[Federal Register Volume 82, Number 94 (Wednesday, May 17, 2017)]
[Notices]
[Pages 22680-22682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-09932]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80664; File No. SR-BatsBZX-2017-07]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade 
Shares of the VanEck Vectors AMT-Free National Municipal Index ETF of 
VanEck Vectors ETF Trust Under BZX Rule 14.11(c)(4)

May 11, 2017.

I. Introduction

    On January 27, 2017, Bats BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
VanEck Vectors AMT-Free National Municipal Index ETF (``Fund'') under 
BZX Rule 14.11(c)(4). The proposed rule change was published for 
comment in the Federal Register on February 14, 2017.\3\ On March 10, 
2017, the Exchange filed Amendment No. 1 to the proposed rule change, 
which amended and replaced the proposed rule change as originally 
filed.\4\ On March 30, 2017, pursuant to Section 19(b)(2) of the 
Act,\5\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\6\ The Commission has received no comment letters 
on the proposed rule change. This order institutes proceedings under 
Section 19(b)(2)(B) of the Act \7\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 79989 (February 8, 
2017), 82 FR 10615.
    \4\ In Amendment No. 1, the Exchange: (1) Clarified its 
description of the two benchmark indexes that the Index (as defined 
below) tracks; (2) clarified its description of the Fund's 
investments; (3) made additional representations regarding the 
applicability of Exchange rules and other requirements; (4) 
clarified its description of the calculation of the net asset value 
of the Fund; (5) stated the cutoff time for orders to create 
Creation Units; (6) represented that FINRA, on behalf of the 
Exchange, may obtain certain information for surveillance; and (7) 
made technical changes. Amendment No. 1 to the proposed rule change 
is available at: https://www.sec.gov/comments/sr-batsbzx-2017-07/batsbzx201707-1667531-148997.pdf.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 80350, 82 FR 16647 
(April 5, 2017). The Commission designated May 15, 2017 as the date 
by which the Commission shall either approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Exchange's Description of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Exchange proposes to list and trade Shares of the Fund under 
BZX Rule 14.11(c)(4), which governs the listing and trading of index 
fund shares based on fixed income securities indexes. The Shares will 
be offered by the VanEck Vectors ETF Trust (``Trust'').\8\ Van Eck 
Associates Corporation will be the investment adviser (``Adviser'') to 
the Fund. The Adviser will serve as the administrator for the Fund. The 
Bank of New York Mellon will serve as the custodian and transfer agent 
for the Fund. Van Eck Securities Corporation will be the distributor of 
the Shares. Bloomberg Finance L.P. and its affiliates will be the index 
provider.
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    \8\ The Exchange states that the Trust is registered with the 
Commission as an open-end investment company. See Registration 
Statement on Form N-1A for the Trust, dated October 31, 2016 (File 
Nos. 333-123257 and 811-10325) (``Registration Statement''). The 
Exchange further states that the Commission has issued an order 
granting certain exemptive relief to the Trust under the Investment 
Company Act of 1940 (``1940 Act''). See Investment Company Act 
Release No. 28021 (October 24, 2007) (File No. 812-13426).
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    The Exchange has made the following representations and statements 
in describing the Fund and its investment strategy, including the 
Fund's portfolio holdings and investment restrictions.\9\
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    \9\ The Commission notes that additional information regarding 
the Fund, the Index (as defined below), the Trust, and the Shares, 
including investment strategies, risks, creation and redemption 
procedures, fees, portfolio holdings disclosure policies, 
calculation of net asset value, distributions, and taxes, among 
other things, can be found in Amendment No. 1 and the Registration 
Statement, as applicable. See supra notes 4 and 8, respectively.
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A. Exchange's Description of the Fund's Principal Investments

    According to the Exchange, the Fund will seek to replicate as 
closely as possible, before fees and expenses, the price and yield 
performance of the Bloomberg Barclays AMT-Free National Municipal Index 
(``Index'').\10\ The Index tracks the municipal bond market by tracking 
two total return, market-size-weighted benchmark indexes with target 
weights as follows:
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    \10\ The Exchange states that, unless otherwise noted, all 
statistics related to the Index presented in the proposal were 
accurate as of November 30, 2016.
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     A 75% weight in the Muni Investment-Grade Rated/$75 
Million Deal Size Index in order to gain exposure to investment grade 
municipal bonds (i.e., rated Baa3/BBB- or higher). To be included in 
the Muni Investment-Grade Rated/$75 Million Deal Size Index, a bond 
must be rated Baa3/BBB- or higher by at least two of the following 
rating agencies if all three agencies rate the bond: Moody's Investors 
Service (``Moody's''), Standard & Poor's Ratings Services (``S&P'') and 
Fitch Ratings, Inc. (``Fitch''). If only two of the three agencies rate 
the bond, the lower rating is used to determine index eligibility. If 
only one of the three agencies rates the bond, the rating must be Baa3/
BBB- or higher. Bonds in the Muni Investment-Grade Rated/$75 Million 
Deal Size Index must have an outstanding par value of at least $7 
million and be

[[Page 22681]]

issued as part of a transaction of at least $75 million.
     A 25% weight in the Muni High Yield/$20 Million Deal Size 
Index in order to gain exposure to non-investment grade municipal bonds 
(i.e., unrated or rated Ba1/BB+ or lower). To be included in the Muni 
High Yield/$20 Million Deal Size Index, a bond must be unrated or rated 
Ba1/BB+ or lower by at least two of the following rating agencies if 
all three agencies rate the bond: Moody's, S&P, and Fitch. If only two 
of the three agencies rate the bond, the lower rating is used to 
determine index eligibility. If only one of the three agencies rates 
the bond, the rating must be Ba1/BB+ or lower. Bonds in the Muni High 
Yield/$20 Million Deal Size Index must have an outstanding par value of 
at least $3 million and be issued as part of a transaction of at least 
$20 million.
    All bonds included in the Index must have a fixed rate, a dated 
date (i.e., the date when interest begins to accrue) after December 31, 
1990, and a nominal maturity of 1 to 30 years. Bonds subject to the 
alternative minimum tax, taxable municipal bonds, bonds with floating 
rates, derivatives and municipal bonds of issuers from the territories 
of the United States (e.g., Puerto Rico) are excluded from the Index. 
The composition of the Index is rebalanced monthly. Interest and 
principal payments earned by the component securities are held in the 
Index without a reinvestment return until month end when they are 
removed from the Index. Qualifying securities issued, but not 
necessarily settled, on or before the month end rebalancing date 
qualify for inclusion in the Index in the following month.
    According to the Exchange, the Fund normally invests at least 80% 
of its total assets in securities that comprise the Fund's benchmark 
index. The Index is comprised of publicly traded municipal bonds that 
cover the U.S. dollar-denominated investment grade and high yield tax-
exempt bond market. The Fund's 80% investment policy is non-fundamental 
and may be changed without shareholder approval upon 60 days' prior 
written notice to shareholders.\11\ The Fund also has adopted a 
fundamental investment policy to invest at least 80% of its assets in 
municipal securities.\12\ When issued transactions (``WIs'') 
representing securities eligible for inclusion in the Index may be used 
by the Fund in seeking performance that corresponds to the Index and in 
such cases would count towards the Fund's 80% Investment Policy.
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    \11\ The Exchange states that the Fund's policy to invest 80% of 
its total assets in securities that comprise the Fund's benchmark 
index (``80% Investment Policy'') is non-fundamental and may be 
changed without shareholder approval upon 60 days' prior written 
notice to shareholders. The Exchange notes that, notwithstanding the 
foregoing, all statements and representations made in the filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets (including, for example, the 
Fund's 80% Investment Policy), or (c) the applicability of Exchange 
rules and surveillance procedures shall constitute continued listing 
requirements for listing the Shares on the Exchange. The issuer has 
represented to the Exchange that it will advise the Exchange of any 
failure by the Fund to comply with the continued listing 
requirements (or any changes made with respect to the Fund's 80% 
Investment Policy), and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will surveil for compliance with 
the continued listing requirements. If the Fund is not in compliance 
with the applicable listing requirements, the Exchange will commence 
delisting procedures under Exchange Rule 14.12.
    \12\ The Fund's policy to invest 80% of its assets in municipal 
securities is a fundamental investment policy that cannot be changed 
without the approval of the holders of a majority of the Fund's 
outstanding voting securities.
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B. Exchange's Description of the Fund's Other Investments

    While the Fund normally will invest at least 80% of its total 
assets in securities that compose the Index, as described above, the 
Fund may invest its remaining assets in the other financial instruments 
described below.
    The Fund may invest its remaining assets in the following 
instruments: Municipal bonds not included in the Index; money market 
instruments, including repurchase agreements or other funds which 
invest exclusively in money market instruments; convertible securities; 
structured notes; certain derivative instruments described below; and, 
to the extent permitted by the 1940 Act, affiliated and unaffiliated 
funds, such as open-end or closed-end management investment companies, 
including other exchange-traded funds (``ETFs'').\13\ WIs not included 
in the Index may also be used by the Fund in managing cash flows. The 
Fund may use exchange-traded futures contracts and exchange-traded 
options thereon, together with positions in cash and money market 
instruments, to simulate full investment in the Index. The Fund may use 
cleared or non-cleared index, interest rate or credit default swap 
agreements. The Fund may invest in exchange-traded warrants. The Fund 
may invest in participation notes.
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    \13\ For purposes of this filing, ETFs include Index Fund Shares 
(as described in Rule 14.11(c)); Portfolio Depositary Receipts (as 
described in Rule 14.11(b)); and Managed Fund Shares (as described 
in Rule 14.11(i)). All ETFs will be listed and traded in the U.S. on 
registered exchanges. The Fund may invest in the securities of ETFs 
registered under the 1940 Act consistent with the requirements of 
Section 12(d)(1) of the 1940 Act, or any rule, regulation or order 
of the Commission or interpretation thereof. While the Fund may 
invest in inverse ETFs, the Fund will not invest in leveraged or 
inverse leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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C. Exchange's Description of the Index

    The Exchange is submitting this proposed rule change because the 
Index for the Fund does not meet all of the generic listing 
requirements of BZX Rule 14.11(c)(4) applicable to index fund shares 
based on fixed income securities indexes. The Exchange states that the 
Index meets all such requirements except for those set forth in BZX 
Rule 14.11(c)(4)(B)(i)(b).\14\ BZX Rule 14.11(c)(4)(B)(i)(b) provides 
that components that in the aggregate account for at least 75% of the 
weight of the index or portfolio each shall have a minimum original 
principal amount outstanding of $100 million or more. As of November 
30, 2016, 25.04% of the weight of the Index components have a minimum 
original principal amount outstanding of $100 million or more.
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    \14\ The Exchange states that, except for BZX Rule 
14.11(c)(4)(B)(i)(b), the Index currently satisfies and will 
continue to satisfy all of the generic listing standards under BZX 
Rule 14.11(c)(4). The Exchange also states that the continued 
listing standards under BZX Rule 14.11(c) applicable to index fund 
shares shall apply to the Shares.
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    According to the Exchange, as of November 30, 2016, there were 
50,615 issues in the Index, and 86.49% of the weight of the Index 
components was comprised of individual maturities that were part of an 
entire municipal bond offering with a minimum original principal amount 
outstanding $100 million or more for all maturities of the offering. In 
addition, the total dollar amount outstanding of issues in the Index 
was approximately $1.5 trillion and the average dollar amount 
outstanding of issues in the Index was approximately $30.4 million. 
Further, the most heavily weighted component represented 1.57% of the 
weight of the Index and the five most heavily weighted components 
represented 3.93% of the weight of the Index. Finally, 63.8% of the 
Index weight consisted of issues with a rating of AA/Aa2 or higher.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
BatsBZX-2017-07, as Modified by Amendment No. 1, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \15\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution

[[Page 22682]]

of such proceedings is appropriate at this time in view of the legal 
and policy issues raised by the proposed rule change. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change, as modified by 
Amendment No. 1.
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    \15\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\16\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposal's consistency with Section 6(b)(5) of the Act, 
which requires, among other things, that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \17\ As noted above, the Exchange is submitting this 
proposed rule change because the Index for the Fund does not meet the 
requirements set forth in BZX Rule 14.11(c)(4)(B)(i)(b). In the 
proposal, the Exchange described certain characteristics of the Index 
as of November 30, 2016,\18\ and stated its belief that the Index is 
sufficiently broad-based to deter potential manipulation and that the 
Index securities are sufficiently liquid to deter potential 
manipulation. However, the Commission notes that the Exchange did not 
provide, for the continued listing of the Shares, parameters around the 
extent to which the Index may change from those characteristics. The 
Commission seeks commenters' views on whether the Exchange's statements 
and representations support a determination that the listing and 
trading of the Shares would be consistent with Section 6(b)(5) of the 
Act, which, among other things, requires that the rules of an exchange 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and to protect 
investors and the public interest.
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    \16\ Id.
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ See supra Section II.C.
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\19\
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    \19\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 7, 2017. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 21, 
2017. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal, which are set 
forth in Amendment No. 1,\20\ in addition to any other comments they 
may wish to submit about the proposed rule change.
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    \20\ See supra note 4.
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    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-2017-07 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BatsBZX-2017-07. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BatsBZX-2017-07 and should 
be submitted on or before June 7, 2017. Rebuttal comments should be 
submitted by June 21, 2017.
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    \21\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-09932 Filed 5-16-17; 8:45 am]
BILLING CODE 8011-01-P