[Federal Register Volume 83, Number 58 (Monday, March 26, 2018)]
[Notices]
[Pages 12992-12995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06013]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82906; File No. SR-CboeBZX-2017-012]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To 
List and Trade Shares of the LHA Market State[supreg] Tactical U.S. 
Equity ETF, a Series of the ETF Series Solutions, Under Rule 14.11(i), 
Managed Fund Shares

March 20, 2018.

I. Introduction

    On December 7, 2017, Cboe 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 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade the shares 
(``Shares'') of the LHA Market State[supreg] Tactical U.S. Equity ETF 
(``Fund''), a Series of the ETF Series Solutions (``Trust''). The 
proposed rule change was published for comment in the Federal Register 
on December 28, 2017.\3\ On January 31, 2018, the Exchange filed 
Amendment No. 1 to the proposed rule change.\4\ On February 6, 2018, 
pursuant to Section 19(b)(2) of the Exchange 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

[[Page 12993]]

rule change.\6\ On February 13, 2018, the Exchange filed Amendment No. 
2 to the proposed rule change.\7\ The Commission received no comment 
letters 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. 82379 (Dec. 21, 
2017), 82 FR 61608.
    \4\ Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety, is available on the Commission's 
website at: https://www.sec.gov/comments/sr-cboebzx-2017-012/cboebzx2017012-3002921-161895.pdf.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 82643, 83 FR 6071 
(Feb. 12, 2018). The Commission designated March 28, 2018, as the 
date by which the Commission shall either approve, disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \7\ In Amendment No. 2, which amended and replaced the proposed 
rule change, as modified by Amendment No. 1, in its entirety, the 
Exchange: (a) Supplemented the description of the Fund's relative 
exposures to the U.S. equity and S&P 500 futures markets; (b) made 
conforming informational and rule reference corrections to maintain 
internal consistency; (c) updated the status of the registration 
statement for the Fund; (d) clarified the use of certain defined 
terms; and (e) made other technical and non-substantive changes. 
Because Amendment No. 2 does not materially alter the substance of 
the proposed rule change or raise unique or novel regulatory issues, 
it is not subject to notice and comment. Amendment No. 2 is 
available on the Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2017-012/cboebzx2017012-3033817-161904.pdf.
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II. Exchange's Description of the Proposal, as Modified by Amendment 
No. 2

    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(i), which governs the listing and trading of Managed Fund Shares 
on the Exchange. The Exchange represents that the Fund will be an 
actively managed exchange-traded fund that seeks to provide investment 
results that exceed the total return performance of the broader U.S. 
equity market on a risk-adjusted basis. The Exchange has submitted this 
proposal in order to allow the Fund to hold listed derivatives, in 
particular S&P 500 futures, in a manner that would exceed the 
limitations of BZX Rule 14.11(i)(4)(C)(iv)(b), which prevents, among 
other things, a series of Managed Fund Shares from holding listed 
derivatives based on any single underlying reference asset in excess of 
30 percent of the weight of its portfolio (including gross notional 
exposures) (``30% Limitation'').\8\ Otherwise, the Fund will comply 
with all other listing requirements of BZX Rule 14.11(i), including BZX 
Rule 14.11(i)(4)(C), on an initial and continued listing basis.
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    \8\ BZX Rule 14.11(i)(4)(C)(iv)(b) requires that the aggregate 
gross notional value of listed derivatives based on any five or 
fewer underlying reference assets to not exceed 65% of the weight of 
the portfolio (including gross notional exposures), and the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset to not exceed 30% of the weight of 
the portfolio (including gross notional exposures). The Exchange 
states that the proposal is to allow the Fund to exceed the specific 
requirement of BZX Rule 14.11(i)(4)(C)(iv)(b) that prevents the 
aggregate gross notional value of listed derivatives based on any 
single underlying reference asset from exceeding 30% of the weight 
of the portfolio (including gross notional exposures). According to 
the Exchange, the Fund will meet the other requirement of BZX Rule 
14.11(i)(4)(C)(iv)(b).
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    The Shares will be offered by the Trust, which is registered with 
the Commission as an open-end investment company.\9\ The Fund's 
adviser, Little Harbor Advisors, LLC (``Adviser''), is not registered 
as a broker-dealer and is not affiliated with a broker-dealer. Adviser 
personnel who make decisions regarding the 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 a broker-dealer; or (b) any new adviser or sub-
adviser is a registered broker-dealer or becomes affiliated with a 
broker-dealer; it will implement a fire wall with respect to its 
relevant personnel or such broker-dealer affiliate, as applicable, 
regarding access to information concerning the composition of, or 
changes to, the portfolio, and will be subject to procedures designed 
to prevent the use and dissemination of material, nonpublic information 
regarding such portfolio.
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    \9\ The Exchange represents that the Trust has filed a post-
effective amendment to its registration statement (``Registration 
Statement'') on December 18, 2017. See Registration Statement on 
Form N-1A for the Trust (File Nos. 333-179562 and 811-22668). The 
Commission has not yet issued an order granting exemptive relief to 
the Trust under the Investment Company Act of 1940 applicable to the 
activities of the Fund, but the Exchange further represents that the 
Fund Shares will not be listed on the Exchange until such an order 
is issued and any conditions contained therein are satisfied.
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    In order to achieve its investment objective, under Normal Market 
Conditions,\10\ the Fund will invest approximately 80% of its net 
assets at the time of investment in U.S. exchange-listed exchange-
traded funds that principally invest in U.S. equity securities (``U.S. 
ETFs'') \11\ or the constituent stock holdings of a U.S. ETF (together 
with U.S. ETFs, collectively, ``U.S. Equities''). The Fund generally 
will invest in U.S. Equities in order to gain exposure to large cap 
U.S. equity securities.
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    \10\ As defined in BZX Rule 14.11(i)(3)(E), the term ``Normal 
Market Conditions'' includes, but is not limited to, the absence of 
trading halts in the applicable financial markets generally; 
operational issues causing dissemination of inaccurate market 
information or system failures; or force majeure type events, such 
as natural or man-made disaster, act of God, armed conflict, act of 
terrorism, riot or labor disruption, or any similar intervening 
circumstance.
    \11\ The Exchange states that, for purposes of the proposal, the 
term ``U.S. ETFs'' means Portfolio Depositary Receipts, Index Fund 
Shares, and Managed Fund Shares as defined in BZX Rules 14.11(b), 
14.11(c), and 14.11(i), respectively, and their equivalents on other 
national securities exchanges.
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    As noted above, BZX Rule 14.11(i)(4)(C)(iv)(b) imposes a 30% 
Limitation. The Exchange is proposing to allow the Fund to hold up to 
60% of the weight of its portfolio at the time of investment (including 
gross notional exposures) in S&P 500 futures contracts traded on the 
Chicago Mercantile Exchange (``S&P 500 Futures''). The Fund will 
utilize short or long S&P 500 Futures to the extent needed to reduce or 
augment, respectively, the Fund's exposure relative to the exposure 
resulting from investments in the U.S. Equities in order to achieve the 
desired net exposure. The Exchange represents that S&P 500 Futures are 
an efficient means of reducing or augmenting exposure to U.S. Equities, 
as described above. According to the Exchange, allowing the Fund to 
hold a greater portion of its portfolio in S&P 500 Futures would 
mitigate the Fund's dependency on holding over-the-counter (``OTC'') 
instruments, which would reduce the Fund's operational burden by 
allowing the Fund to primarily use listed futures contracts to achieve 
its investment objective and would further reduce counter-party risk 
associated with holding OTC instruments. The Exchange notes that the 
Fund may also hold certain fixed income securities and cash and cash 
equivalents in compliance with BZX Rules 14.11(i)(4)(C)(ii) and (iii) 
in order to collateralize its S&P 500 Futures positions.
    As noted above, the Fund's investment in U.S. ETFs or the 
constituent stocks of a U.S. ETF will constitute approximately 80% of 
the Fund's net assets at the time of investment and under Normal Market 
Conditions, and such holdings will meet the requirements for U.S. 
Component Stocks in BZX Rule 14.11(i)(4)(C)(i)(a). The Fund may hold 
approximately 20% of its net assets at the time of investment in fixed 
income securities, cash, cash equivalents, and the cash value of 
futures positions \12\ under Normal Market Conditions. The combination 
of U.S. ETFs, constituent stocks of U.S. ETFs, fixed income securities, 
cash, cash equivalents, and the cash value of futures positions will 
constitute the entirety of the Fund's holdings and the cash value of 
these holdings will be

[[Page 12994]]

used to form the basis for these calculations. The Exchange notes that 
this is different than the calculation used to measure the Fund's 
holdings in S&P 500 Futures (as it relates to the Fund holding up to 
60% of the weight of its portfolio), which, as noted above, is 
calculated using gross notional exposures gained through the S&P 500 
Futures in both the numerator and denominator, and which is consistent 
with the derivatives exposure calculation under BZX Rule 
14.11(i)(4)(C)(iv). The Exchange represents that, except for the 30% 
Limitation, the Fund's proposed investments will satisfy, on an initial 
and continued listing basis, all of the generic listing standards under 
BZX Rule 14.11(i)(4)(C) and all other applicable requirements for 
Managed Fund Shares under BZX Rule 14.11(i).
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    \12\ The Exchange states that cash value of futures positions is 
based on the value of the Fund's daily margin account with the 
applicable futures exchange(s).
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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 proposed rule change is 
consistent with Section 6(b)(5) of the Exchange Act,\14\ which 
requires, among other things, that the Exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \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. 78f(b)(5).
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    The Commission notes that, according to the Exchange, the Shares 
will meet each of the initial and continued listing criteria in BZX 
Rule 14.11(i), including BZX Rule 14.11(i)(4)(C), with the exception of 
the 30% Limitation. According to the Exchange, the liquidity in the S&P 
500 Futures markets mitigates the concerns that BZX Rule 
14.11(i)(4)(C)(iv)(b) is intended to address and that such liquidity 
would prevent the Shares from being susceptible to manipulation.\15\
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    \15\ According to the Exchange, as of December 7, 2017, the 
average daily notional volume for S&P 500 Futures was more than $180 
billion over the previous thirty trading days. The Exchange 
represents that allowing the Fund to hold a greater portion of its 
portfolio in S&P 500 Futures would mitigate the Fund's dependency on 
holding OTC instruments, which would reduce the Fund's operational 
burden by allowing the Fund to primarily use listed futures 
contracts to achieve its investment objective and would further 
reduce counter-party risk associated with holding OTC instruments. 
Moreover, the Exchange represents that the diversity, liquidity, and 
market capitalization of the securities underlying the S&P 500 Index 
are sufficient to protect against market manipulation of both the 
Fund's holdings and the Shares as it relates to the S&P 500 Futures 
holdings.
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    In addition, the Exchange represents 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. The Exchange further represents that all of the futures contracts 
and U.S. ETFs held by the Fund will trade on markets that are members 
of the Intermarket Surveillance Group (``ISG'') or affiliated with a 
member of ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement. Moreover, the Exchange represents that 
it may obtain information regarding trading in the Shares and the 
underlying futures contracts and U.S. ETFs held by the Fund via the ISG 
from other exchanges who are members of the ISG or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement.\16\ The Commission also notes that, according to the 
Exchange, the Fund's investment in U.S. ETFs or the constituent stocks 
of a U.S. ETF will meet the requirements for U.S. Component Stocks in 
BZX Rule 14.11(i)(4)(C)(i)(a). BZX Rule 14.11(i)(4)(C)(i)(a) provides 
that equity securities in the portfolio shall be listed on a national 
securities exchange, except that no more than 10% of the equity weight 
of the portfolio may be non-exchange traded ADRs. As all national 
securities exchanges are ISG members, the Commission notes that no less 
than 90% of constituent stocks of a U.S. ETF that the Fund will hold 
will be traded on markets that are members of ISG. In addition, the 
Exchange also represents that the Shares of the Fund will comply with 
all requirements applicable to Managed Fund Shares, including, but not 
limited to, requirements relating to the dissemination of key 
information such as the Disclosed Portfolio,\17\ net asset value,\18\ 
and the Intraday Indicative Value,\19\ suspension of trading or 
removal,\20\ trading halts,\21\ surveillance,\22\ minimum price 
variation for quoting and order entry,\23\ the information 
circular,\24\ and firewalls \25\ as set forth in Exchange rules 
applicable to Managed Fund Shares. Likewise, the Exchange represents 
that all statements and representations made in this filing regarding 
(a) the description of the portfolio or reference assets, (b) 
limitations on portfolio holdings or reference assets, (c) 
dissemination and availability of reference asset and intraday 
indicative values, (d) or the applicability of Exchange listing rules 
specified in this filing shall constitute continued listing 
requirements for listing the Shares on the Exchange. Moreover, 
according to the Exchange, the issuer has represented to the Exchange 
that it will advise the Exchange of any failure by the Fund or Shares 
to comply with the continued listing requirements, and, pursuant to its 
obligations under Section 19(g)(1) of the Exchange Act, the Exchange 
will surveil for compliance with the continued listing 
requirements.\26\ 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.
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    \16\ As stated above, S&P 500 Futures are traded on the Chicago 
Mercantile Exchange. The Commission notes that the Chicago 
Mercantile Exchange represents a significant market in S&P 500 
Futures, is a regulated futures and options market, and is a member 
of ISG. See supra note 16. For a list of the current members and 
affiliate members of ISG, see www.isgportal.com. 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.
    \17\ See BZX Rules 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
    \18\ See BZX Rule 14.11(i)(4)(A)(ii).
    \19\ See BZX Rule 14.11(i)(4)(B)(i).
    \20\ See BZX Rule 14.11(i)(4)(B)(iii).
    \21\ See BZX Rule 14.11(i)(4)(B)(iv).
    \22\ See BZX Rule 14.11(i)(2)(C).
    \23\ See BZX Rule 14.11(i)(2)(B).
    \24\ See BZX Rule 14.11(i)(6).
    \25\ See BZX Rule 14.11(i)(7).
    \26\ The Exchange represents that FINRA conducts certain cross-
market surveillances on behalf of the Exchange pursuant to a 
regulatory services agreement. The Exchange further represents that 
it is responsible for FINRA's performance under this regulatory 
services agreement.
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    This approval order is based on all of the Exchange's 
representations and description of the Fund, including those set forth 
above and in Amendment No. 2 to the proposed rule change.
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as modified by Amendment No. 2, is consistent with Section 
6(b)(5) of the Exchange Act \27\ and the rules and regulations 
thereunder applicable to a national securities exchange.
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    \27\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\28\

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that the proposed rule change (SR-CboeBZX-2017-012), as modified by 
Amendment No. 2, be, and hereby is, approved.
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    \28\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06013 Filed 3-23-18; 8:45 am]
 BILLING CODE 8011-01-P