user 
(and/or any guarantor).
    \13\ Municipal notes are shorter-term municipal debt obligations 
that may provide interim financing in anticipation of tax 
collection, receipt of grants, bond sales, or revenue receipts.
    \14\ Municipal commercial paper is generally unsecured debt that 
is issued to meet short-term financing needs.
    \15\ Tender option bonds are synthetic floating-rate or 
variable-rate securities issued when long-term bonds are purchased 
in the primary or secondary market and then deposited into a trust. 
Custodial receipts are then issued to investors, such as the Fund, 
evidencing ownership interests in the trust.
    \16\ VRDOs are tax-exempt obligations that contain a floating or 
variable interest rate adjustment formula and a right of demand on 
the part of the holder thereof to receive payment of the unpaid 
principal balance plus accrued interest upon a short notice period 
not to exceed seven days.
    \17\ Municipal lease obligations include certificates of 
participation issued by government authorities or entities to 
finance the acquisition or construction of equipment, land, and/or 
facilities.
    \18\ Stripped securities are created when an issuer separates 
the interest and principal components of an instrument and sells 
them as separate securities. In general, one security is entitled to 
receive the interest payments on the underlying assets and the other 
to receive the principal payments.
    \19\ Structured securities are privately negotiated debt 
obligations where the principal and/or interest is determined by 
reference to the performance of an underlying investment, index, or 
reference obligation, and may be issued by governmental agencies. 
While structured securities are part of the principal holdings of 
the Fund, the Issuer represents that such 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.
    \20\ The Fund may purchase or sell securities that it is 
entitled to receive on a when issued or delayed delivery basis as 
well as through a forward commitment.
    \21\ Zero coupon securities are securities that are sold at a 
discount to par value and do not pay interest during the life of the 
security. The discount approximates the total amount of interest the 
security will accrue and compound over the period until maturity at 
a rate of interest reflecting the market rate of the security at the 
time of issuance. Upon maturity, the holder of a zero coupon 
security is entitled to receive the par value of the security.
    \22\ The Fund currently anticipates investing in only registered 
open-end investment companies, including mutual funds and the open-
end investment company funds described in Bats Rule 14.11. The Fund 
may invest in the securities of other investment companies to the 
extent permitted by law.
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    In the 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, the Fund will wind up and terminate, and its net 
assets will be distributed to then current shareholders.
    The 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. The Fund will hold a minimum of 75 
different Municipal Securities when at least four creation units are 
outstanding. The 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. No single Municipal 
Security held by the 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 the Fund's portfolio. The Fund will hold 
Municipal Securities of at least 20 non-affiliated issuers. The Fund 
will hold Municipal Securities of at least 30 non-affiliated issuers 
when at least four creation units are outstanding.\23\ To the extent 
that the Fund at one point has sufficient creation units outstanding 
necessary to trigger a diversity requirement laid out above (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.
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    \23\ For purposes of this filing, 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.
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    In the absence of normal circumstances, the Fund may temporarily 
depart from its normal investment process, provided that such departure 
is, in the opinion of the Adviser, consistent with the Fund's 
investment objective and in the best interest of the Fund. For example, 
the Fund may hold a higher than normal proportion of its assets in cash 
in response to adverse market, economic or political conditions.
    The Fund intends to qualify each year as a regulated investment 
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended.\24\ The Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification and distribution requirements 
necessary to establish and maintain RIC qualification under Subchapter 
M.
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    \24\ 26 U.S.C. 851.
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Other Portfolio Holdings
    The Fund may also, to a limited extent (under normal circumstances, 
less than 20% of the Fund's net assets), engage in transactions in 
futures contracts, options, or swaps in order to facilitate trading or 
to reduce transaction costs.\25\ The Fund's investments will be 
consistent with its investment objective and will not be used to 
achieve leveraged returns (i.e. two times or three times the Fund's 
benchmark, as described in the Registration Statement).
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    \25\ Derivatives might be included in the Fund's investments to 
serve the investment objectives of the Fund. Such derivatives 
include only the following: Interest rate futures, interest rate 
options, interest rate swaps, and swaps on Municipal Securities 
indexes. The derivatives will be centrally cleared and they will be 
collateralized. Derivatives are not a principal investment strategy 
of the Fund.
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    The Fund may also enter into repurchase and reverse repurchase 
agreements for Municipal Securities (collectively, ``Repurchase 
Agreements''). Repurchase Agreements involve the sale of securities 
with an agreement to repurchase the securities at an agreed-upon price, 
date and interest payment and have the characteristics of borrowing as 
part of the Fund's principal holdings.\26\
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    \26\ The Fund's exposure to reverse repurchase agreements will 
be covered by liquid assets having a value equal to or greater than 
such commitments. The use of reverse repurchase agreements is a form 
of leverage because the proceeds derived from reverse repurchase 
agreements may be invested in additional securities. As further 
stated below, the Fund's investments will be consistent with its 
investment objective and will not be used to achieve leveraged 
returns.
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    The Fund may also invest in short-term instruments (``Short-Term 
Instruments''),\27\ which includes

[[Page 11281]]

exchange traded and non-exchange traded investment companies (including 
investment companies advised by BFA or its affiliates) that invest in 
money market instruments.
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    \27\ The Fund may invest in Short-Term Instruments, including 
money market instruments, on an ongoing basis to provide liquidity 
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of 
money market funds (including those advised by BFA or otherwise 
affiliated with BFA); (ii) obligations issued or guaranteed by the 
U.S. government, its agencies or instrumentalities (including 
government-sponsored enterprises); (iii) negotiable certificates of 
deposit (``CDs''), bankers' acceptances, fixed-time deposits and 
other obligations of U.S. and non-U.S. banks (including non-U.S. 
branches) and similar institutions; (iv) commercial paper, including 
asset-backed commercial paper; (v) non-convertible corporate debt 
securities (e.g., bonds and debentures) with remaining maturities at 
the date of purchase of not more than 397 days and that satisfy the 
rating requirements set forth in Rule 2a-7 under the 1940 Act; and 
(vi) short-term U.S. dollar-denominated obligations of non-U.S. 
banks (including U.S. branches) that, in the opinion of BFA, are of 
comparable quality to obligations of U.S. banks which may be 
purchased by the Fund. All money market securities acquired by the 
Fund will be rated investment grade. The Fund does not intend to 
invest in any unrated money market securities. However, it may do 
so, to a limited extent, such as where a rated money market security 
becomes unrated, if such money market security is determined by the 
Adviser to be of comparable quality. BFA may determine that unrated 
securities are of comparable 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 rating 
organization rating similar securities and issuers.
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Investment Restrictions
    The 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 \28\ under the 1940 Act.\29\ 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 assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
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    \28\ In reaching liquidity decisions, the Adviser may consider 
factors including: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; the nature of the 
security and the nature of the marketplace trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer); any legal or contractual 
restrictions on the ability to transfer the security or asset; 
significant developments involving the issuer or counterparty 
specifically (e.g., default, bankruptcy, etc.) or the securities 
markets generally; and settlement practices, registration 
procedures, limitations on currency conversion or repatriation, and 
transfer limitations (for foreign securities or other assets).
    \29\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act of 1933).
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    The Fund may also invest up to 20% of its net assets in Municipal 
Securities that pay interest that is subject to the AMT.
iShares iBonds Dec 2025 AMT-Free Muni Bond ETF
    According to the Registration Statement, the Fund will seek to 
maximize tax-free current income and terminate on or around December 
2025. To achieve its objective, the Fund will invest, under normal 
circumstances,\30\ at least 80% of its net assets in Municipal 
Securities, as defined below, such that the interest on each security 
is exempt from U.S. federal income taxes and the federal alternative 
minimum tax (the ``AMT''). The Fund is not a money market fund and does 
not seek to maintain a stable net asset value of $1.00 per share. The 
Fund will be classified as a ``non-diversified'' investment company 
under the 1940 Act.\31\
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    \30\ 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.
    \31\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
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    The Fund intends to qualify each year as a regulated investment 
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended. The Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification and distribution requirements 
necessary to establish and maintain RIC qualification under Subchapter 
M.
Principal Holdings--Municipal Securities
    To achieve its objective, the Fund will invest, under normal 
circumstances, in U.S.-dollar denominated investment-grade fixed-rate 
Municipal Securities, as defined below. The Fund will invest in both 
callable and non-callable municipal bonds. 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.\32\ Under normal 
circumstances, the Fund's effective duration will vary within one year 
(plus or minus) of the effective duration of the securities comprising 
the S&P AMT-Free Municipal Series Dec 2025 Index, which, as of December 
15, 2015, was 8.26 years.\33\
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    \32\ 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.
    \33\ Effective duration is a measure of the Fund's price 
sensitivity to changes in yields or interest rates.
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    Municipal securities (``Municipal Securities'') are fixed and 
variable rate securities issued in the U.S. 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 include only the following instruments: 
General obligation bonds,\34\ limited obligation bonds (or revenue 
bonds),\35\ [sic], municipal notes,\36\ municipal

[[Page 11282]]

commercial paper,\37\ tender option bonds,\38\ variable rate demand 
obligations (``VRDOs''),\39\ municipal lease obligations,\40\ stripped 
securities,\41\ structured securities,\42\ when issued securities,\43\ 
zero coupon securities,\44\ and exchange traded and non-exchange traded 
investment companies (including investment companies advised by BFA or 
its affiliates) that invest in such Municipal Securities.\45\
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    \34\ General obligation bonds are obligations involving the 
credit of an issuer possessing taxing power and are payable from 
such issuer's general revenues and not from any particular source.
    \35\ Limited obligation bonds are payable only from the revenues 
derived from a particular facility or class of facilities or, in 
some cases, from the proceeds of a special excise or other specific 
revenue source, and also include industrial development bonds issued 
pursuant to former U.S. federal tax law. Industrial development 
bonds generally are also revenue bonds and thus are not payable from 
the issuer's general revenues. The credit and quality of industrial 
development bonds are usually related to the credit of the corporate 
user of the facilities. Payment of interest on and repayment of 
principal of such bonds is the responsibility of the corporate user 
(and/or any guarantor).
    \36\ Municipal notes are shorter-term municipal debt obligations 
that may provide interim financing in anticipation of tax 
collection, receipt of grants, bond sales, or revenue receipts.
    \37\ Municipal commercial paper is generally unsecured debt that 
is issued to meet short-term financing needs.
    \38\ Tender option bonds are synthetic floating-rate or 
variable-rate securities issued when long-term bonds are purchased 
in the primary or secondary market and then deposited into a trust. 
Custodial receipts are then issued to investors, such as the Fund, 
evidencing ownership interests in the trust.
    \39\ VRDOs are tax-exempt obligations that contain a floating or 
variable interest rate adjustment formula and a right of demand on 
the part of the holder thereof to receive payment of the unpaid 
principal balance plus accrued interest upon a short notice period 
not to exceed seven days.
    \40\ Municipal lease obligations include certificates of 
participation issued by government authorities or entities to 
finance the acquisition or construction of equipment, land, and/or 
facilities.
    \41\ Stripped securities are created when an issuer separates 
the interest and principal components of an instrument and sells 
them as separate securities. In general, one security is entitled to 
receive the interest payments on the underlying assets and the other 
to receive the principal payments.
    \42\ Structured securities are privately negotiated debt 
obligations where the principal and/or interest is determined by 
reference to the performance of an underlying investment, index, or 
reference obligation, and may be issued by governmental agencies. 
While structured securities are part of the principal holdings of 
the Fund, the Issuer represents that such 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.
    \43\ The Fund may purchase or sell securities that it is 
entitled to receive on a when issued or delayed delivery basis as 
well as through a forward commitment.
    \44\ Zero coupon securities are securities that are sold at a 
discount to par value and do not pay interest during the life of the 
security. The discount approximates the total amount of interest the 
security will accrue and compound over the period until maturity at 
a rate of interest reflecting the market rate of the security at the 
time of issuance. Upon maturity, the holder of a zero coupon 
security is entitled to receive the par value of the security.
    \45\ The Fund currently anticipates investing in only registered 
open-end investment companies, including mutual funds and the open-
end investment company funds described in Bats Rule 14.11. The Fund 
may invest in the securities of other investment companies to the 
extent permitted by law.
---------------------------------------------------------------------------

    In the 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 2025, the Fund will wind up and terminate, and its net 
assets will be distributed to then current shareholders.
    The 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. The Fund will hold a minimum of 75 
different Municipal Securities when at least four creation units are 
outstanding. The 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. No single Municipal 
Security held by the 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 the Fund's portfolio. The Fund will hold 
Municipal Securities of at least 20 non-affiliated issuers. The Fund 
will hold Municipal Securities of at least 30 non-affiliated issuers 
when at least four creation units are outstanding.\46\ To the extent 
that the Fund at one point has sufficient creation units outstanding 
necessary to trigger a diversity requirement laid out above (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.
---------------------------------------------------------------------------

    \46\ For purposes of this filing, 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.
---------------------------------------------------------------------------

    In the absence of normal circumstances, the Fund may temporarily 
depart from its normal investment process, provided that such departure 
is, in the opinion of the Adviser, consistent with the Fund's 
investment objective and in the best interest of the Fund. For example, 
the Fund may hold a higher than normal proportion of its assets in cash 
in response to adverse market, economic or political conditions.
    The Fund intends to qualify each year as a regulated investment 
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended.\47\ The Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification and distribution requirements 
necessary to establish and maintain RIC qualification under Subchapter 
M.
---------------------------------------------------------------------------

    \47\ 26 U.S.C. 851.
---------------------------------------------------------------------------

Other Portfolio Holdings
    The Fund may also, to a limited extent (under normal circumstances, 
less than 20% of the Fund's net assets), engage in transactions in 
futures contracts, options, or swaps in order to facilitate trading or 
to reduce transaction costs.\48\ The Fund's investments will be 
consistent with its investment objective and will not be used to 
achieve leveraged returns (i.e. two times or three times the Fund's 
benchmark, as described in the Registration Statement).
---------------------------------------------------------------------------

    \48\ Derivatives might be included in the Fund's investments to 
serve the investment objectives of the Fund. Such derivatives 
include only the following: Interest rate futures, interest rate 
options, interest rate swaps, and swaps on Municipal Securities 
indexes. The derivatives will be centrally cleared and they will be 
collateralized. Derivatives are not a principal investment strategy 
of the Fund.
---------------------------------------------------------------------------

    The Fund may also enter into repurchase and reverse repurchase 
agreements for Municipal Securities (collectively, ``Repurchase 
Agreements''). Repurchase Agreements involve the sale of securities 
with an agreement to repurchase the securities at an agreed-upon price, 
date and interest payment and have the characteristics of borrowing as 
part of the Fund's principal holdings.\49\
---------------------------------------------------------------------------

    \49\ The Fund's exposure to reverse repurchase agreements will 
be covered by liquid assets having a value equal to or greater than 
such commitments. The use of reverse repurchase agreements is a form 
of leverage because the proceeds derived from reverse repurchase 
agreements may be invested in additional securities. As further 
stated below, the Fund's investments will be consistent with its 
investment objective and will not be used to achieve leveraged 
returns.
---------------------------------------------------------------------------

    The Fund may also invest in short-term instruments (``Short-Term 
Instruments''),\50\ which includes

[[Page 11283]]

exchange traded and non-exchange traded investment companies (including 
investment companies advised by BFA or its affiliates) that invest in 
money market instruments.
---------------------------------------------------------------------------

    \50\ The Fund may invest in Short-Term Instruments, including 
money market instruments, on an ongoing basis to provide liquidity 
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of 
money market funds (including those advised by BFA or otherwise 
affiliated with BFA); (ii) obligations issued or guaranteed by the 
U.S. government, its agencies or instrumentalities (including 
government-sponsored enterprises); (iii) negotiable certificates of 
deposit (``CDs''), bankers' acceptances, fixed-time deposits and 
other obligations of U.S. and non-U.S. banks (including non-U.S. 
branches) and similar institutions; (iv) commercial paper, including 
asset-backed commercial paper; (v) non-convertible corporate debt 
securities (e.g., bonds and debentures) with remaining maturities at 
the date of purchase of not more than 397 days and that satisfy the 
rating requirements set forth in Rule 2a-7 under the 1940 Act; and 
(vi) short-term U.S. dollar-denominated obligations of non-U.S. 
banks (including U.S. branches) that, in the opinion of BFA, are of 
comparable quality to obligations of U.S. banks which may be 
purchased by the Fund. All money market securities acquired by the 
Fund will be rated investment grade. The Fund does not intend to 
invest in any unrated money market securities. However, it may do 
so, to a limited extent, such as where a rated money market security 
becomes unrated, if such money market security is determined by the 
Adviser to be of comparable quality. BFA may determine that unrated 
securities are of comparable 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 rating 
organization rating similar securities and issuers.
---------------------------------------------------------------------------

Investment Restrictions
    The 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 \51\ under the 1940 Act.\52\ 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 assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
---------------------------------------------------------------------------

    \51\ In reaching liquidity decisions, the Adviser may consider 
factors including: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; the nature of the 
security and the nature of the marketplace trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer); any legal or contractual 
restrictions on the ability to transfer the security or asset; 
significant developments involving the issuer or counterparty 
specifically (e.g., default, bankruptcy, etc.) or the securities 
markets generally; and settlement practices, registration 
procedures, limitations on currency conversion or repatriation, and 
transfer limitations (for foreign securities or other assets).
    \52\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    The Fund may also invest up to 20% of its net assets in Municipal 
Securities that pay interest that is subject to the AMT.
iShares iBonds Dec 2026 AMT-Free Muni Bond ETF
    According to the Registration Statement, the Fund will seek to 
maximize tax-free current income and terminate on or around December 
2026. To achieve its objective, the Fund will invest, under normal 
circumstances,\53\ at least 80% of its net assets in Municipal 
Securities, as defined below, such that the interest on each security 
is exempt from U.S. federal income taxes and the federal alternative 
minimum tax (the ``AMT''). The Fund is not a money market fund and does 
not seek to maintain a stable net asset value of $1.00 per share. The 
Fund will be classified as a ``non-diversified'' investment company 
under the 1940 Act.\54\
---------------------------------------------------------------------------

    \53\ 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.
    \54\ The diversification standard is set forth in Section 
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a regulated investment 
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended. The Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification and distribution requirements 
necessary to establish and maintain RIC qualification under Subchapter 
M.
Principal Holdings--Municipal Securities
    To achieve its objective, the Fund will invest, under normal 
circumstances, in U.S.-dollar denominated investment-grade fixed-rate 
Municipal Securities, as defined below. The Fund will invest in both 
callable and non-callable municipal bonds. 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.\55\ Under normal 
circumstances, the Fund's effective duration will vary within one year 
(plus or minus) of the effective duration of the securities comprising 
the S&P AMT-Free Municipal Series Dec 2026 Index, which, as of December 
15, 2015, was 9.22 years.\56\
---------------------------------------------------------------------------

    \55\ 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.
    \56\ Effective duration is a measure of the Fund's price 
sensitivity to changes in yields or interest rates.
---------------------------------------------------------------------------

    Municipal securities (``Municipal Securities'') are fixed and 
variable rate securities issued in the U.S. 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 include only the following instruments: 
General obligation bonds,\57\ limited obligation bonds (or revenue 
bonds),\58\ [sic], municipal notes,\59\ municipal commercial paper,\60\ 
tender option bonds,\61\ variable rate demand obligations 
(``VRDOs''),\62\ municipal

[[Page 11284]]

lease obligations,\63\ stripped securities,\64\ structured 
securities,\65\ when issued securities,\66\ zero coupon securities,\67\ 
and exchange traded and non-exchange traded investment companies 
(including investment companies advised by BFA or its affiliates) that 
invest in such Municipal Securities.\68\
---------------------------------------------------------------------------

    \57\ General obligation bonds are obligations involving the 
credit of an issuer possessing taxing power and are payable from 
such issuer's general revenues and not from any particular source.
    \58\ Limited obligation bonds are payable only from the revenues 
derived from a particular facility or class of facilities or, in 
some cases, from the proceeds of a special excise or other specific 
revenue source, and also include industrial development bonds issued 
pursuant to former U.S. federal tax law. Industrial development 
bonds generally are also revenue bonds and thus are not payable from 
the issuer's general revenues. The credit and quality of industrial 
development bonds are usually related to the credit of the corporate 
user of the facilities. Payment of interest on and repayment of 
principal of such bonds is the responsibility of the corporate user 
(and/or any guarantor).
    \59\ Municipal notes are shorter-term municipal debt obligations 
that may provide interim financing in anticipation of tax 
collection, receipt of grants, bond sales, or revenue receipts.
    \60\ Municipal commercial paper is generally unsecured debt that 
is issued to meet short-term financing needs.
    \61\ Tender option bonds are synthetic floating-rate or 
variable-rate securities issued when long-term bonds are purchased 
in the primary or secondary market and then deposited into a trust. 
Custodial receipts are then issued to investors, such as the Fund, 
evidencing ownership interests in the trust.
    \62\ VRDOs are tax-exempt obligations that contain a floating or 
variable interest rate adjustment formula and a right of demand on 
the part of the holder thereof to receive payment of the unpaid 
principal balance plus accrued interest upon a short notice period 
not to exceed seven days.
    \63\ Municipal lease obligations include certificates of 
participation issued by government authorities or entities to 
finance the acquisition or construction of equipment, land, and/or 
facilities.
    \64\ Stripped securities are created when an issuer separates 
the interest and principal components of an instrument and sells 
them as separate securities. In general, one security is entitled to 
receive the interest payments on the underlying assets and the other 
to receive the principal payments.
    \65\ Structured securities are privately negotiated debt 
obligations where the principal and/or interest is determined by 
reference to the performance of an underlying investment, index, or 
reference obligation, and may be issued by governmental agencies. 
While structured securities are part of the principal holdings of 
the Fund, the Issuer represents that such 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.
    \66\ The Fund may purchase or sell securities that it is 
entitled to receive on a when issued or delayed delivery basis as 
well as through a forward commitment.
    \67\ Zero coupon securities are securities that are sold at a 
discount to par value and do not pay interest during the life of the 
security. The discount approximates the total amount of interest the 
security will accrue and compound over the period until maturity at 
a rate of interest reflecting the market rate of the security at the 
time of issuance. Upon maturity, the holder of a zero coupon 
security is entitled to receive the par value of the security.
    \68\ The Fund currently anticipates investing in only registered 
open-end investment companies, including mutual funds and the open-
end investment company funds described in Bats Rule 14.11. The Fund 
may invest in the securities of other investment companies to the 
extent permitted by law.
---------------------------------------------------------------------------

    In the 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 2026, the Fund will wind up and terminate, and its net 
assets will be distributed to then current shareholders.
    The 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. The Fund will hold a minimum of 75 
different Municipal Securities when at least four creation units are 
outstanding. The 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. No single Municipal 
Security held by the 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 the Fund's portfolio. The Fund will hold 
Municipal Securities of at least 20 non-affiliated issuers. The Fund 
will hold Municipal Securities of at least 30 non-affiliated issuers 
when at least four creation units are outstanding.\69\ To the extent 
that the Fund at one point has sufficient creation units outstanding 
necessary to trigger a diversity requirement laid out above (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.
---------------------------------------------------------------------------

    \69\ For purposes of this filing, 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.
---------------------------------------------------------------------------

    In the absence of normal circumstances, the Fund may temporarily 
depart from its normal investment process, provided that such departure 
is, in the opinion of the Adviser, consistent with the Fund's 
investment objective and in the best interest of the Fund. For example, 
the Fund may hold a higher than normal proportion of its assets in cash 
in response to adverse market, economic or political conditions.
    The Fund intends to qualify each year as a regulated investment 
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of 
1986, as amended.\70\ The Fund will invest its assets, and otherwise 
conduct its operations, in a manner that is intended to satisfy the 
qualifying income, diversification and distribution requirements 
necessary to establish and maintain RIC qualification under Subchapter 
M.
---------------------------------------------------------------------------

    \70\ 26 U.S.C. 851.
---------------------------------------------------------------------------

Other Portfolio Holdings
    The Fund may also, to a limited extent (under normal circumstances, 
less than 20% of the Fund's net assets), engage in transactions in 
futures contracts, options, or swaps in order to facilitate trading or 
to reduce transaction costs.\71\ The Fund's investments will be 
consistent with its investment objective and will not be used to 
achieve leveraged returns (i.e. two times or three times the Fund's 
benchmark, as described in the Registration Statement).
---------------------------------------------------------------------------

    \71\ Derivatives might be included in the Fund's investments to 
serve the investment objectives of the Fund. Such derivatives 
include only the following: Interest rate futures, interest rate 
options, interest rate swaps, and swaps on Municipal Securities 
indexes. The derivatives will be centrally cleared and they will be 
collateralized. Derivatives are not a principal investment strategy 
of the Fund.
---------------------------------------------------------------------------

    The Fund may also enter into repurchase and reverse repurchase 
agreements for Municipal Securities (collectively, ``Repurchase 
Agreements''). Repurchase Agreements involve the sale of securities 
with an agreement to repurchase the securities at an agreed-upon price, 
date and interest payment and have the characteristics of borrowing as 
part of the Fund's principal holdings.\72\
---------------------------------------------------------------------------

    \72\ The Fund's exposure to reverse repurchase agreements will 
be covered by liquid assets having a value equal to or greater than 
such commitments. The use of reverse repurchase agreements is a form 
of leverage because the proceeds derived from reverse repurchase 
agreements may be invested in additional securities. As further 
stated below, the Fund's investments will be consistent with its 
investment objective and will not be used to achieve leveraged 
returns.
---------------------------------------------------------------------------

    The Fund may also invest in short-term instruments (``Short-Term 
Instruments''),\73\ which includes exchange traded and non-exchange 
traded investment companies (including investment companies advised by 
BFA or its affiliates) that invest in money market instruments.
---------------------------------------------------------------------------

    \73\ The Fund may invest in Short-Term Instruments, including 
money market instruments, on an ongoing basis to provide liquidity 
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of 
money market funds (including those advised by BFA or otherwise 
affiliated with BFA); (ii) obligations issued or guaranteed by the 
U.S. government, its agencies or instrumentalities (including 
government-sponsored enterprises); (iii) negotiable certificates of 
deposit (``CDs''), bankers' acceptances, fixed-time deposits and 
other obligations of U.S. and non-U.S. banks (including non-U.S. 
branches) and similar institutions; (iv) commercial paper, including 
asset-backed commercial paper; (v) non-convertible corporate debt 
securities (e.g., bonds and debentures) with remaining maturities at 
the date of purchase of not more than 397 days and that satisfy the 
rating requirements set forth in Rule 2a-7 under the 1940 Act; and 
(vi) short-term U.S. dollar-denominated obligations of non-U.S. 
banks (including U.S. branches) that, in the opinion of BFA, are of 
comparable quality to obligations of U.S. banks which may be 
purchased by the Fund. All money market securities acquired by the 
Fund will be rated investment grade. The Fund does not intend to 
invest in any unrated money market securities. However, it may do 
so, to a limited extent, such as where a rated money market security 
becomes unrated, if such money market security is determined by the 
Adviser to be of comparable quality. BFA may determine that unrated 
securities are of comparable 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 rating 
organization rating similar securities and issuers.
---------------------------------------------------------------------------

Investment Restrictions
    The Fund may hold up to an aggregate amount of 15% of its net 
assets in

[[Page 11285]]

illiquid assets (calculated at the time of investment), as deemed 
illiquid by the Adviser \74\ under the 1940 Act.\75\ 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 assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
---------------------------------------------------------------------------

    \74\ In reaching liquidity decisions, the Adviser may consider 
factors including: The frequency of trades and quotes for the 
security; the number of dealers wishing to purchase or sell the 
security and the number of other potential purchasers; dealer 
undertakings to make a market in the security; the nature of the 
security and the nature of the marketplace trades (e.g., the time 
needed to dispose of the security, the method of soliciting offers, 
and the mechanics of transfer); any legal or contractual 
restrictions on the ability to transfer the security or asset; 
significant developments involving the issuer or counterparty 
specifically (e.g., default, bankruptcy, etc.) or the securities 
markets generally; and settlement practices, registration 
procedures, limitations on currency conversion or repatriation, and 
transfer limitations (for foreign securities or other assets).
    \75\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    The Fund may also invest up to 20% of its net assets in Municipal 
Securities that pay interest that is subject to the AMT.
Net Asset Value
    According to the Registration Statement, the net asset value 
(``NAV'') of the Funds will be calculated each business day as of the 
close of regular trading on the New York Stock Exchange (``NYSE''), 
generally 4:00 p.m. Eastern Time (the ``NAV Calculation Time''), on 
each day that the NYSE is open for trading, based on prices at the NAV 
Calculation Time. NAV per Share is calculated by dividing each Fund's 
net assets by the number of Shares outstanding.
    According to the Registration Statement, unless otherwise described 
below, the Funds will value Municipal Securities using prices provided 
directly from one or more broker-dealers, market makers, or independent 
third-party pricing services which may use matrix pricing and valuation 
models, as well as recent market transactions for the same or similar 
assets, to derive values.
    Exchange traded investment companies will be valued at market 
closing price or, if no closing price is available, at the last traded 
price on the primary exchange on which they are traded. Price 
information for such securities will be taken from the exchange where 
the security is primarily traded. Investment companies not listed on an 
exchange are valued at their net asset value.
    Futures and options contracts will be valued at their last sale 
price or settle price as of the close of the applicable exchange.
    Repurchase Agreements will generally be valued at par. In certain 
circumstances, Short-Term Instruments may be valued on the basis of 
amortized cost.
    According to the Registration Statement, generally, trading in 
money market instruments, and certain Municipal Securities is 
substantially completed each day at various times prior to the close of 
business on the Exchange. Additionally, trading in certain derivatives 
is substantially completed each day at various times prior to the close 
of business on the Exchange. The values of such securities and 
derivatives used in computing the NAV of the Funds are determined at 
such times.
    According to the Registration Statement, when market quotations are 
not readily available or are believed by BFA to be unreliable, the 
Funds' investments are valued at fair value. Fair value determinations 
are made by BFA in accordance with policies and procedures approved by 
the Trust's board of trustees and in accordance with the 1940 Act. BFA 
may conclude that a market quotation is not readily available or is 
unreliable if a security or other asset or liability is thinly traded, 
or where there is a significant event \76\ subsequent to the most 
recent market quotation.
---------------------------------------------------------------------------

    \76\ A ``significant event'' is an event that, in the judgment 
of BFA, is likely to cause a material change to the closing market 
price of the asset or liability held by the Fund.
---------------------------------------------------------------------------

    According to the Registration Statement, fair value represents a 
good faith approximation of the value of an asset or liability. The 
fair value of an asset or liability held by a Fund is the amount that 
the Fund might reasonably expect to receive from the current sale of 
that asset or the cost to extinguish that liability in an arm's-length 
transaction. Valuing a Fund's investments using fair value pricing will 
result in prices that may differ from current valuations and that may 
not be the prices at which those investments could have been sold 
during the period in which the particular fair values were used.
The Shares
    Each Fund will issue and redeem Shares on a continuous basis at the 
NAV per Share only in large blocks of a specified number of Shares or 
multiples thereof (``Creation Units'') in transactions with authorized 
participants who have entered into agreements with the Distributor. 
Each Fund currently anticipates that a Creation Unit will consist of 
50,000 Shares, though this number may change from time to time, 
including prior to listing of the Funds. The exact number of Shares 
that will constitute a Creation Unit will be disclosed in the 
respective Registration Statement of each Fund. Once created, Shares of 
each Fund trade on the secondary market in amounts less than a Creation 
Unit.
    The consideration for purchase of Creation Units of a Fund 
generally will consist of the in-kind deposit of a designated portfolio 
of securities (including any portion of such securities for which cash 
may be substituted) (i.e., the ``Deposit Securities''), and the ``Cash 
Component'' computed as described below. Together, the Deposit 
Securities and the Cash Component constitute the ``Fund Deposit,'' 
which represents the minimum initial and subsequent investment amount 
for a Creation Unit of a Fund.
    The portfolio of securities required for purchase of a Creation 
Unit may not be identical to the portfolio of securities a Fund will 
deliver upon redemption of Shares. The Deposit Securities and Fund 
Securities (as defined below), as the case may be, in connection with a 
purchase or redemption of a Creation Unit, generally will correspond 
pro rata to the securities held by the Fund.
    The Cash Component will be an amount equal to the difference 
between the NAV of the Shares (per Creation Unit) and the ``Deposit 
Amount,'' which will be an amount equal to the market value of the 
Deposit Securities, and serve to compensate for any differences between 
the NAV per Creation Unit and the Deposit Amount. Each Fund

[[Page 11286]]

generally offers Creation Units partially for cash. BFA will make 
available through the National Securities Clearing Corporation 
(``NSCC'') on each business day, prior to the opening of business on 
the Exchange, the list of names and the required number or par value of 
each Deposit Security and the amount of the Cash Component to be 
included in the current Fund Deposit (based on information as of the 
end of the previous business day) for the Fund.
    The identity and number or par value of the Deposit Securities may 
change pursuant to changes in the composition of a Fund's portfolio as 
rebalancing adjustments and corporate action events occur from time to 
time. The composition of the Deposit Securities may also change in 
response to adjustments to the weighting or composition of the holdings 
of a Fund.
    Each Fund reserves the right to permit or require the substitution 
of a ``cash in lieu'' amount to be added to the Cash Component to 
replace any Deposit Security that may not be available in sufficient 
quantity for delivery or that may not be eligible for transfer through 
the Depository Trust Company (``DTC'') or the clearing process through 
the NSCC.\77\
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    \77\ The Adviser represents that, to the extent the Trust 
permits or requires a ``cash in lieu'' amount, such transactions 
will be effected in the same manner or in an equitable manner for 
all authorized participants.
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    Except as noted below, all creation orders must be placed for one 
or more Creation Units and must be received by the Distributor in 
proper form no later than 4:00 p.m., Eastern Time, in each case on the 
date such order is placed in order for creation of Creation Units to be 
effected based on the NAV of Shares of the Fund as next determined on 
such date after receipt of the order in proper form. Orders requesting 
substitution of a ``cash in lieu'' amount generally must be received by 
the Distributor no later than 2:00 p.m., Eastern Time on the Settlement 
Date. The ``Settlement Date'' is generally the third business day after 
the transmittal date. On days when the Exchange or the bond markets 
close earlier than normal, a Fund may require orders to create or to 
redeem Creation Units to be placed earlier in the day.
    Fund Deposits must be delivered through the Federal Reserve System 
(for cash and government securities), through DTC (for corporate and 
municipal securities), or through a central depository account, such as 
with Euroclear or DTC, maintained by State Street or a sub-custodian (a 
``Central Depository Account'') by an authorized participant. Any 
portion of a Fund Deposit that may not be delivered through the Federal 
Reserve System or DTC must be delivered through a Central Depository 
Account. The Fund Deposit transfer must be ordered by the authorized 
participant in a timely fashion so as to ensure the delivery of the 
requisite number of Deposit Securities to the account of the Fund by no 
later than 3:00 p.m., Eastern Time, on the Settlement Date.
    A standard creation transaction fee will be imposed to offset the 
transfer and other transaction costs associated with the issuance of 
Creation Units.
    Shares of a Fund may be redeemed only in Creation Units at their 
NAV next determined after receipt of a redemption request in proper 
form by the Distributor and only on a business day. BFA will make 
available through the NSCC, prior to the opening of business on the 
Exchange on each business day, the designated portfolio of securities 
(including any portion of such securities for which cash may be 
substituted) that will be applicable (subject to possible amendment or 
correction) to redemption requests received in proper form on that day 
(``Fund Securities''). Fund Securities received on redemption may not 
be identical to Deposit Securities that are applicable to creations of 
Creation Units.
    Unless cash redemptions are available or specified for a Fund, the 
redemption proceeds for a Creation Unit generally will consist of a 
specified amount of cash, Fund Securities, plus additional cash in an 
amount equal to the difference between the NAV of the Shares being 
redeemed, as next determined after the receipt of a request in proper 
form, and the value of the specified amount of cash and Fund 
Securities, less a redemption transaction fee. Each Fund generally 
redeems Creation Units partially for cash.
    A standard redemption transaction fee will be imposed to offset 
transfer and other transaction costs that may be incurred by the Fund.
    Redemption requests for Creation Units of a Fund must be submitted 
to the Distributor by or through an authorized participant no later 
than 4:00 p.m. Eastern Time on any business day, in order to receive 
that day's NAV. The authorized participant must transmit the request 
for redemption in the form required by the Fund to the Distributor in 
accordance with procedures set forth in the authorized participant 
agreement.
    Additional information regarding the Shares and each Fund, 
including investment strategies, risks, creation and redemption 
procedures, fees and expenses, portfolio holdings disclosure policies, 
distributions, taxes and reports to be distributed to beneficial owners 
of the Shares can be found in the Registration Statement or on the Web 
site for the Funds (www.iShares.com), as applicable.
Availability of Information
    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 include additional 
quantitative information updated on a daily basis, including, for each 
Fund: (1) The prior business day's NAV and the market closing price or 
mid-point of the bid/ask spread at the time of calculation of such NAV 
(the ``Bid/Ask Price''),\78\ and a calculation of the premium or 
discount of the market closing price or Bid/Ask Price against the NAV; 
and (2) data in chart format displaying the frequency distribution of 
discounts and premiums of the daily Bid/Ask Price against the NAV, 
within appropriate ranges, for each of the four previous calendar 
quarters. Daily trading volume information 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. 
On each business day, before commencement of trading in Shares during 
Regular Trading Hours \79\ on the Exchange, each Fund will disclose on 
its Web site 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.\80\ The Disclosed Portfolio will include, as 
applicable, the names, quantity, percentage weighting and market value 
of securities and other assets held by the Fund and the characteristics 
of such assets. The Web site and information will be publicly available 
at no charge.
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    \78\ The Bid/Ask Price of the Fund will be determined using the 
highest bid and the lowest offer on the Exchange as of the time of 
calculation of the Fund's NAV. The records relating to Bid/Ask 
Prices will be retained by the Fund or its service providers.
    \79\ As defined in Rule 1.5(w), the term ``Regular Trading 
Hours'' means the time between 9:30 a.m. and 4:00 p.m. Eastern Time.
    \80\ Under accounting procedures to be followed by each Fund, 
trades made on the prior business day (``T'') will be booked and 
reflected in NAV on the current business day (``T+1''). Accordingly, 
each Fund will be able to disclose at the beginning of the business 
day the portfolio that will form the basis for the NAV calculation 
at the end of the business day.

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[[Page 11287]]

    In addition, for each Fund, an estimated value, defined in Bats 
Rule 14.11(i)(3)(C) as the ``Intraday Indicative Value,'' that reflects 
an estimated intraday value of the Fund's portfolio, will be 
disseminated. Moreover, the Intraday Indicative Value will be based 
upon the current value for the components of the Disclosed Portfolio 
and 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.\81\
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    \81\ Currently, it is the Exchange's understanding that several 
major market data vendors display and/or make widely available 
Intraday Indicative Values published via the Consolidated Tape 
Association (``CTA'') or other data feeds.
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    The dissemination of the Intraday Indicative Value, together with 
the Disclosed Portfolio, will allow investors to determine the value of 
the underlying portfolio of each Fund on a daily basis and provide a 
close estimate of that value throughout the trading day.
    Intraday, executable price quotations on assets held by each Fund 
are available from major broker-dealer firms and for exchange-traded 
assets, including investment companies, 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.
    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. Quotation 
and last sale information for the Shares will be available on the 
facilities of the CTA. Price information relating to all other 
securities held by the Funds will be available from major market data 
vendors. Quotations and last sale information for the underlying 
exchange traded investment companies will be available through CTA.
Initial and Continued Listing
    The Shares will be subject to Bats Rule 14.11(i), which sets forth 
the initial and continued listing criteria applicable to Managed Fund 
Shares. The Exchange represents that, for initial and/or continued 
listing, each Fund must be in compliance with Rule 10A-3 under the 
Act.\82\ A minimum of 100,000 Shares of each Fund will be outstanding 
at the commencement of trading on the Exchange. 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.
---------------------------------------------------------------------------

    \82\ See 17 CFR 240.10A-3.
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Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of each Fund. The Exchange will halt trading in 
the Shares under the conditions specified in Bats Rule 11.18. 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 
securities and/or the financial instruments 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. Trading in the Shares also will be subject to Rule 
14.11(i)(4)(B)(iv), which sets forth circumstances under which trading 
in the Shares of a Fund may be halted.
Trading Rules
    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. Bats [sic] will allow 
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in Bats Rule 11.11(a), the 
minimum price variation for quoting and entry of orders in Managed Fund 
Shares traded on the Exchange is $0.01, with the exception of 
securities that are priced less than $1.00, for which the minimum price 
variation for order entry is $0.0001.
Surveillance
    The Exchange believes that its 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. Trading of 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.\83\ 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 (``TRACE'').
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    \83\ For a list of the current members of ISG, see 
www.isgportal.org. 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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    As it relates to exchange traded investment companies, the Funds 
will only invest in investment companies that trade on markets that are 
a member of the ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement.
    The Exchange prohibits the distribution of material non-public 
information by its employees.
Information Circular
    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) Bats 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 \84\ and After Hours 
Trading Sessions \85\ 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

[[Page 11288]]

confirmation of a transaction; and (6) trading information.
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    \84\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m. 
Eastern Time.
    \85\ The After Hours Trading Session is from 4:00 p.m. to 5:00 
p.m. Eastern Time.
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    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.
    In addition, the Information Circular will reference that each Fund 
is subject to various fees and expenses described in the Registration 
Statement. The Information Circular will also disclose the trading 
hours of the Shares of the Funds and the applicable NAV Calculation 
Time for the Shares. The Information Circular will disclose that 
information about the Shares of the Funds will be publicly available on 
the Funds' Web site. In addition, the Information Circular will 
reference that the Trust is subject to various fees and expenses 
described in each Fund's Registration Statement.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \86\ in general and Section 6(b)(5) of the Act \87\ 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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    \86\ 15 U.S.C. 78f.
    \87\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in Bats Rule 14.11(i). The 
Exchange believes that its 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. Bats Rule 14.11(i)(7) 
provides that, if the investment adviser to the investment company 
issuing Managed Fund Shares is affiliated with a broker-dealer, such 
investment adviser shall erect a ``fire wall'' between the investment 
adviser and the broker-dealer with respect to access to information 
concerning the composition and/or changes to such investment company 
portfolio. The Adviser is not a registered broker-dealer, but is 
affiliated with multiple broker-dealers and has implemented ``fire 
walls'' with respect to such broker-dealers regarding access to 
information concerning the composition and/or changes to a Fund's 
portfolio. In addition, Adviser personnel who make decisions regarding 
a Fund's portfolio are subject to procedures designed to prevent the 
use and dissemination of material nonpublic information regarding the 
Fund's portfolio. 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. Each Fund's investments will be 
well-diversified in that 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; each Fund 
will hold a minimum of 75 different Municipal Securities when at least 
four creation units are outstanding for that Fund; 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 for that Fund; no single Municipal Security held 
by a Fund will exceed 4% of the weight of that Fund's portfolio and no 
single issuer of Municipal Securities will account for more than 10% of 
the weight of a Fund's portfolio; each Fund will hold Municipal 
Securities of at least 20 non-affiliated issuers; and each Fund will 
hold Municipal Securities of at least 30 non-affiliated issuers when at 
least four creation units are outstanding.
    According to the Registration Statement, each Fund will invest, 
under normal circumstances,\88\ at least 80% of its net assets in 
Municipal Securities such that the interest on each security is exempt 
from U.S. federal income taxes and the federal AMT. Additionally, 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 \89\ under the 1940 Act.\90\ Each Fund will 
monitor its portfolio liquidity on an ongoing basis to determine 
whether, in light of current circumstances, an adequate level of 
liquidity is being maintained, and will consider taking appropriate 
steps in order to maintain adequate liquidity if, through a change in 
values, net assets, or other circumstances, more than 15% of the Fund's 
net assets are held in illiquid assets. Illiquid assets include 
securities subject to contractual or other restrictions on resale and 
other instruments that lack readily available markets as determined in 
accordance with Commission staff guidance.
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    \88\ See supra note 7.
    \89\ See supra note 27.
    \90\ The Commission has stated that long-standing Commission 
guidelines have required open-end funds to hold no more than 15% of 
their net assets in illiquid securities and other illiquid assets. 
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR 
14618 (March 18, 2008), footnote 34. See also, Investment Company 
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31, 
1970) (Statement Regarding ``Restricted Securities''); Investment 
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March 
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio 
security is illiquid if it cannot be disposed of in the ordinary 
course of business within seven days at approximately the value 
ascribed to it by the fund. See Investment Company Act Release No. 
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting 
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act 
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990) 
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
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 Disclosed Portfolio will be made available to all market 
participants at the same time. In addition, a large amount of 
information is publicly available regarding the Funds and the Shares, 
thereby promoting market transparency. Moreover, the Intraday 
Indicative Value will be disseminated by one or more major market data 
vendors at least every 15 seconds during Regular Trading Hours. On each 
business day, before commencement of trading in Shares during Regular 
Trading Hours, each Fund will disclose on its Web site the Disclosed 
Portfolio that will form the basis for the Fund's calculation of NAV at 
the end of the business day. Pricing information will include 
additional quantitative information updated on a daily basis, 
including, for the Fund: (1) The prior business day's NAV and the 
market closing price or mid-point of the

[[Page 11289]]

Bid/Ask Price,\91\ and a calculation of the premium or discount of the 
market closing price or Bid/Ask Price against the NAV; and (2) data in 
chart format displaying the frequency distribution of discounts and 
premiums of the daily market closing price or Bid/Ask Price against the 
NAV, within appropriate ranges, for each of the four previous calendar 
quarters. Additionally, information regarding market price and trading 
of the Shares will be continually available on a real-time basis 
throughout the day on brokers' computer screens and other electronic 
services, and quotation and last sale information for the Shares will 
be available on the facilities of the CTA. The Web site for each Fund 
will include a form of the prospectus for the Fund and additional data 
relating to NAV and other applicable quantitative information. Trading 
in Shares of a Fund will be halted under the conditions specified in 
Bats 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 Bats Rule 14.11(i)(4)(B)(iv), which sets forth 
circumstances under which Shares may be halted. In addition, as noted 
above, investors will have ready access to information regarding the 
Fund's holdings, the Intraday Indicative Value, the Disclosed 
Portfolio, and quotation and last sale information for the Shares.
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    \91\ The Bid/Ask Price of a Fund will be determined using the 
highest bid and the lowest offer on the Exchange as of the time of 
calculation of the Fund's NAV. The records relating to Bid/Ask 
Prices will be retained by the Fund or its service providers.
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    Intraday, executable price quotations on assets held by the Funds 
are available from major broker-dealer firms and for exchange-traded 
assets, including investment companies, 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.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of actively-managed exchange traded product that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG, from other exchanges that are members of 
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. As noted above, investors will also have 
ready access to information regarding each Fund's holdings, the 
Intraday Indicative Value, the Disclosed Portfolio, and quotation and 
last sale information for the Shares.
    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 actively-managed exchange-traded product 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 proposed rule 
change 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 [email protected]. Please include 
File Number SR-BatsBZX-2017-10 in 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-2017-10. This 
file number should be included in 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 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 Number SR-BatsBZX-2017-10 and should 
be submitted on or before March 14, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\92\
---------------------------------------------------------------------------

    \92\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-03301 Filed 2-17-17; 8:45 am]
 BILLING CODE 8011-01-P