[Federal Register Volume 84, Number 122 (Tuesday, June 25, 2019)]
[Notices]
[Pages 29892-29903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13413]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86157; File No. SR-CboeBZX-2019-047]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt BZX Rule 14.11(k) To Permit
the Listing and Trading of Managed Portfolio Shares
June 19, 2019.
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 June 6, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III 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 proposes a rule change to adopt BZX Rule 14.11(k) to
permit the listing and trading of Managed Portfolio Shares, which are
shares of actively managed exchange-traded funds for which the
portfolio is disclosed in accordance with standard mutual fund
disclosure rules.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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 aspects 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 add new Rule 14.11(k) for the purpose of
permitting the listing and trading, or trading pursuant to unlisted
trading privileges, of Managed Portfolio Shares, which are securities
issued by an actively managed open-end investment management
company.\3\
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\3\ A Managed Portfolio Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C.80a-1) (``1940 Act'') organized as an
open-end management investment company or similar entity that
invests in a portfolio of securities selected by its investment
adviser consistent with its investment objectives and policies. The
basis of this proposal is an application for exemptive relief that
was filed on April 4, 2019 (the ``Application'') and for which
public notice was issued on April 8, 2019 (the ``Notice'') (File No.
812-14405) and subsequent order granting certain exemptive relief to
Precidian Funds LLC (``Precidian''); Precidian ETFs Trust and
Precidian ETF Trust II; and Foreside Fund Services, LLC issued on
May 20, 2019 (the ``Order'' and, collectively, with the Application
and the Notice, the ``Exemptive Order''). The Order specifically
notes that ``granting the requested exemptions is appropriate in and
consistent with the public interest and consistent with the
protection of investors and the purposes fairly intended by the
policy and provisions of the Act. It is further found that the terms
of the proposed transactions, including the consideration to be paid
or received, are reasonable and fair and do not involve overreaching
on the part of any person concerned, and that the proposed
transactions are consistent with the policy of each registered
investment company concerned and with the general purposes of the
Act.'' See Investment Company Act Release Nos. 33440 and 33477.
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Proposed Listing Rules
Proposed Rule 14.11(k)(1) provides that the Exchange will consider
for trading, whether by listing or pursuant to unlisted trading
privileges, Managed Portfolio Shares that meet the criteria of Rule
14.11(k).
Proposed Rule 14.11(k)(2) provides that Rule 14.11(k) is applicable
only to Managed Portfolio Shares and that, except to the extent
inconsistent with Rule 14.11(k), or unless the context otherwise
requires, the rules and procedures of the Exchange's Board of Directors
shall be applicable to the trading on the Exchange of such securities.
Proposed Rule 14.11(k)(2) provides further that Managed Portfolio
Shares are included within the definition of ``security'' or
``securities''
[[Page 29893]]
as such terms are used in the Rules of the Exchange.
Proposed Rule 14.11(k)(2)(A) provides that the Exchange will file
separate proposals under Section 19(b) of the Act before the listing
and trading of a series of Managed Portfolio Shares. For each series of
Managed Portfolio Shares, a ``Verified Intraday Indicative Value'' will
be disseminated in one second intervals during Regular Trading Hours.
Such Verified Intraday Indicative Value is ``verified'' in that the
Investment Company's pricing verification agent compares no fewer than
two calculations of the intraday indicative value for the series of
Managed Portfolio Shares.
Proposed Rule 14.11(k)(2)(B) provides that transactions in Managed
Portfolio Shares will occur only during Regular Trading Hours.\4\
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\4\ 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.
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Proposed Rule 14.11(k)(2)(C) provides that the Exchange will
implement and maintain written surveillance procedures for Managed
Portfolio Shares. As part of these surveillance procedures, the
Investment Company's investment adviser will make available daily to
FINRA and the Exchange the portfolio holdings of each series of Managed
Portfolio Shares.
Proposed Rule 14.11(k)(2)(D) provides that Authorized Participants
(as defined in the Investment Company's Form N-1A filed with the SEC)
creating or redeeming Managed Portfolio Shares will sign an agreement
with an agent (``AP Representative'') to establish a confidential
account for the benefit of such Authorized Participant (``AP'') that
will deliver or receive all consideration to or from the issuer in a
creation or redemption. An AP Representative may not disclose the
consideration delivered or received in a creation or redemption.
Proposed Rule 14.11(k)(2)(E) provides that, if the investment
adviser to the Investment Company issuing Managed Portfolio Shares is
registered as a broker-dealer or is affiliated with a broker-dealer,
such investment adviser will erect and maintain a ``fire wall'' between
the investment adviser and personnel of the broker-dealer or broker-
dealer affiliate, as applicable, with respect to access to information
concerning the composition and/or changes to such Investment Company
portfolio. 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.
Proposed Rule 14.11(k)(2)(F) provides that, if an AP
Representative, the custodian, pricing verification agent, reporting
authority, distributor, or administrator for an Investment Company
issuing Managed Portfolio Shares, or any other entity that has access
to information concerning the composition, changes to such Investment
Company's portfolio, and/or the consideration associated with creating
or redeeming shares of a series of Managed Portfolio Shares, is
registered as a broker-dealer or affiliated with a broker-dealer, such
AP Representative, custodian, pricing verification agent reporting
authority, distributor, or administrator or other entity will erect and
maintain a ``fire wall'' between such AP Representative, custodian,
pricing verification agent, reporting authority, distributor,
administrator or other entity and personnel of the broker-dealer,
broker-dealer affiliate, or the personnel who have knowledge of changes
to the portfolio, as applicable, with respect to access to information
concerning the composition and/or changes to such Investment Company
portfolio. Personnel who have access to information regarding decisions
on the Investment Company's portfolio composition and/or changes to the
portfolio must be subject to procedures designed to prevent the use and
dissemination of material nonpublic information regarding the
applicable Investment Company portfolio.
Proposed Rule 14.11(k)(3)(A) defines the term ``Managed Portfolio
Share'' as a security that (a) represents an interest in a registered
investment company (``Investment Company'') organized as an open-end
management investment company, that invests in a portfolio of
securities selected by the Investment Company's investment adviser
consistent with the Investment Company's investment objectives and
policies; (b) is issued in a specified aggregate minimum number of
shares equal to a Creation Unit, or multiples thereof, in return for a
designated portfolio of securities (and/or an amount of cash) with a
value equal to the next determined net asset value which the AP
Representative will provide through a confidential account; and (c)
when aggregated in the same specified aggregate number of shares equal
to a Redemption Unit, or multiples thereof, may be redeemed at the
request of an Authorized Participant (as defined in the Investment
Company's Form N-1A filed with the SEC), which Authorized Participant
will be paid through a confidential account established for its benefit
a portfolio of securities and/or cash with a value equal to the next
determined net asset value (``NAV'').\5\
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\5\ For purposes of this filing, references to a series of
Managed Portfolio Shares are referred to interchangeably as a series
of Managed Portfolio Shares or as a ``Fund'' and shares of a series
of Managed Portfolio Shares are generally referred to as the
``Shares''.
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Proposed Rule 14.11(k)(3)(B) defines the term ``Verified Intraday
Indicative Value'' (``VIIV'') as estimated indicative value of a
Managed Portfolio Share based on all of the holdings of a series of
Managed Portfolio Shares as of the close of business on the prior
business day and, for corporate actions, based on the applicable
holdings as of the opening of business on the current business day,
priced and disseminated in one second intervals during Regular Trading
Hours by the Reporting Authority. The Verified Intraday Indicative
Value is monitored by an Investment Company's pricing verification
agent responsible for processing Consolidated Tape best bid and offer
quotation information into at least two ``Calculation Engines,'' each
of which then calculates a separate intraday indicative value for
comparison by the pricing verification agent based on the mid-point
between the current NBB and NBO for the portfolio constituents of a
series of Managed Portfolio Shares, one of which will be deemed by the
Investment Company's investment adviser as the Primary Intraday
Indicative Value and the other the Secondary Intraday Indicative Value.
The pricing verification agent will continuously compare the Primary
Intraday Indicative Value against the Secondary Intraday Indicative
Values to which the pricing verification agent has access. Where the
pricing verification agent has verified the Primary Intraday Indicative
Value as compared to the Secondary Intraday Indicative Value, the
Primary Intraday Indicative Value will be used as the Verified Intraday
Indicative Value and will be disseminated publicly during Regular
Trading Hours for each series of Managed Portfolio Shares.\6\
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\6\ Each Calculation Engine is a computer that receives data
from a real-time quote feed, calculates a price for the securities
in the portfolio, and aggregates the weights of the securities in
the portfolio to produce an intra-day indicative value.
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Proposed Rule 14.11(k)(3)(C) defines the term ``Creation Unit'' as
a specified minimum number of Managed Portfolio Shares issued by an
Investment Company at the request of an AP in return for a designated
portfolio of securities (and/or an amount of cash) specified each day
consistent with the
[[Page 29894]]
Investment Company's investment objectives and policies.
Proposed Rule 14.11(k)(3)(D) defines the term ``Redemption Unit''
as a specified minimum number of Managed Portfolio Shares that may be
redeemed to an Investment Company at the request of an AP in return for
a portfolio of securities and/or cash.
Proposed Rule 14.11(k)(3)(E) defines the term ``Reporting
Authority'' in respect of a particular series of Managed Portfolio
Shares as the Exchange, the exchange that lists a particular series of
Managed Portfolio Shares (if the Exchange is trading such series
pursuant to unlisted trading privileges), an institution, or a
reporting service designated by the issuer of a series of Managed
Portfolio Shares as the official source for calculating and reporting
information relating to such series, including, the NAV, the VIIV, or
other information relating to the issuance, redemption or trading of
Managed Portfolio Shares. A series of Managed Portfolio Shares may have
more than one Reporting Authority, each having different functions.
Proposed Rule 14.11(k)(3)(F) provides that the term ``Normal Market
Conditions'' includes, but is not limited to, the absence of trading
halts in the applicable financial markets generally; operational issues
(e.g., systems failure) causing dissemination of inaccurate market
information; or force majeure type events such as natural or manmade
disaster, act of God, armed conflict, act of terrorism, riot or labor
disruption or any similar intervening circumstance.
Proposed Rule 14.11(k)(4) sets forth initial and continued listing
criteria applicable to Managed Portfolio Shares. Proposed Rule
14.11(k)(4)(A)(i) provides that, for each series of Managed Portfolio
Shares, the Exchange will establish a minimum number of Managed
Portfolio Shares required to be outstanding at the time of commencement
of trading on the Exchange. In addition, proposed Rule
14.11(k)(4)(A)(ii) provides that the Exchange will obtain a
representation from the issuer of each series of Managed Portfolio
Shares that the NAV per share for the series will be calculated daily
and that the NAV will be made available to all market participants at
the same time.\7\ Proposed Rule 14.11(k)(4)(A)(iii) provides that all
Managed Portfolio Shares shall have a stated investment objective,
which shall be adhered to under normal market conditions.
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\7\ Proposed Rule 14.11(k)(4)(B)(iii) provides that if the
Exchange becomes aware that the NAV with respect to a series of
Managed Portfolio Shares is not disseminated to all market
participants at the same time, it will halt trading in such series
until such time as the NAV is available to all market participants.
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Proposed Rule 14.11(k)(4)(B) provides that each series of Managed
Portfolio Shares will be listed and traded subject to application of
the following continued listing criteria. Proposed Rule
14.11(k)(4)(B)(i) provides that the VIIV for Managed Portfolio Shares
will be widely disseminated by the Reporting Authority and/or by one or
more major market data vendors every second during Regular Trading
Hours and will be disseminated to all market participants at the same
time. Proposed Rule 14.11(k)(4)(B)(ii) provides that the Exchange will
consider the suspension of trading in, and will commence delisting
proceedings under Rule 14.12 for, a series of Managed Portfolio Shares
under any of the following circumstances: (a) If, following the initial
twelve-month period after commencement of trading on the Exchange of a
series of Managed Portfolio Shares, there are fewer than 50 beneficial
holders of the series of Managed Portfolio Shares; (b) if the value of
the VIIV is no longer calculated or available to all market
participants at the same time; (c) if the holdings of a series of
Managed Portfolio Shares are not made available on a quarterly basis as
required under the 1940 Act or are not made available to all market
participants at the same time; (d) if the Investment Company issuing
the Managed Portfolio Shares has failed to file any filings required by
the Commission or if the Exchange is aware that the Investment Company
is not in compliance with the conditions of any exemptive order or no-
action relief granted by the Securities and Exchange Commission to the
Investment Company with respect to the series of Managed Portfolio
Shares; (e) if any of the continued listing requirements set forth in
Rule 14.11(k) are not continuously maintained; (f) if any of the
applicable Continued Listing Representations for the issue of Managed
Fund Shares are not continuously met; or (g) if such other event shall
occur or condition exists which, in the opinion of the Exchange, makes
further dealings on the Exchange inadvisable.
Proposed Rule 14.11(k)(4)(B)(iii) provides that, upon notification
to the Exchange by the Investment Company or its agent that: (i) the
intraday indicative values calculated by more than one Calculation
Engines differ by more than 25 basis points for 60 seconds in
connection with pricing of the Verified Intraday Indicative Value; (ii)
the Verified Intraday Indicative Value of a series of Managed Portfolio
Shares is not being calculated or disseminated in one-second intervals,
as required; or (iii) 10% or more of a series of Managed Portfolio
Shares' portfolio holdings have become subject to a trading halt or
otherwise do not have readily available market quotations, the Exchange
shall halt trading in the Managed Portfolio Shares as soon as
practicable. Such halt in trading shall continue until the Investment
Company or its agent notifies the Exchange that the intraday indicative
values calculated by the Calculation Engines no longer differ by more
than 25 basis points for 60 seconds, that the Verified Intraday
Indicative Value is being calculated and disseminated as required, or
that less than 10% of the portfolio holdings are subject to a trading
halt or otherwise do not have readily available market quotations. The
Investment Company or its agent shall be responsible for monitoring
that the Verified Intraday Indicative Value is being priced and
disseminated as required and whether the intraday indicative values to
be calculated by more than one Calculation Engines differ by more than
25 basis points for 60 seconds. In addition, if the Exchange becomes
aware that the net asset value with respect to a series of Managed
Portfolio Shares is not disseminated to all market participants at the
same time, the holdings of a series of Managed Portfolio Shares are not
made available on a quarterly basis as required under the 1940 Act, or
such holdings are not made available to all market participants at the
same time, it will halt trading in such series until such time as the
net asset value or the holdings are available to all market
participants.
Proposed Rule 14.11(k)(4)(B)(iv) provides that, upon termination of
an Investment Company, the Exchange requires that Managed Portfolio
Shares issued in connection with such entity be removed from Exchange
listing.
Proposed Rule 14.11(k)(4)(B)(v) provides that voting rights shall
be as set forth in the applicable Investment Company prospectus.
Proposed Rule 14.11(k)(5), which relates to limitation of Exchange
liability, provides that neither the Exchange, the Reporting Authority,
nor any agent of the Exchange shall have any liability for damages,
claims, losses or expenses caused by any errors, omissions, or delays
in calculating or disseminating any current portfolio value; the
current value of the portfolio of securities required to be deposited
to the open-end management investment company in connection with
issuance of Managed Portfolio Shares; the VIIV; the amount of any
dividend equivalent
[[Page 29895]]
payment or cash distribution to holders of Managed Portfolio Shares;
NAV; or other information relating to the purchase, redemption, or
trading of Managed Portfolio Shares, resulting from any negligent act
or omission by the Exchange, the Reporting Authority or any agent of
the Exchange, or any act, condition, or cause beyond the reasonable
control of the Exchange, its agent, or the Reporting Authority,
including, but not limited to, an act of God; fire; flood;
extraordinary weather conditions; war; insurrection; riot; strike;
accident; action of government; communications or power failure;
equipment or software malfunction; or any error, omission, or delay in
the reports of transactions in one or more underlying securities.
Key Features of Managed Portfolio Shares
While funds issuing Managed Portfolio Shares will be actively-
managed and, to that extent, similar to Managed Fund Shares, Managed
Portfolio Shares differ from Managed Fund Shares in the following
important respects.\8\ First, in contrast to Managed Fund Shares, which
are actively-managed funds listed and traded under Rule 14.11(i) \9\
and for which a ``Disclosed Portfolio'' is required to be disseminated
at least once daily,\10\ the portfolio for a series of Managed
Portfolio Shares will be disclosed quarterly in accordance with normal
disclosure requirements otherwise applicable to open-end investment
companies registered under the 1940 Act.\11\ The composition of the
portfolio of a series of Managed Portfolio Shares would not be
available at commencement of Exchange listing and/or trading. Second,
in connection with the creation and redemption of shares in ``Creation
Unit'' or ``Redemption Unit'' size (as described below), the delivery
of any portfolio securities in kind will be effected through a
``Confidential Account'' (as described below) for the benefit of the
creating or redeeming AP (as described further below in ``Creation and
Redemption of Shares'') without disclosing the identity of such
securities to the AP.
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\8\ The Exchange notes that these unique components of Managed
Portfolio Shares were addressed in the Exemptive Order (specifically
in the Application and Notice). Specifically, the Notice stated that
the Commission ``believes that the alternative arbitrage mechanism
proposed by Applicants can also work in an efficient manner to
maintain an ActiveShares ETF's secondary market prices close to its
NAV. The Commission recognizes, however, that the lack of full
transparency may cause the ActiveShares ETFs to trade with spreads
and premiums/discounts that are larger than those of comparable,
fully transparent ETFs. Nonetheless, as long as arbitrage continues
to keep the ActiveShares ETF's secondary market price and NAV close,
and does so efficiently so that spreads remain narrow, the
Commission believes that investors would benefit from the
opportunity to invest in active strategies through a vehicle that
offers the traditional benefits of ETFs.''
\9\ The Commission approved a proposed rule change to adopt
generic listing standards for Managed Fund Shares. See Securities
Exchange Act Release No. 78396 (July 22, 2016), 81 FR 49698 (July
28, 2016 (SR-BATS-2015-100) (order approving proposed rule change to
amend Rule 14.11(i) to adopt generic listing standards for Managed
Fund Shares).
\10\ BZX Rule 14.11(i)(3)(B) defines the term ``Disclosed
Portfolio'' as the identities and quantities of the securities and
other assets held by the Investment Company that will form the basis
for the Investment Company's calculation of NAV at the end of the
business day. Rule 14.11(i)(4)(B)(ii)(a) requires that the Disclosed
Portfolio will be disseminated at least once daily and will be made
available to all market participants at the same time.
\11\ A mutual fund is required to file with the Commission its
complete portfolio schedules for the second and fourth fiscal
quarters on Form N-CSR under the 1940 Act, and is required to file
its complete portfolio schedules for the first and third fiscal
quarters on Form N-Q under the 1940 Act, within 60 days of the end
of the quarter. Form N-Q requires funds to file the same schedules
of investments that are required in annual and semi-annual reports
to shareholders. These forms are available to the public on the
Commission's website at www.sec.gov.
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For each series of Managed Portfolio Shares, an estimated value--
the VIIV--that reflects an estimated intraday value of a fund's
portfolio will be disseminated. Specifically, the VIIV will be based
upon all of a series' holdings as of the close of the prior business
day and, for corporate actions, based on the applicable holdings as of
the opening of business on the current business day, and will be widely
disseminated by the Reporting Authority and/or one or more major market
data vendors every second during Regular Trading Hours. The
dissemination of the VIIV will allow investors to determine the
estimated intra-day value of the underlying portfolio of a series of
Managed Portfolio Shares and will provide a close estimate of that
value throughout the trading day.
The Exchange, after consulting with various Lead Market Makers
(``LMMs'') \12\ that trade exchange-traded funds (``ETFs'') on the
Exchange, believes that market makers will be able to make efficient
and liquid markets priced near the VIIV as long as a VIIV is
disseminated every second,\13\ and market makers employ market making
techniques such as ``statistical arbitrage,'' including correlation
hedging, beta hedging, and dispersion trading, which is currently used
throughout the financial services industry, to make efficient markets
in exchange-traded products.\14\ This ability should permit market
makers to make efficient markets in an issue of Managed Portfolio
Shares without precise knowledge of a fund's underlying portfolio.\15\
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\12\ As defined in Exchange Rule 11.8(e)(1)(B), the term LMM
means a Market Maker registered with the Exchange for a particular
LMM Security that has committed to maintain Minimum Performance
Standards in the LMM Security.
\13\ The Exchange notes that the Commission reached the same
conclusion in the Notice, specifically stating: ``The Commission
believes that the alternative arbitrage mechanism proposed by
Applicants can also work in an efficient manner to maintain an
ActiveShares ETF's secondary market prices close to its NAV.'' See
the Notice at 19.
\14\ Statistical arbitrage enables a trader to construct an
accurate proxy for another instrument, allowing it to hedge the
other instrument or buy or sell the instrument when it is cheap or
expensive in relation to the proxy. Statistical analysis permits
traders to discover correlations based purely on trading data
without regard to other fundamental drivers. These correlations are
a function of differentials, over time, between one instrument or
group of instruments and one or more other instruments. Once the
nature of these price deviations have been quantified, a universe of
securities is searched in an effort to, in the case of a hedging
strategy, minimize the differential. Once a suitable hedging proxy
has been identified, a trader can minimize portfolio risk by
executing the hedging basket. The trader then can monitor the
performance of this hedge throughout the trade period making
correction where warranted. In the case of correlation hedging, the
analysis seeks to find a proxy that matches the pricing behavior of
a fund. In the case of beta hedging, the analysis seeks to determine
the relationship between the price movement over time of a fund and
that of another stock.
Dispersion trading is a hedged strategy designed to take
advantage of relative value differences in implied volatilities
between an index and the component stocks of that index.
\15\ APs that enter into their own separate Confidential
Accounts shall have enough information to ensure that they are able
to comply with applicable regulatory requirements. For example, for
purposes of net capital requirements, the maximum Securities Haircut
applicable to the securities in a Creation Basket, as determined
under Rule 15c3-1, will be disclosed daily on each Fund's website.
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To protect the identity and weightings of the portfolio holdings, a
series of Managed Portfolio Shares would sell and redeem their shares
in creation units to APs only through an unaffiliated broker-dealer
acting on an agency basis, as further described below. As such, on each
``Business Day'' (as defined below), before commencement of trading in
Shares on the Exchange, each series of Managed Portfolio Shares will
provide to an AP Representative of each AP the identities and
quantities of portfolio securities that will form the basis for a
Fund's calculation of NAV per Share at the end of the Business Day, as
well as the names and quantities of the instruments comprising a
``Creation Basket'' or the ``Redemption Instruments'' and the estimated
``Balancing Amount'' (if any) (as described below), for that day (as
further described below). This information will permit APs to purchase
[[Page 29896]]
``Creation Units'' or redeem ``Redemption Units'' through an in-kind
transaction with a Fund, as described below.
Using various trading methodologies such as statistical arbitrage,
both APs and other market participants will be able to hedge exposures
by trading correlative portfolios, securities or other proxy
instruments, thereby enabling an arbitrage functionality throughout the
trading day. For example, if an AP believes that Shares of a Fund are
trading at a price that is higher than the value of its underlying
portfolio based on the VIIV, the AP may sell Shares short and purchase
securities that the AP believes will track the movements of a Fund's
portfolio until the spread narrows and the AP executes offsetting
orders or the AP enters an order with its AP Representative to create
Fund Shares. Upon the completion of the Creation Unit, the AP will
unwind its correlative hedge. Similarly, a non-AP market participant
would be able to perform an identical function but, because it would
not be able to create or redeem directly, would have to employ an AP to
create or redeem Shares on its behalf.
APs can engage in arbitrage by creating or redeeming Shares if the
AP believes the Shares are overvalued or undervalued. As discussed
above, the trading of a Fund's Shares and the creation or redemption of
portfolio securities may bring the prices of a Fund's Shares and its
portfolio assets closer together through market pressure.
The AP Representative's execution of a Creation Unit in a
Confidential Account,\16\ combined with the sale of Fund Shares in the
secondary market by the AP, may create downward pressure on the price
of Shares and/or upward pressure on the price of the portfolio
securities, bringing the market price of Shares and the value of a
Fund's portfolio securities closer together. Similarly, an AP could buy
Shares and instruct the AP Representative to redeem Fund Shares and
liquidate underlying portfolio securities in a Confidential Account.
The AP's purchase of a Fund's Shares in the secondary market, combined
with the liquidation of the portfolio securities from its Confidential
Account by an AP Representative, may also create upward pressure on the
price of Shares and/or downward pressure on the price of portfolio
securities, driving the market price of Shares and the value of a
Fund's portfolio securities closer together.
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\16\ A Confidential Account is a restricted account owned by an
AP and held at a broker-dealer who will act as an AP Representative
(execution agent acting on agency basis) on their behalf. The
restricted account will be established and governed via contract and
used solely for creation and redemption activity, while protecting
the confidentiality of the portfolio constituents. For reporting
purposes, the books and records of the Confidential Account will be
maintained by the AP Representative and provided to the appropriate
regulatory agency as required. The Confidential Account will be
liquidated daily, so that the account holds no positions at the end
of day.
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The Exchange understands that traders use statistical analysis to
derive correlations between different sets of instruments to identify
opportunities to buy or sell one set of instruments when it is
mispriced relative to the others. For Managed Portfolio Shares, market
makers may use the knowledge of a Fund's means of achieving its
investment objective, as described in the applicable Fund registration
statement (the ``Registration Statement''), to construct a hedging
proxy for a Fund to manage a market maker's quoting risk in connection
with trading Fund Shares. Market makers can then conduct statistical
arbitrage between their hedging proxy (for example, the Russell 1000
Index) and Shares of a Fund, buying and selling one against the other
over the course of the trading day. They will evaluate how their proxy
performed in comparison to the price of a Fund's Shares, and use that
analysis as well as knowledge of risk metrics, such as volatility and
turnover, to enhance their proxy calculation to make it a more
efficient hedge.
Market makers have indicated to the Exchange that there will be
sufficient data to run a statistical analysis which will lead to
spreads being tightened substantially around the VIIV. This is similar
to certain other existing exchange traded products (for example, ETFs
that invest in foreign securities that do not trade during U. S.
trading hours), in which spreads may be generally wider in the early
days of trading and then narrow as market makers gain more confidence
in their real-time hedges.
Creations and Redemptions of Shares
In connection with the creation and redemption of Creation Units
and Redemption Units, the delivery or receipt of any portfolio
securities in-kind will be required to be effected through a separate
confidential brokerage account (i.e., a Confidential Account) with an
AP Representative,\17\ which will be a bank or broker-dealer such as
broker-dealer affiliates of JP Morgan Chase, State Street Bank and
Trust, or Bank of New York Mellon, for the benefit of an AP.\18\ An AP
must be a Depository Trust Company (``DTC'') Participant that has
executed a ``Participant Agreement'' with the applicable distributor
(the ``Distributor'') with respect to the creation and redemption of
Creation Units and Redemption Units and formed a Confidential Account
for its benefit in accordance with the terms of the Participant
Agreement. For purposes of creations or redemptions, all transactions
will be effected through the respective AP's Confidential Account, for
the benefit of the AP without disclosing the identity of such
securities to the AP.
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\17\ Each AP shall enter into its own separate Confidential
Account with an AP Representative.
\18\ In the event that an AP Representative is a bank, the bank
will be required to have an affiliated broker-dealer to accommodate
the execution of hedging transactions on behalf of the holder of a
Confidential Account.
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Each AP Representative will be given, before the commencement of
trading each Business Day (defined below), the ``Creation Basket'' (as
described below) for that day. This information will permit an AP that
has established a Confidential Account with an AP Representative, to
instruct the AP Representative to buy and sell positions in the
portfolio securities to permit creation and redemption of Creation
Units and Redemption Units.
In the case of a creation, the AP would enter into an irrevocable
creation order with a Fund and then direct the AP Representative to
purchase the necessary basket of portfolio securities. The AP
Representative would then purchase the necessary securities in the
Confidential Account. In purchasing the necessary securities, the AP
Representative would be required, by the terms of the Confidential
Account Agreement, to obfuscate the purchase by use of tactics such as
breaking the purchase into multiple purchases and transacting in
multiple marketplaces. Once the necessary basket of securities has been
acquired, the purchased securities held in the Confidential Account
would be contributed in-kind to the applicable Fund.
The Funds will offer and redeem Creation Units and Redemption Units
on a continuous basis at the NAV per Share next determined after
receipt of an order in proper form. The NAV per Share of each Fund will
be determined as of the close of regular trading each business day.
Funds will sell and redeem Creation Units and Redemption Units only on
Business Days.
In order to keep costs low and permit Funds to be as fully invested
as possible, Shares will be purchased and redeemed in Creation Units
and Redemption Units and generally on an
[[Page 29897]]
in-kind basis. Accordingly, except where the purchase or redemption
will include cash under the circumstances described in the Registration
Statement, APs will be required to purchase Creation Units by making an
in-kind deposit of specified instruments (``Deposit Instruments''), and
APs redeeming their Shares will receive an in-kind transfer of
specified instruments (``Redemption Instruments'') through the AP
Representative in their Confidential Account.\19\ On any given Business
Day, the names and quantities of the instruments that constitute the
Deposit Instruments and the names and quantities of the instruments
that constitute the Redemption Instruments will be identical, and these
instruments may be referred to, in the case of either a purchase or a
redemption, as the ``Creation Basket.''
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\19\ Funds must comply with the federal securities laws in
accepting Deposit Instruments and satisfying redemptions with
Redemption Instruments, including that the Deposit Instruments and
Redemption Instruments are sold in transactions that would be exempt
from registration under the 1933 Act.
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As noted above, each AP will be required to establish a
Confidential Account with an AP Representative and transact with each
Fund through that Confidential Account.\20\ Therefore, before the
commencement of trading on each Business Day, the AP Representative of
each AP will be provided, on a confidential basis and at the same time
as other AP Representatives, with a list of the names and quantities of
the instruments comprising a Creation Basket, as well as the estimated
Balancing Amount (if any), for that day. The published Creation Basket
will apply until a new Creation Basket is announced on the following
Business Day, and there will be no intra-day changes to the Creation
Basket except to correct errors in the published Creation Basket. The
instruments and cash that the purchaser is required to deliver in
exchange for the Creation Units it is purchasing are referred to as the
``Portfolio Deposit.''
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\20\ Transacting through a Confidential Account is designed to
be very similar to transacting through any broker-dealer account,
except that the AP Representative will be bound to keep the names
and weights of the portfolio securities confidential. Each service
provider that has access to the identity and weightings of
securities in a Fund's Creation Basket or portfolio securities, such
as a Fund's Custodian or pricing verification agent, shall be
restricted contractually from disclosing that information to any
other person, or using that information for any purpose other than
providing services to the Fund. To comply with certain recordkeeping
requirements applicable to APs, the AP Representative will maintain
and preserve, and make available to the Commission, certain required
records related to the securities held in the Confidential Account.
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APs will enter into an agreement with an AP Representative to open
a Confidential Account, for the benefit of the AP. The AP
Representative will serve as an agent between a Fund and each AP and
act as a broker-dealer on behalf of the AP. Each day, the Custodian
(defined below) will transmit the applicable Fund constituent file to
each AP Representative and, acting on execution instructions from the
AP,\21\ the AP Representative may purchase or sell the securities
currently held in a Fund's portfolio for purposes of effecting in-kind
creation and redemption activity during the day.\22\
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\21\ An AP will issue execution instructions to the AP
Representative and be responsible for all associated profit or
losses. Like a traditional ETF, the AP has the ability to sell the
basket securities at any point during Regular Trading Hours.
\22\ Each Fund will identify one or more entities to enter into
a contractual arrangement with the Fund to serve as an AP
Representative. In selecting entities to serve as AP
Representatives, a Fund will obtain representations from the entity
related to the confidentiality of the Fund's Creation Basket and
portfolio securities, the effectiveness of information barriers, and
the adequacy of insider trading policies and procedures. In
addition, as a broker-dealer, Section 15(g) of the Act requires the
AP Representative to establish, maintain, and enforce written
policies and procedures reasonably designed to prevent the misuse of
material, nonpublic information by the AP Representative or any
person associated with the AP Representative.
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Other market participants will not have the ability to create or
redeem shares directly with a Fund. Rather, if other market
participants wish to create or redeem Shares in a Fund, it will have to
do so through an AP.
Placement of Purchase Orders
Each Fund will issue Shares through the Distributor on a continuous
basis at NAV. The Exchange represents that the issuance of Shares will
operate in a manner substantially similar to that of other ETFs. Each
Fund will issue Shares only at the NAV per Share next determined after
an order in proper form is received.
The Distributor will furnish acknowledgements to those placing
orders that the orders have been accepted, but the Distributor may
reject any order which is not submitted in proper form, as described in
a Fund's prospectus or Statement of Additional Information (``SAI'').
The NAV of each Fund is expected to be determined once each Business
Day at a time determined by the Trust's Board of Directors (``Board''),
currently anticipated to be as of the close of the regular trading
session on the NYSE (ordinarily 4:00 p.m. E.T.) (the ``Valuation
Time''). Each Fund will establish a cut-off time (``Order Cut-Off
Time'') for purchase orders in proper form. To initiate a purchase of
Shares, an AP must submit to the Distributor an irrevocable order to
purchase such Shares after the most recent prior Valuation Time.
Purchases of Shares will be settled in-kind and/or cash for an
amount equal to the applicable NAV per Share purchased plus applicable
``Transaction Fees,'' as discussed below.
Generally, all orders to purchase Creation Units must be received
by the Distributor no later than the end of Regular Trading Hours on
the date such order is placed (``Transmittal Date'') in order for the
purchaser to receive the NAV per Share determined on the Transmittal
Date. In the case of custom orders made in connection with creations or
redemptions in whole or in part in cash, the order must be received by
the Distributor, no later than the Order Cut-Off Time.\23\ The
Distributor will maintain a record of Creation Unit purchases and will
send out confirmations of such purchases upon receipt.\24\
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\23\ A ``custom order'' is any purchase or redemption of Shares
made in whole or in part on a cash basis, as provided in the
Registration Statement.
\24\ An AP Representative will provide information related to
creations and redemption of Creation Units and Redemption Units to
the Financial Industry Regulatory Authority (``FINRA'') upon
request.
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Purchases of Shares--Secondary Market
Only APs will be able to acquire Shares at NAV directly from a Fund
through the Distributor. The required payment must be transferred in
the manner set forth in a Fund's SAI by the specified time on the
Transmittal Date. These investors and others will also be able to
purchase Shares in secondary market transactions at prevailing market
prices.
Redemption
Beneficial Owners may sell their Shares in the secondary market.
Alternatively, investors that own enough Shares to constitute a
Redemption Unit or multiples thereof may redeem those Shares through
the Distributor, which will act as the Trust's representative for
redemption. The size of a Redemption Unit will be subject to change.
Redemption orders for Redemption Units or multiples thereof must be
placed by or through an AP.
Authorized Participant Redemption
The Shares may be redeemed to a Fund in Redemption Unit size or
multiples thereof as described below. Redemption orders of Redemption
Units must be placed by or through an AP (``AP Redemption Order'').
Each Fund will establish an Order Cut-Off Time for redemption orders of
Redemption Units
[[Page 29898]]
in proper form. Redemption Units of a Fund will be redeemable at their
NAV per Share next determined after receipt of a request for redemption
by the Trust in the manner specified below before the Order Cut-Off
Time. To initiate an AP Redemption Order, an AP must submit to the
Distributor an irrevocable order to redeem such Redemption Unit after
the most recent prior Valuation Time but not later than the Order Cut-
Off Time.
In the case of a redemption, the AP would enter into an irrevocable
redemption order, and then instruct the AP Representative to sell the
underlying basket of securities that it will receive in the redemption.
As with the purchase of securities, the AP Representative would be
required to obfuscate the sale of the portfolio securities it will
receive as redemption proceeds using similar tactics.
Consistent with the provisions of Section 22(e) of the 1940 Act and
Rule 22e-2 thereunder, the right to redeem will not be suspended, nor
payment upon redemption delayed, except for: (1) Any period during
which the Exchange is closed other than customary weekend and holiday
closings, (2) any period during which trading on the Exchange is
restricted, (3) any period during which an emergency exists as a result
of which disposal by a Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for a Fund to determine
its NAV, and (4) for such other periods as the Commission may by order
permit for the protection of shareholders.
It is expected that redemptions will occur primarily in-kind,
although redemption payments may also be made partly or wholly in cash.
The Participant Agreement signed by each AP will require establishment
of a Confidential Account to receive distributions of securities in-
kind upon redemption.\25\ Each AP will be required to open a
Confidential Account with an AP Representative in order to facilitate
orderly processing of redemptions.
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\25\ The terms of each Confidential Account will be set forth as
an exhibit to the applicable Participant Agreement, which will be
signed by each AP. The terms of the Confidential Account will
provide that the trust be formed under applicable state laws; the
custodian may act as AP Representative of the Confidential Account;
and the AP Representative will be paid by the AP a fee negotiated
directly between the APs and the AP Representative(s).
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After receipt of a Redemption Order, a Fund's custodian
(``Custodian'') will typically deliver securities to the Confidential
Account with a value approximately equal to the value of the Shares
\26\ tendered for redemption at the Cut-Off time. The Custodian will
make delivery of the securities by appropriate entries on its books and
records transferring ownership of the securities to the AP's
Confidential Account, subject to delivery of the Shares redeemed. The
AP Representative of the Confidential Account will in turn liquidate
the securities based on instructions from the AP.\27\ The AP
Representative will pay the liquidation proceeds net of expenses plus
or minus any cash balancing amount to the AP through DTC.\28\ The
redemption securities that the Confidential Account receives are
expected to mirror the portfolio holdings of a Fund pro rata. To the
extent a Fund distributes portfolio securities through an in-kind
distribution to more than one Confidential Account for the benefit of
the accounts' respective APs, each Fund expects to distribute a pro
rata portion of the portfolio securities selected for distribution to
each redeeming AP.
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\26\ If the NAV of the Shares redeemed differs from the value of
the securities delivered to the applicable Confidential Account, the
applicable Fund will receive or pay a cash balancing amount to
compensate for the difference between the value of the securities
delivered and the NAV.
\27\ An AP will issue execution instructions to the AP
Representative and be responsible for all associated profit or
losses. Like a traditional ETF, the AP has the ability to sell the
basket securities at any point during Regular Trading Hours.
\28\ Under applicable provisions of the Internal Revenue Code,
the AP is expected to be deemed a ``substantial owner'' of the
Confidential Account because it receives distributions from the
Confidential Account. As a result, all income, gain or loss realized
by the Confidential Account will be directly attributed to the AP.
In a redemption, the AP will have a basis in the distributed
securities equal to the fair market value at the time of the
distribution and any gain or loss realized on the sale of those
Shares will be taxable income to the AP.
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If the AP would receive a security that it is restricted from
receiving, for example if the AP is engaged in a distribution of the
security, a Fund will deliver cash equal to the value of that security.
APs and non-AP market participants will provide the AP Representative
with a list of restricted securities applicable to the AP or non-AP
market participants on a daily basis, and a Fund will substitute cash
for those securities in the applicable Confidential Account.
To address odd lots, fractional shares, tradeable sizes or other
situations where dividing securities is not practical or possible, the
adviser may make minor adjustments to the pro rata portion of portfolio
securities selected for distribution to each redeeming AP on such
Business Day.
The Trust will accept a Redemption Order in proper form. A
Redemption Order is subject to acceptance by the Trust and must be
preceded or accompanied by an irrevocable commitment to deliver the
requisite number of Shares. At the time of settlement, an AP will
initiate a delivery of the Shares plus or minus any cash balancing
amounts, and less the expenses of liquidation.
Pricing Calculations
According to the Notice, the pricing verification agent, on behalf
of each Fund, will utilize two separate calculation engines to
calculate intra-day indicative values (``Calculation Engines''), based
on the mid-point between the current national best bid and offer
disseminated by the Consolidated Quotation System (``CQS'') and
Unlisted Trading Privileges Plan Securities Information Processor,\29\
to provide the estimated real-time value on a per Share basis of each
Fund's holdings every second during the Exchange's Regular Trading
Hours.\30\ The Custodian will provide, on a daily basis, the identities
and quantities of portfolio securities that will form the basis for the
applicable Fund's calculation of NAV at the end of the Business
Day,\31\ plus any cash in the portfolio, to the pricing verification
agent for purposes of calculating the VIIV.\32\
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\29\ According to the Exemptive Order, all Commission-registered
exchanges and market centers send their trades and quotes to a
central consolidator where the Consolidated Tape System (CTS) and
CQS data streams are produced and distributed worldwide. See https://www.ctaplan.com/index. Although there is only one source of market
quotations, each Calculation Engine will receive the data directly
and calculate an indicative value separately and independently from
each other Calculation Engine.
\30\ Dissemination of VIIV at one second intervals (as compared
to every fifteen seconds for existing ETFs) helps to strike a
balance between providing all investors with useable information at
a rate that can be processed by retail investors, does not provide
so much information so as to allow market participants to accurately
determine the constituents, and their weightings, of the portfolio,
can be accurately calculated and disseminated, and still provides
professional traders with per second data.
\31\ Trades made on the prior Business Day (T) will be booked
and reflected in the NAV on the current Business Day (T+1). Thus,
the VIIV calculated throughout the day will be based on the same
portfolio as is used to calculate the NAV on that day.
\32\ The Commission opined in the Notice that Precidian has
addressed the concerns previously noted by the Commission with
respect to reliance on the typical 15-second intraday indicative
value for arbitrage purposes, by creating a VIIV that: (i) would be
calculated and disseminated every second; and (ii) has precise and
uniform parameters for calculation across all Funds, including that
the Funds and their respective adviser take responsibility for its
calculation. The Notice additionally highlights that arbitrage is
further facilitated and those concerns are addressed because each
Fund also will only invest in certain securities that trade on a
U.S. exchange, contemporaneously with the Fund's Shares. Because the
securities are exchange traded, Precidian asserted that the AP
Representative would be able to promptly buy or sell the basket
securities that it exchanges with the Funds on behalf of an AP upon
receiving an order to enter into a creation or redemption
transaction. The portfolio holdings' secondary market, moreover,
would provide reliable price inputs for the VIIV calculation.
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[[Page 29899]]
According to the Notice, it is anticipated that each Calculation
Engine could be using some combination of different hardware, software
and communications platforms to process the CQS data. Different
hardware platforms' operating systems could be receiving and
calculating the CQS data inputs differently, potentially resulting in
one Calculation Engine processing the indicative value in a different
time slice than another Calculation Engine's system, thus processing
values in different sequences. The processing differences between
different Calculation Engines will most likely be in the sub-second
range. Consequently, the frequency of occurrence of out of sequence
values among different Calculation Engines due to differences in
operating system environments should be minimal. Other factors that
could result in sequencing that is not uniform among the different
Calculation Engines are message gapping, internal system software
design, and how the CQS data is transmitted to the Calculation Engine.
While the expectation is that the Primary Intraday Indicative Value and
Secondary Intraday Indicative Value will generally match, having dual
streams of redundant data that must be compared by the pricing
verification agent will provide an additional check that the resulting
VIIV is accurate.
According to the Notice, each Fund's Board has a responsibility to
oversee the process of calculating an accurate VIIV and to make an
affirmative determination, at least annually, that the procedures used
to calculate the VIIV and maintain its accuracy are, in its reasonable
business judgment, appropriate. These procedures and their continued
effectiveness will be subject to the ongoing oversight of each Fund's
chief compliance officer. The specific methodology for calculating the
VIIV will be disclosed on each Fund's website. While each Fund will
oversee the calculation of the VIIV, a Fund will utilize at two
Calculation Engines.
Availability of Information
As noted above, a mutual fund is required to file with the
Commission its complete portfolio schedules for the second and fourth
fiscal quarters on Form N-CSR under the 1940 Act, and is required to
file its complete portfolio schedules for the first and third fiscal
quarters on Form N-Q under the 1940 Act, within 60 days of the end of
the quarter. Form N-Q requires funds to file the same schedules of
investments that are required in annual and semi-annual reports to
shareholders. The Trust's SAI and each Fund's shareholder reports will
be available free upon request from the Trust. These documents and
forms may be viewed on-screen or downloaded from the Commission's
website at www.sec.gov.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding 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 via the Consolidated Tape Association
(``CTA'') high-speed line. In addition, the VIIV, as defined in
proposed Rule 14.11(k)(3)(B) and as described further below, will be
widely disseminated by the Reporting Authority and/or one or more major
market data vendors every second during Regular Trading Hours.
Dissemination of the VIIV
The VIIV, which is approximate value of each Fund's investments on
a per Share basis, will be disseminated every second during Regular
Trading Hours. The VIIV should not be viewed as a ``real-time'' update
of NAV because the VIIV may not be calculated in the same manner as
NAV, which is computed once per day.
The VIIV for each Fund will be disseminated by the Reporting
Authority and/or one or more major market data vendors in one-second
intervals during Regular Trading Hours. Each Fund will adopt procedures
governing the calculation of the VIIV. For purposes of the VIIV,
securities held by a Fund will be valued throughout the day based on
the mid-point between the disseminated current national best bid and
offer. If the adviser for a Fund determines that the mid-point of the
bid/ask spread is inaccurate, a Fund will use fair value pricing based
on the procedures described above. That fair value pricing will be
carried over to the next day's VIIV until the first trade in that stock
is reported unless the adviser deems a particular portfolio security to
be illiquid and/or the available ongoing pricing information unlikely
to be reliable. In such case, that fact will be disclosed as soon as
practicable on each Fund's website, including the identity and
weighting of that security in a Fund's portfolio, and the impact of
that security on VIIV calculation, including the fair value price for
that security being used for the calculation of that day's VIIV.
By utilizing the mid-point pricing for purposes of VIIV
calculation, stale prices are eliminated and more accurate
representation of the real time value of the underlying securities is
provided to the market. Specifically, quotations based on the mid-point
of bid/ask spreads more accurately reflect current market sentiment by
providing real time information on where market participants are
willing to buy or sell securities at that point in time. Using
quotations rather than last sale information addresses concerns
regarding the staleness of pricing information of less actively traded
securities. Because quotations are updated more frequently than last
sale information especially for inactive securities, the VIIV will be
based on more current and accurate information. The use of quotations
will also dampen the impact of any momentary spikes in the price of a
portfolio security.
The pricing verification agent will continuously compare the
Primary Intraday Indicative Value against a non-public Secondary
Intraday Indicative Value to which the pricing verification agent has
access. Where the pricing verification agent has verified the Primary
Intraday Indicative Value as compared to the Secondary Intraday
Indicative Value, the Primary Intraday Indicative Value will be used as
the Verified Intraday Indicative Value and will be disseminated
publicly during Regular Trading Hours for each series of Managed
Portfolio Shares. Upon notification to the Exchange by the issuer of a
series of Managed Portfolio Shares or its agent that the Primary
Intraday Indicative Value and the Secondary Intraday Indicative Value
differ by more than 25 basis points for 60 seconds, the Exchange will
halt trading as soon as practicable in a Fund until the discrepancy is
resolved.\33\ Each Fund's Board will review the procedures used to
calculate the VIIV and maintain its accuracy as appropriate, but not
less than annually. The specific methodology for
[[Page 29900]]
calculating the VIIV will be disclosed on each Fund's website.
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\33\ Any small divergence of less than 25 basis points would be
lower than the average bid/ask spread for actively managed ETFs, and
relatively immaterial to the overall indicative value. A continuous
deviation for sixty seconds could indicate an error in the feed or
in a Calculation Engine.
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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. Shares will trade on
the Exchange only during Regular Trading Hours as provided in proposed
Rule 14.11(k)(2)(B). As provided in BZX Rule 11.11(a), the minimum
price variation for quoting and entry of orders in securities 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 Managed Portfolio 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 Managed Portfolio Shares through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products, including
Managed Portfolio Shares. The Exchange will require the issuer of each
series of Managed Portfolio Shares listed on the Exchange to represent
to the Exchange that it will advise the Exchange of any failure by a
Fund 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. If a Fund is not in compliance with the applicable
listing requirements, the Exchange will commence delisting procedures
under Exchange Rule 14.12.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Information Circular
Prior to the commencement of trading of a series of Managed
Portfolio Shares, the Exchange will inform its members in an
Information Circular (``Circular'') of the special characteristics and
risks associated with trading the Shares. Specifically, the Circular
will discuss the following: (1) The procedures for purchases and
redemptions of Shares; (2) BZX 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 VIIV is disseminated; (4) the requirement that members deliver a
prospectus to investors purchasing newly issued Shares prior to or
concurrently with the confirmation of a transaction; (5) trading
information; and (6) that the portfolio holdings of the Shares are not
disclosed on a daily basis.
In addition, the Circular will reference that Funds are subject to
various fees and expenses described in the Registration Statement. The
Circular will discuss any exemptive, no-action, and interpretive relief
granted by the Commission from any rules under the Act. The Circular
will also disclose that the NAV for the Shares will be calculated after
4:00 p.m., E.T. each trading day.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \34\ in general and Section 6(b)(5) of the Act \35\ in
particular in that it is 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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\34\ 15 U.S.C. 78f.
\35\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that proposed Rule 14.11(k) is designed to
prevent fraudulent and manipulative acts and practices in that the
proposed rules relating to listing and trading of Managed Portfolio
Shares provide specific initial and continued listing criteria required
to be met by such securities. Proposed Rule 14.11(k)(4) sets forth
initial and continued listing criteria applicable to Managed Portfolio
Shares. Proposed Rule 14.11(k)(4)(A)(i) provides that, for each series
of Managed Portfolio Shares, the Exchange will establish a minimum
number of Managed Portfolio Shares required to be outstanding at the
time of commencement of trading on the Exchange. In addition, proposed
Rule 14.11(k)(4)(A)(ii) provides that the Exchange will obtain a
representation from the issuer of each series of Managed Portfolio
Shares that the NAV per share for the series will be calculated daily
and that the NAV will be made available to all market participants at
the same time.\36\ Proposed Rule 14.11(k)(4)(A)(iii) provides that all
Managed Portfolio Shares shall have a stated investment objective,
which shall be adhered to under normal market conditions.
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\36\ Proposed Rule 14.11(k)(4)(B)(iii) provides that if the
Exchange becomes aware that the NAV with respect to a series of
Managed Portfolio Shares is not disseminated to all market
participants at the same time, it will halt trading in such series
until such time as the NAV is available to all market participants.
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Proposed Rule 14.11(k)(4)(B) provides that each series of Managed
Portfolio Shares will be listed and traded subject to application of
the specified continued listing criteria, as described above. Proposed
Rule 14.11(k)(4)(B)(i) provides that the VIIV for Managed Portfolio
Shares will be widely disseminated by the Reporting Authority and/or
one or more major market data vendors every second during Regular
Trading Hours. Proposed Rule 14.11(k)(4)(B)(ii) provides that the
Exchange will consider the suspension of trading in, and will commence
delisting proceedings under Rule 14.12 for, a series of Managed
Portfolio Shares under any of the following circumstances: (a) If,
following the initial twelve-month period after commencement of trading
on the Exchange of a series of Managed Portfolio Shares, there are
fewer than 50 beneficial holders of the series of Managed Portfolio
Shares; (b) if the value of the Verified Intraday Indicative Value is
no longer calculated or available to all market participants at the
same time; (c) if the holdings of a series of Managed Portfolio Shares
are not made available on a quarterly basis as required under the 1940
Act or are not made available to all market participants at the same
time; (d) if the Investment Company issuing the Managed Portfolio
Shares has failed to file any filings required by the Securities and
Exchange Commission or if the Exchange is aware that the Investment
Company is not in compliance with the conditions of any exemptive order
or no-action relief granted by the Securities and Exchange Commission
to the Investment Company with respect to the series of Managed
Portfolio Shares; (e) if any of the continued listing requirements set
forth in Rule 14.11(k) are not continuously maintained; (f) if any of
the applicable Continued Listing Representations for the issue of
Managed Fund Shares are not continuously met; or (g) if such other
event shall occur or condition exists which, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. Proposed
Rule 14.11(k)(4)(B)(iii) provides that, upon notification to the
Exchange by the Investment Company or its agent that (i) the Primary
Intraday Indicative Value and Secondary Intraday Indicative Value, to
be compared by the applicable Investment Company's pricing verification
agent, differ by more than
[[Page 29901]]
25 basis points for 60 seconds in connection with pricing of the VIIV,
or (ii) that the VIIV of a series of Managed Portfolio Shares is not
being calculated or disseminated in one-second intervals, as required,
the Exchange shall halt trading in the Managed Portfolio Shares as soon
as practicable. Such halt in trading shall continue until the
Investment Company or its agent notifies the Exchange that the intraday
indicative values no longer differ by more than 25 basis points for 60
seconds or that the VIIV is being calculated and disseminated as
required. Proposed Rule 14.11(k)(4)(B)(iv) provides that, upon
termination of an Investment Company, the Exchange requires that
Managed Portfolio Shares issued in connection with such entity be
removed from Exchange listing. Proposed Rule 14.11(k)(4)(B)(v) provides
that voting rights shall be as set forth in the applicable Investment
Company prospectus.
Proposed Rule 14.11(k)(2)(E) provides that, if the investment
adviser to the Investment Company issuing Managed Portfolio Shares is
registered as a broker-dealer or is affiliated with a broker-dealer
such investment adviser will erect and maintain a ``fire wall'' between
the investment adviser and personnel of the broker-dealer or broker-
dealer affiliate, as applicable, with respect to access to information
concerning the composition and/or changes to such Investment Company
portfolio. Proposed Rule 14.11(k)(2)(F) provides that, if an AP
Representative, the Custodian or pricing verification agent for an
Investment Company issuing Managed Portfolio Shares, or any other
entity that has access to information concerning the composition and/or
changes to such Investment Company's portfolio, is registered as a
broker-dealer or affiliated with a broker-dealer, such AP
Representative, custodian, pricing verification agent or other entity
will erect and maintain a ``fire wall'' between such AP Representative,
custodian, pricing verification agent, or other entity and personnel of
the broker- dealer or broker-dealer affiliate, as applicable, with
respect to access to information concerning the composition and/or
changes to such Investment Company portfolio. 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.\37\
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\37\ The Exchange notes that the Order dismissed concerns raised
by a third party related to potential violation of Section 10(b) of
the Act, stating that ``Contrary to the contentions advanced in the
third-party submissions, the provision of the basket composition
information to the AP Representative or use of that information by
the AP Representative as provided for in the Application should not
give rise to insider trading violations under section 10(b) of the
Exchange Act.'' The notice goes on to say that ``an unaffiliated
broker-dealer (``AP Representative'') acting as an agent of another
broker-dealer (``AP'')will be given information concerning the
identity and weightings of the basket of securities that the ETF
would exchange for its shares (but not information concerning the
issuers of those underlying securities). The AP Representative is
provided this information by the ETF so that, pursuant to
instructions received from an AP, the AP Representative may
undertake the purchase or redemption of the ETF's Shares (in the
form of creation units) and the purchase or sale of the basket of
securities that are exchanged for creation units. The ETFs will
provide this information to an AP Representative on a confidential
basis, the AP Representative is subject to a duty of non-disclosure
(which includes an obligation not to provide this information to an
AP), and the AP Representative may not use the information in any
way except to facilitate the operation of the ETF by purchasing or
selling the basket of securities and to exchange it with the ETF to
complete an AP's orders to purchase or redeem the ETF's
Shares.6Furthermore, section 15(g) of the Exchange Act requires an
AP Representative, as a registered broker, to establish, maintain,
and enforce written policies and procedures reasonably designed to
prevent the misuse of material nonpublic information by the AP
Representative or any person associated with the AP
Representative.'' The Order goes on to say ``For the foregoing
reasons, it is found that granting the requested exemptions is
appropriate in and consistent with the public interest and
consistent with the protection of investors and the purposes fairly
intended by the policy and provisions of the Act. It is further
found that the terms of the proposed transactions, including the
consideration to be paid or received, are reasonable and fair and do
not involve overreaching on the part of any person concerned, and
that the proposed transactions are consistent with the policy of
each registered investment company concerned and with the general
purposes of the Act.''
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The Exchange, after consulting with various LMMs that trade ETFs on
the Exchange, believes that market makers will be able to make
efficient and liquid markets priced near the VIIV, as long as market
makers have knowledge of a Fund's means of achieving its investment
objective even without daily disclosure of a fund's underlying
portfolio.\38\ The Exchange believes that market makers will employ
risk-management techniques to make efficient markets in exchange traded
products. This ability should permit market makers to make efficient
markets in shares without knowledge of a fund's underlying portfolio.
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\38\ The Exchange notes that the Commission reached the same
conclusion in the Notice, specifically stating: ``The Commission
believes that the alternative arbitrage mechanism proposed by
Applicants can also work in an efficient manner to maintain an
ActiveShares ETF's secondary market prices close to its NAV.'' See
the Notice at 19.
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The Exchange understands that traders use statistical analysis to
derive correlations between different sets of instruments to identify
opportunities to buy or sell one set of instruments when it is
mispriced relative to the others. For Managed Portfolio Shares, market
makers utilizing statistical arbitrage use the knowledge of a fund's
means of achieving its investment objective, as described in the
applicable fund registration statement, to construct a hedging proxy
for a fund to manage a market maker's quoting risk in connection with
trading fund shares. Market makers will then conduct statistical
arbitrage between their hedging proxy (for example, the Russell 1000
Index) and shares of a fund, buying and selling one against the other
over the course of the trading day. Eventually, at the end of each day,
they will evaluate how their proxy performed in comparison to the price
of a fund's shares, and use that analysis as well as knowledge of risk
metrics, such as volatility and turnover, to enhance their proxy
calculation to make it a more efficient hedge.
Market makers have indicated to the Exchange that there will be
sufficient data to run a statistical analysis which will lead to
spreads being tightened substantially around the VIIV. This is similar
to certain other existing exchange traded products (for example, ETFs
that invest in foreign securities that do not trade during U. S.
trading hours), in which spreads may be generally wider in the early
days of trading and then narrow as market makers gain more confidence
in their real-time hedges.
The LMMs also indicated that, as with some other new exchange-
traded products, spreads would tend to narrow as market makers gain
more confidence in the accuracy of their hedges and their ability to
adjust these hedges in real-time relative to the published VIIV and
gain an understanding of the applicable market risk metrics such as
volatility and turnover, and as natural buyers and sellers enter the
market. Other relevant factors cited by LMMs were that a fund's
investment objectives are clearly disclosed in the applicable
prospectus, the existence of quarterly portfolio disclosure and the
ability to create shares in creation unit size or redeem in redemption
unit size through an AP.
The real-time dissemination of a Fund's VIIV together with the
right of APs to create and redeem each day at the NAV will be
sufficient for market participants to value and trade Shares in a
manner that will not lead to
[[Page 29902]]
significant deviations between the shares' Bid/Ask Price and NAV.
The pricing efficiency with respect to trading a series of Managed
Portfolio Shares will generally rest on the ability of market
participants to arbitrage between the Shares and a fund's portfolio, in
addition to the ability of market participants to assess a fund's
underlying value accurately enough throughout the trading day in order
to hedge positions in shares effectively. Professional traders can buy
Shares that they perceive to be trading at a price less than that which
will be available at a subsequent time, and sell Shares they perceive
to be trading at a price higher than that which will be available at a
subsequent time. It is expected that, as part of their normal day-to-
day trading activity, market makers assigned to Shares by the Exchange,
off-exchange market makers, firms that specialize in electronic
trading, hedge funds and other professionals specializing in short-
term, non-fundamental trading strategies will assume the risk of being
``long'' or ``short'' shares through such trading and will hedge such
risk wholly or partly by simultaneously taking positions in correlated
assets \39\ or by netting the exposure against other, offsetting
trading positions--much as such firms do with existing ETFs and other
equities. Disclosure of a fund's investment objective and principal
investment strategies in its prospectus and SAI, along with the
dissemination of the VIIV every second, should permit professional
investors to engage easily in this type of hedging activity.\40\
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\39\ Price correlation trading is used throughout the financial
industry. It is used to discover both trading opportunities to be
exploited, such as currency pairs and statistical arbitrage, as well
as for risk mitigation such as dispersion trading and beta hedging.
These correlations are a function of differentials, over time,
between one or multiple securities pricing. Once the nature of these
price deviations have been quantified, a universe of securities is
searched in an effort to, in the case of a hedging strategy,
minimize the differential. Once a suitable hedging basket has been
identified, a trader can minimize portfolio risk by executing the
hedging basket. The trader then can monitor the performance of this
hedge throughout the trade period, making corrections where
warranted.
\40\ With respect to trading in the Shares, market participants
would manage risk in a variety of ways. It is expected that market
participants will be able to determine how to trade Shares at levels
approximating the VIIV without taking undue risk by gaining
experience with how various market factors (e.g., general market
movements, sensitivity of the VIIV to intraday movements in interest
rates or commodity prices, etc.) affect VIIV, and by finding hedges
for their long or short positions in Shares using instruments
correlated with such factors. Market participants will likely
initially determine the VIIV's correlation to a major large
capitalization equity benchmark with active derivative contracts,
such as the Russell 1000 Index, and the degree of sensitivity of the
VIIV to changes in that benchmark. For example, using hypothetical
numbers for illustrative purposes, market participants should be
able to determine quickly that price movements in the Russell 1000
Index predict movements in a Fund's VIIV 95% of the time (an
acceptably high correlation) but that the VIIV generally moves
approximately half as much as the Russell 1000 Index with each price
movement. This information is sufficient for market participants to
construct a reasonable hedge--buy or sell an amount of futures,
swaps or ETFs that track the Russell 1000 equal to half the opposite
exposure taken with respect to Shares. Market participants will also
continuously compare the intraday performance of their hedge to a
Fund's VIIV. If the intraday performance of the hedge is correlated
with the VIIV to the expected degree, market participants will feel
comfortable they are appropriately hedged and can rely on the VIIV
as appropriately indicative of a Fund's performance.
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With respect to trading of the Shares, the ability of market
participants to buy and sell Shares at prices near the VIIV is
dependent upon their assessment that the VIIV is a reliable, indicative
real-time value for a Fund's underlying holdings. Market participants
are expected to accept the VIIV as a reliable, indicative real-time
value because (1) the VIIV will be calculated and disseminated based on
a Fund's actual portfolio holdings, (2) the securities in which a Fund
plans to invest are generally highly liquid and actively traded and
therefore generally have accurate real time pricing available, and (3)
market participants will have a daily opportunity to evaluate whether
the VIIV at or near the close of trading is indeed predictive of the
actual NAV.\41\
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\41\ The statements in the Statutory Basis section of this
filing relating to pricing efficiency, arbitrage, and activities of
market participants, including market makers and APs, are based on
statements in the Exemptive Order, representations by Precidian, and
review by the Exchange.
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In a typical index-based ETF, it is standard for APs to know what
securities must be delivered in a creation or will be received in a
redemption. For Managed Portfolio Shares, however, APs do not need to
know the securities comprising the portfolio of a Fund since creations
and redemptions are handled through the Confidential Account mechanism.
In-kind creations and redemptions through a Confidential Account are
expected to preserve the integrity of the active investment strategy
and reduce the potential for ``free riding'' or ``front-running,''
while still providing investors with the advantages of the ETF
structure.
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 an
issue of Managed Portfolio Shares that the NAV per share of a fund will
be calculated daily and that the NAV will be made available to all
market participants at the same time. Investors can also obtain a
fund's SAI, shareholder reports, and its Form N-CSR, Form N-Q and Form
N-SAR. A fund's SAI and shareholder reports will be available free upon
request from the applicable fund, and those documents and the Form N-
CSR, Form N-Q and Form N-SAR may be viewed on-screen or downloaded from
the Commission's website. In addition, a large amount of information
will be publicly available regarding the Funds and the Shares, thereby
promoting market transparency. Quotation and last sale information for
the Shares will be available via the CTA high-speed line. Information
regarding the VIIV will be widely disseminated every second throughout
Regular Trading Hours by the Reporting Authority and/or one or more
major market data vendors. The website for each Fund will include a
form of the prospectus for the Fund that may be downloaded, and
additional data relating to NAV and other applicable quantitative
information, updated on a daily basis. Moreover, prior to the
commencement of trading, the Exchange will inform its members in a
Circular of the special characteristics and risks associated with
trading the Shares.
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, as noted above, investors
will have ready access to information regarding the VIIV 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, rather will facilitate the listing and trading of
additional actively-managed
[[Page 29903]]
exchange-traded products that will enhance competition among both
market participants and listing venues, 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 Exchange consents, the Commission will:
A. By order approve or disapprove such 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-CboeBZX-2019-047 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-2019-047. 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-2019-047 and should be submitted
on or before July 16, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Acting Secretary.
[FR Doc. 2019-13413 Filed 6-24-19; 8:45 am]
BILLING CODE 8011-01-P