[Federal Register Volume 83, Number 198 (Friday, October 12, 2018)]
[Notices]
[Pages 51745-51747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22207]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84378; File No. SR-CboeBZX-2018-044]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 1 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change, as 
Modified by Amendment No. 1, To Amend BZX Rule 14.11(c) (Index Fund 
Shares)

October 5, 2018.

I. Introduction

    On June 21, 2018, 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 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend BZX Rule 14.11(c) to permit either the portfolio holdings of a 
series of Index Fund Shares or the index underlying a series of Index 
Fund Shares to satisfy the listing standards under BZX Rules 
14.11(c)(3), (4), and (5). The proposed rule change was published for 
comment in the Federal Register on July 11, 2018.\3\ On August 23, 
2018, 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 approve or disapprove the proposed rule 
change.\5\ On September 28, 2018, the Exchange filed Amendment No. 1 to 
the proposed rule change, which amended and replaced the proposed rule 
change as originally filed.\6\ The Commission has received no comment 
letters on the proposal. The Commission is publishing this notice and 
order to solicit comments on the proposed rule change, as modified by 
Amendment No. 1, from interested persons and to institute proceedings 
pursuant to 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. 83594 (July 5, 
2018), 83 FR 32158.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 83919, 83 FR 44083 
(August 29, 2018). The Commission designated October 9, 2018 as the 
date by which the Commission shall approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change.
    \6\ In Amendment No. 1, the Exchange: (1) Proposed to delete 
certain references to the term ``portfolio'' in BZX Rules 
14.11(c)(1)(C), 14.11(c)(8), and 14.11(c)(9)(B)(i)(b) such that the 
amended provisions would apply only to the index underlying a series 
of Index Fund Shares; (2) represented that, to the extent that the 
proposal results in meaningful additional costs associated with 
regulatory review, the Exchange either already has or will dedicate 
sufficient additional resources to perform such reviews; (3) 
supplemented its arguments in support of the proposal; and (4) made 
technical and conforming changes. Amendment No. 1 is available at: 
https://www.sec.gov/comments/sr-cboebzx-2018-044/srcboebzx2018044.htm.
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal, as Modified by Amendment No. 1 \8\
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    \8\ For a full description of the proposal, see Amendment No. 1, 
supra note 6.
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    BZX Rule 14.11(c) sets forth the listing standards for Index Fund 
Shares. Currently, the Exchange determines whether a series of Index 
Fund Shares meets the initial and continued listing standards under BZX 
Rules 14.11(c)(3), (4), and (5) by assessing the underlying index. The 
Exchange now proposes to permit either the portfolio holdings of a 
series of Index Fund Shares or the index underlying a series of Index 
Fund Shares to satisfy the initial and continued listing standards 
under BZX Rules 14.11(c)(3), (4), and (5). As a result, the proposal 
would allow the Exchange to generically list a series of Index Fund 
Shares where the generic listing standards are satisfied by either its 
portfolio holdings or its underlying index.
    The Exchange also proposes to amend BZX Rules 14.11(c)(1)(C),\9\ 
14.11(c)(8),\10\ and 14.11(c)(9)(B)(i)(b) \11\ to eliminate certain 
references to the term ``portfolio'' such that the amended provisions 
would apply only to the underlying index. As proposed, all other 
references to ``index or portfolio'' or ``portfolio or index'' in BZX 
Rule 14.11(c) would mean the index underlying a series of Index Fund 
Shares or the portfolio holdings of a series of Index Fund Shares.
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    \9\ BZX Rule 14.11(c)(1)(C) currently defines the term 
``Reporting Authority'' to mean, in part, the official source for 
calculating and reporting information relating to a series of Index 
Fund Shares, including, but not limited to, any current index ``or 
portfolio'' value. The Exchange proposes to delete the term ``or 
portfolio'' from this provision.
    \10\ BZX Rule 14.11(c)(8) currently provides, in part, that the 
Exchange may list and trade Index Fund Shares based on one or more 
foreign or domestic indexes ``or portfolios'' and that each issue of 
Index Fund Shares based on each particular index ``or portfolio, or 
combination thereof,'' shall be designated as a separate series and 
shall be identified by a unique symbol. The Exchange proposes to 
delete the terms ``or portfolios'' and ``or portfolio, or 
combination thereof,'' from this provision.
    \11\ BZX Rule 14.11(c)(9)(B)(i)(b) currently provides, in part, 
that the Exchange will consider the suspension of trading in and 
will initiate delisting proceedings for a series of Index Fund 
Shares if the value of the index ``or portfolio'' of securities on 
which the series of Index Fund Shares is based is no longer 
calculated or available, or an interruption to the dissemination of 
the value of the index ``or portfolio'' of securities persists past 
the trading day in which it occurred, or the index ``or portfolio'' 
on which a series of Index Fund Shares is based is replaced with a 
new index ``or portfolio'' unless certain conditions are met. The 
Exchange proposes to delete the terms ``or portfolio'' from this 
provision.
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    The Exchange represents that it has in place surveillance 
procedures that are adequate to properly monitor trading in Index Fund 
Shares in all trading sessions and to deter and detect violations of 
Exchange rules and applicable federal securities laws. In addition, the 
Exchange states that it does not believe that the proposal will result 
in any meaningful additional costs associated with regulatory review, 
but to the extent that it does, the Exchange either already has or will 
dedicate sufficient additional resources to perform such reviews.

[[Page 51746]]

III. Proceedings to Determine Whether To Approve or Disapprove SR-
CboeBZX-2018-044, 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 \12\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of proceedings is appropriate at this time in 
view of the legal and policy issues raised by the proposal. 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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    \12\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\13\ 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,\14\ 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.
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    \13\ Id.
    \14\ 15 U.S.C. 78f(b)(5).
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    As discussed above, the proposal would permit either the portfolio 
holdings of a series of Index Fund Shares or the index underlying a 
series of Index Fund Shares to satisfy the initial and continued 
listing standards under BZX Rules 14.11(c)(3), (4), and (5). The 
Exchange asserts that the proposal would provide issuers of Index Fund 
Shares with a greater degree of control over whether their products 
meet their ongoing listing obligations, and that the proposal would 
accomplish the policy goals underlying the listing standards for Index 
Fund Shares.\15\ In particular, the Exchange asserts that the index 
methodology for an index underlying a series of Index Fund Shares is 
out of the control of the issuers of the products, and that it is 
problematic to require an issuer to ensure that the underlying index 
meets listing standards on an ongoing basis.\16\ The Exchange also 
asserts that, after a series of Index Fund Shares is listed on the 
Exchange, both the index constituents and the portfolio holdings are 
equally viable for evaluating whether the shares are susceptible to 
manipulation.\17\ Moreover, according to the Exchange, portfolio 
holdings are arguably a better means for making these determinations 
than the underlying index because the portfolio holdings reflect the 
actual assets held by a series of Index Fund Shares, whereas the index 
constituents are just the assets that the series is designed to 
track.\18\ Additionally, the Exchange states that any series of Index 
Fund Shares listed on the Exchange must meet all requirements 
applicable under the Investment Company Act of 1940, including Rule 
35d-1,\19\ which requires a series of Index Fund Shares to invest at 
least 80% of its assets in investments connoted by the index (``80% 
Rule'').\20\ According to the Exchange, the 80% Rule would provide 
assurance that there is significant overlap between the portfolio 
holdings and the underlying index.\21\ Finally, the Exchange compares 
Index Fund Shares to Managed Fund Shares, and notes that the generic 
listing standards for Managed Fund Shares under BZX Rule 14.11(i) apply 
to portfolio holdings.\22\
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    \15\ See Amendment No. 1, supra note 6, at 7 and 10.
    \16\ See id. at 7. According to the Exchange, where the index 
constituents no longer meet the listing standards, the only ways for 
constituents to get back into compliance are through natural market 
movements, an index rebalance, a change to the index methodology, or 
a change of index. See id. The Exchange asserts that: (1) It is not 
feasible for an issuer to rely on natural market movements to bring 
a series of Index Fund Shares back into compliance with the listing 
standards; (2) an index rebalance may or may not bring a series of 
Index Fund Shares back into compliance, and index rebalances may not 
occur within the cure periods specified in BZX Rule 14.12 (i.e., up 
to 180 calendar days from initial notice of non-compliance with the 
listing standards); and (3) changing an index's methodology or 
changing the underlying index would require significant effort and 
months of notice, and therefore also may not occur within the cure 
periods specified in BZX Rule 14.12. See id.
    \17\ See id. at 5.
    \18\ See id. at 6. The Exchange acknowledges that allowing the 
portfolio holdings to satisfy the generic listing standards could 
raise concerns that a series of Index Fund Shares may be based on an 
index that does not meet the generic listing standards and therefore 
may be susceptible to manipulation. See id. at 9. However, the 
Exchange argues that, currently, a series of Index Fund Shares 
overlying an index that meets the generic listing standards may have 
portfolio holdings that could theoretically be susceptible to 
manipulation (and/or the creation and redemption process and the 
arbitrage mechanisms would not operate efficiently) because the 
portfolio holdings do not meet the generic listing standards. See 
id.
    \19\ 17 CFR 270.35d-1.
    \20\ See Amendment No. 1, supra note 6, at 9-10.
    \21\ See id.
    \22\ See id. at 8.
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    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,\23\ in addition to any other comments they may wish 
to submit about the proposal. In particular, the Commission seeks 
comment regarding whether the proposal would result in the listing and 
trading of Index Fund Shares that are susceptible to manipulation 
because they overlie indexes that do not meet the listing standards 
under BZX Rule 14.11(c). The Commission seeks comment regarding whether 
the 80% Rule or any other safeguard would help assure that, as long as 
the portfolio holdings meet the listing standards under BZX Rules 
14.11(c)(3), (4), and (5), the Index Fund Shares would not be 
susceptible to manipulation. The Commission also seeks comment 
regarding whether the proposal sufficiently addressed manipulation risk 
by merely applying, without change, the current listing standards under 
BZX Rules 14.11(c)(3), (4), and (5) that are applicable to the 
underlying index to the portfolio holdings of a series of Index Fund 
Shares.\24\ Moreover, the Commission seeks comment regarding whether 
the Exchange has sufficiently justified the flexibility it seeks under 
the proposal, which would allow the Exchange to choose to apply the 
listing standards under BZX Rules 14.11(c)(3), (4), and (5) to either 
the portfolio holdings or the underlying index, both at the time of 
initial listing and at any time thereafter.\25\ Finally, the Commission 
seeks comment regarding the sufficiency of the Exchange's statements in 
support of the deletion of certain references to the term ``portfolio'' 
in BZX Rules 14.11(c)(1)(C), 14.11(c)(8), and 14.11(c)(9)(B)(i)(b).
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    \23\ See supra note 6.
    \24\ The Commission notes that there are differences between the 
listing standards for Index Fund Shares under BZX Rule 14.11(c) and 
the listing standards for Managed Fund Shares under BZX Rule 
14.11(i).
    \25\ As proposed, the Exchange could assess the portfolio 
holdings at one time, and assess the underlying index at another 
time.
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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 proposed rule 
change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) or any other provision of the Act, or the rules and regulations

[[Page 51747]]

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 under the Act,\26\ any request for an 
opportunity to make an oral presentation.\27\
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    \26\ 17 CFR 240.19b-4.
    \27\ 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 proposed rule change, as modified by 
Amendment No. 1, should be approved or disapproved by November 2, 2018. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by November 16, 2018.
    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-CboeBZX-2018-044 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-CboeBZX-2018-044. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2018-044 and should be submitted 
by October 29, 2018. Rebuttal comments should be submitted by November 
16, 2018.
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    \28\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22207 Filed 10-11-18; 8:45 am]
BILLING CODE 8011-01-P