[Federal Register Volume 83, Number 10 (Tuesday, January 16, 2018)]
[Notices]
[Pages 2234-2237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00533]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82476; File No. SR-BATSBZX-2017-58]
Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Order
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To
List and Trade Shares of the Cboe Vest S&P 500[supreg] Dividend
Aristocrats[supreg] Target Income Index ETF Under the ETF Series
Solutions Trust Under Rule 14.11(c)(3)
January 9, 2018.
I. Introduction
On September 19, 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'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the Cboe Vest S&P 500[supreg] Dividend
Aristocrats[supreg] Target Income Index ETF (``Fund'') under the ETF
Series Solutions Trust (``Trust''). The proposed
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rule change was published for comment in the Federal Register on
October 11, 2017.\3\ On November 17,2017, pursuant to Section 19(b)(2)
of the Act,\4\ 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.\5\ On December 29, 2017, the Exchange filed
Amendment No. 1 to the proposed rule change. On January 2, 2018, the
Exchange filed Amendment No. 2 to the proposed rule change, which
replaced the original filing, as amended by Amendment No. 1, in its
entirety.\6\ The Commission received no comments on the proposed rule
change. This order approves the proposed rule change, as modified by
Amendment No. 2.
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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. 81815 (October 4,
2017), 82 FR 47265.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 82115, 82 FR 55891
(November 24, 2017). The Commission designated January 9, 2018, as
the date by which the Commission shall either approve or disapprove,
or institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ In Amendment No. 2, the Exchange: (1) Updated information
regarding the Fund's registration statement; (2) made
representations regarding the fire walls to be implemented by the
Fund's adviser and the provider of the underlying index; (3)
disclosed the investment objective of the Fund; (4) provided
additional information regarding the underlying index; (5)
supplemented its description of the Fund's permitted investments;
(6) described the availability of price information for the Shares
and the Fund's permitted investments; (7) made certain
representations regarding surveillance; (8) represented that the
Fund's portfolio holdings will be disclosed daily on the issuer's
website; (9) stated that the Exchange deems the Shares to be equity
securities; (10) disclosed the minimum number of Shares that will be
outstanding at the commencement of trading; (11) identified
circumstances in which trading in the Shares may and will be halted;
and (12) made other technical amendments. Amendment No. 2 is
available at https://www.sec.gov/comments/sr-batsbzx-2017-58/batsbzx201758-2869571-161745.pdf. Because Amendment No. 2 does not
materially alter the substance of the proposed rule change or raise
unique or novel regulatory issues, Amendment No. 2 is not subject to
notice and comment.
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II. Description of the Proposal \7\
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\7\ Additional information regarding the Trust, the Fund, the
underlying index, and the Shares, including investment strategies,
risks, creation and redemption procedures, fees, portfolio holdings,
disclosure policies, calculation of the NAV, distributions, and
taxes, among other things, can be found in Amendment No. 2, supra
note 6, and the Registration Statement, infra note 8.
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The Exchange proposes to list and trade the Shares pursuant to its
Rule 14.11(c)(3), which governs the listing and trading of Index Fund
Shares on the Exchange.\8\ The Shares do not qualify for generic
listing because the index underlying the Shares includes derivatives,
rather than consisting exclusively of ``U.S. Component Stocks'' (as
defined in BZX Rule 14.11(c)(1)(D)) or ``U.S. Component Stocks and
cash,'' as required by BZX Rule 14.11(c)(3)(A)(i).
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\8\ According to the Exchange, the Trust filed with the
Commission a registration statement on Form N-1A under the
Securities Act of 1993 relating to the Fund (File Nos. 333-179562
and 811-22668) (``Registration Statement''). According to the
Exchange, the Commission has not yet issued an order granting
exemptive relief to the Trust under the Investment Company Act of
1940 (15 U.S.C. 80a-1) applicable to the activities of the Fund. The
Exchange represents that the Fund will not be listed on the Exchange
until such an order is issued and any conditions contained therein
are satisfied.
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The Funds' adviser, Cboe Vest Financial, LLC (the ``Adviser''), and
index provider, Chicago Board Options Exchange (``Cboe Options'' or the
``Index Provider''), are not registered as broker-dealers, but are
affiliated with a broker-dealer. The Index Provider has implemented and
will maintain a ``fire wall'' with respect to such broker-dealer and
its personnel regarding access to information concerning the
composition and/or changes to the Index (as defined below). In
addition, Index Provider personnel who make decisions regarding the
Index composition or methodology are subject to procedures designed to
prevent the use and dissemination of material nonpublic information
regarding the Index, pursuant to BZX Rule 14.11(c)(3)(B)(iii). The
Adviser has also implemented and will maintain a ``fire wall'' with
respect to such broker-dealer and its personnel regarding access to
information concerning the composition and/or changes to the 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 a 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.
A. The Index
The Fund will track the Cboe S&P 500[supreg] Dividend
Aristocrats[supreg] Target Income Index (``Index''). The Index is
composed of two parts: (1) An equal-weighted portfolio of the stocks
contained in the S&P 500 Dividend Aristocrats Index \9\ (``Aristocrat
Stocks'') that have options that trade on a national securities
exchange; and (2) a rolling series of short weekly or monthly call
options on each of the Aristocrat Stocks (``Covered Calls'').\10\ The
equity component of the Index is rebalanced (i.e., weights are reset to
equal-weighted) quarterly effective after the close of the last
business day of each January, April, July, and October and
reconstituted (i.e., Aristocrat Stocks are added and deleted according
to the Index rules) annually effective after the close of the last
business day of each January.
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\9\ According to the Exchange, there are currently 51 stocks in
the Index and at each annual reconstitution the minimum number of
constituent stocks is 40.
\10\ All of the options contracts held by the Fund will trade on
markets that are a member of Intermarket Surveillance Group
(``ISG'') or affiliated with a member of ISG or with which the
Exchange has in place a comprehensive surveillance sharing
agreement.
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B. The Fund's Principal Investments
The Fund would invest all, or substantially all, of its assets in
the component securities that make up the Index. Under Normal Market
Conditions,\11\ at least 80% of the Fund's total assets (exclusive of
any collateral held from securities lending) will be invested in the
component securities of the Index. The Fund will hold only: U.S.
exchange-listed equity securities; FLEX options listed on a U.S.
national securities exchange overlying other exchange-listed equity
securities or U.S equity indexes; standardized options listed on a U.S.
national securities exchange overlying exchange-listed equity
securities or U.S. equity indexes; cash; and cash equivalents.
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\11\ ``Normal Market Conditions'' is defined in BZX Rule
14.11(i)(3)(E).
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C. The Fund's Non-Principal Investments
The Fund would hold up to 20% of its assets in instruments that are
not included in the Index, including only the following: U.S. exchange-
listed ETFs that provide broad-based exposure to U.S. large cap stocks,
U.S. exchange-listed FLEX and/or U.S. exchange-listed standardized
options on such ETFs, U.S. exchange-listed FLEX and/or U.S. exchange-
listed standardized options on the S&P 500 Index, and cash and cash
equivalents.\12\
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\12\ For purposes of this proposal, cash equivalents include
short-term instruments with maturities of less than three months,
including: (i) U.S. Government securities, including bills, notes,
and bonds differing as to maturity and rates of interest, which are
either issued or guaranteed by the U.S. Treasury or by U.S.
Government agencies or instrumentalities; (ii) certificates of
deposit issued against funds deposited in a bank or savings and loan
association; (iii) bankers acceptances, which are short-term credit
instruments used to finance commercial transactions; (iv) repurchase
agreements and reverse repurchase agreements; (v) bank time
deposits, which are monies kept on deposit with banks or savings and
loan associations for a stated period of time at a fixed rate of
interest; (vi) commercial paper, which are short-term unsecured
promissory notes; and (vii) money market funds.
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[[Page 2236]]
III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to list and trade the Shares, as modified by Amendment No. 2,
is consistent with the Exchange Act and the rules and regulations
thereunder applicable to a national securities exchange.\13\ In
particular, the Commission finds that the proposal to list and trade
the Shares on the Exchange is consistent with Section 11A(a)(1)(C)(iii)
of the Exchange Act,\14\ which sets forth Congress's finding that it is
in the public interest and appropriate for the protection of investors
and the maintenance of fair and orderly markets to assure the
availability to brokers, dealers, and investors of information with
respect to quotations for, and transactions in, securities. According
to the Exchange, quotation and last-sale information for the Shares
will be available through the Consolidated Tape Association, and
information regarding the previous day's closing price and trading
volume for the Shares will be published daily in the financial section
of newspapers.
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\13\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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The Commission also finds that the proposed rule change is
consistent with Section 6(b)(5) of the Exchange Act,\15\ which
requires, among other things, that the Exchange's rules be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
and, in general, to protect investors and the public interest. The
Commission believes that the proposal to list and trade the Shares is
reasonably designed to promote fair disclosure of information that may
be necessary to price the Shares appropriately.
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\15\ 15 U.S.C. 78f(b)(5).
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The Exchange deems the Shares to be equity securities,\16\ and
therefore trading in the Shares will be subject to the Exchange's
existing rules governing the trading of equity securities. The Exchange
represents that the Shares and the Index will satisfy, on an initial
and continued listing basis, all of the generic listing standards other
than BZX Rule 14.11(c)(3)(A)(i), and will satisfy all other applicable
requirements for Index Fund Shares under BZX Rule 14.11(c).
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\16\ See Amendment No. 2, supra note 6, at 11.
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The Index value will be widely disseminated by one or more major
market data vendors at least every 15 seconds during the Exchange's
Regular Trading Hours.\17\ Further, an Intraday Indicative Value for
the Shares, updated at least every 15 seconds, will be disseminated
during the Exchange's Regular Trading Hours.\18\ The portfolio of
instruments held by the Fund will be disclosed daily on the Fund's
website.\19\
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\17\ See BZX Rule 14.11(c)(3)(B)(ii)(a). The Exchange's
``Regular Trading Hours'' are between 9:30 a.m. and 4:00 p.m.
Eastern Time. See BZX Rule 1.5(w).
\18\ See BZX Rule 14.11(c)(3)(C).
\19\ See BZX Rule 14.11(c)(1)(B)(iv).
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Quotation and last sale information for standardized options will
be available via the Options Price Reporting Authority. RFQ information
for FLEX Options will be available directly from the listing exchange.
Last-sale information for FLEX Options will be available via the
Options Price Reporting Authority. The intra-day, closing and
settlement prices of exchange-traded options (both standardized and
FLEX Options) will be readily available from the options exchanges,
automated quotation systems, published or other public sources, or
online information services such as Bloomberg or Reuters. Price
information on Treasury bills and other cash equivalents is available
from major broker-dealer firms or market data vendors, as well as from
automated quotation systems, published or other public sources, or
online information services.
The Commission also believes that the proposal is designed to
prevent trading when a reasonable degree of transparency cannot be
assured. The Exchange states that trading in the Shares may be halted
for market conditions or for reasons that, in the view of the Exchange,
make trading inadvisable. Similarly, trading in the Shares will be
halted where there is an interruption to the Intraday Indicative Value
being disseminated at least every 15 seconds during Regular Trading
Hours and such interruption persists past the trading day in which it
occurred.\20\ The Exchange will obtain a representation from the issuer
of the Shares that the NAV per Share will be calculated daily and made
available to all market participants at the same time.\21\ If the
Exchange becomes aware that the NAV for the Shares is not being
disseminated to all market participants at the same time or the daily
public website disclosure of portfolio holdings does not occur, the
Exchange shall halt trading in the Shares.\22\
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\20\ See Amendment No. 2, supra note 6, at 11.
\21\ See BZX Rule 14.11(c)(9)(A)(ii).
\22\ See BZX Rule 14.11(c)(1)(b)(iv).
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To support this proposal, the Exchange has made the following
representations:
(1) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.\23\
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\23\ See Amendment No. 2, supra note 6, at 11.
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(2) The Exchange or FINRA, on behalf of the Exchange, will
communicate as needed regarding trading in the Shares and exchange-
traded options contracts with other markets and other entities that are
members of the ISG and may obtain trading information regarding trading
in the Shares and exchange-traded options contracts from such markets
and other entities. The Exchange is also able to access, as needed,
trade information for certain fixed income instruments reported to
FINRA's Trade Reporting and Compliance Engine. The Exchange may obtain
information regarding trading in the Shares and exchange-traded options
contracts from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.\24\
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\24\ See id. at 11-12.
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(3) All of the instruments held by the Fund, other than cash
equivalents, will be U.S. exchange-listed and will trade on markets
that are a member of the ISG or affiliated with a member of ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement.\25\
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\25\ See id. at 10, 15.
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(4) For initial and continued listing, the Fund must be in
compliance with Rule 10A-3 under the Exchange Act.\26\
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\26\ See id. at 11.
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(5) A minimum of 100,000 Shares will be outstanding at the
commencement of trading on the Exchange.\27\
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\27\ See id.
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(6) The Fund will not be listed on the Exchange until the
Commission has issued an order granting exemptive relief to the Trust
under the Investment Company Act of 1940 applicable to the activities
of the Fund and any conditions contained therein are satisfied.\28\
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\28\ See id. at 4 n.3.
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All statements and representations made in this filing regarding
the index composition, the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and intraday
indicative values, and the applicability of Exchange rules specified in
this filing shall constitute continued listing requirements for the
Fund. The issuer has represented to the Exchange that it will advise
the Exchange of any failure by the Fund or the Shares to comply with
the continued listing requirements, and, pursuant to its obligations
under Section 19(g)(1) of the Act, the Exchange will surveil for
compliance with the continued listing requirements. If the Fund or the
Shares are not in compliance with the applicable listing requirements,
the Exchange will commence delisting procedures under BZX Rule 14.12.
This approval order is based on all of the Exchange's representations,
including those set forth above and in Amendment No. 2.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Exchange Act \29\
and Section 11A(a)(1)(C)(iii) of the Exchange Act \30\ and the rules
and regulations thereunder applicable to a national securities
exchange.
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\29\ 15 U.S.C. 78f(b)(5).
\30\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\31\ that the proposed rule change (SR-BATSBZX-2017-58),
as modified by Amendment No. 2, be, and hereby is, approved.
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\31\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00533 Filed 1-12-18; 8:45 am]
BILLING CODE 8011-01-P