[Federal Register Volume 84, Number 142 (Wednesday, July 24, 2019)]
[Notices]
[Pages 35698-35701]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15657]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86410; File No. SR-CboeBZX-2019-023]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend Rule 14.11(c) (Index Fund Shares) To 
Adopt Generic Listing Standards for Index Fund Shares Based on an Index 
of Municipal Securities

July 18, 2019.

I. Introduction

    On April 3, 2019, Cboe BZX Exchange, Inc. (``Exchange'' or ``Cboe 
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 Cboe BZX Rule 14.11(c) to adopt generic 
listing standards for Index Fund Shares (``Shares'') based on an index 
or portfolio of municipal securities. The proposed rule change was 
published for comment in the Federal Register on April 22, 2019.\3\ On 
May 30, 2019, 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\ The Commission has received no comments on the 
proposal. The Commission is publishing this order to institute 
proceedings pursuant to Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the proposed rule change.
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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. 85656 (Apr. 16, 
2019), 84 FR 16753.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85966, 84 FR 26172 
(June 5, 2019). The Commission designated July 21, 2019 as the date 
by which the Commission shall approve or disapprove, or institute 
proceedings to determine whether to approve or disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change 7
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    \7\ For a full description of the proposed rule change, see 
Notice, supra note 3.
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    Cboe BZX Rule 14.11(c) permits the Exchange to list a series of 
Shares based on an index or portfolio of underlying securities. 
Currently, Cboe BZX Rule 14.11(c) includes generic listing standards 
for Shares based on an index or portfolio of equity or fixed income 
securities or a combination thereof. Municipal Securities \8\ are a 
type of fixed income security, and therefore currently the Exchange may 
generically list and trade securities overlying an index or portfolio 
of Municipal Securities provided the index or portfolio satisfies the 
criteria of Cboe BZX Rule 14.11(c)(4). According to the Exchange, 
however, indexes and portfolios of Municipal Securities typically do 
not satisfy the criterion that component securities in an index or 
portfolio that in aggregate account for at least 75% of the Fixed 
Income Securities portion of the weight of the index or portfolio each 
have a minimum

[[Page 35699]]

original principal amount outstanding of $100 million or more.\9\ The 
Exchange states that generally Municipal Securities are issued with 
individual maturities of relatively small size, although they typically 
are constituents of a much larger municipal bond offering.\10\
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    \8\ The proposed rule defines the term ``Municipal Securities'' 
by incorporating the definition in Section 3(a)(29) of the Act.
    \9\ See Notice, supra note 3, 84 FR at 16754. ``Fixed Income 
Securities are debt securities that are notes, bonds, debentures or 
evidence of indebtedness that include, but are not limited to, U.S. 
Department of Treasury securities (``Treasury Securities''), 
government-sponsored entity securities (``GSE Securities''), 
municipal securities, trust preferred securities, supranational debt 
and debt of a foreign country or a subdivision thereof.'' Cboe BXZ 
Rule 14.11(c)(4).
    \10\ See id.
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A. Proposed Cboe BZX Rule 14.11(c)(4)(B)(ii)

1. Applicability
    Proposed Cboe BZX Rule 14.11(c)(4)(B)(ii) provides generic listing 
standards for Shares based on an index or portfolio of Municipal 
Securities. Because existing Cboe BZX Rule 14.11(c)(4)(B)(i) also 
applies to Shares based on an index or portfolio of Municipal 
Securities, the Exchange represents that it would apply existing Cboe 
BZX Rule 14.11(c)(4)(B)(i) and proposed Cboe BZX Rule 
14.11(c)(4)(B)(ii) in a ``waterfall'' manner. Specifically, the 
Exchange would initially evaluate every series of Shares based on an 
index or portfolio of Municipal Securities or Municipal Securities and 
cash against the generic listing standards of existing Cboe BZX Rule 
14.11(c)(4)(B)(i) and would apply proposed Cboe BZX Rule 
14.11(c)(4)(B)(ii) only to Shares whose index or portfolio does not 
meet the requirements of Cboe BZX Rule 14.11(c)(4)(B)(i).
2. Proposed Generic Listing Criteria
    The Exchange asserts that Cboe BZX Rule 14.11(c)(4)(B)(ii) includes 
many requirements that are more stringent than those applicable under 
Cboe BZX Rule 14.11(c)(4)(B)(i). These heightened requirements, 
according to the Exchange, would deter potential manipulation of such 
Municipal Securities indices even though the index or portfolio may 
include securities that have smaller original principal amounts 
outstanding. The proposed quantitative requirements described below 
would apply on both an initial and continued basis to a Municipal 
Securities index or portfolio underlying a series of Shares.
a. Original Principal Amount Outstanding
    According to the Exchange, Municipal Securities are typically 
issued with individual maturities of relatively small size, although 
they generally are constituents of a much larger municipal bond 
offering.\11\ Accordingly, the Exchange proposes to reduce the 
requirement for minimum original principal amount outstanding for 
component securities from at least $100 million to at least $5 million. 
Further, the Exchange proposes that qualifying securities must have 
been issued as part of a transaction of at least $20 million. Lastly, 
the Exchange proposes to increase the percentage weight of an index or 
portfolio that must satisfy the original principal amount outstanding 
requirement from 75% to 90%.
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    \11\ See supra note 10 and accompanying text.
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    The Exchange asserts that reducing the minimum original principal 
amount outstanding for component securities will not make an index or 
portfolio more susceptible to manipulation.\12\ The Exchange argues 
that the requirement that component securities in a Municipal 
Securities index or portfolio have a minimum principal amount 
outstanding, in concert with the other requirements of Cboe BZX Rule 
14.11(c)(4)(B)(ii), will ensure that such index or portfolio is 
sufficiently broad-based in scope as to minimize potential manipulation 
of the index or portfolio.\13\ In addition, the Exchange asserts that 
its proposal to require that 90% of the weight of a Municipal 
Securities index or portfolio meet the original principal amount 
outstanding requirement (as opposed to 75% for existing Cboe BZX Rule 
14.11(c)(4)(B)(i)) will further deter potential manipulation by 
ensuring that a greater portion of the index or portfolio meets this 
minimum size requirement.\14\
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    \12\ See Notice, supra note 3, 84 FR at 16754.
    \13\ See id.
    \14\ See id. at 16754-55.
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    The Exchange notes that the Commission has previously approved the 
listing and trading of several series of Shares where the underlying 
Municipal Securities index or portfolio required that component 
securities representing at least 90% of the weight of the index or 
portfolio have a minimum original principal amount outstanding of at 
least $5 million and have been issued as part of a transaction of at 
least $20 million.\15\
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    \15\ See Securities Exchange Act Release No. 84049 (Sept. 6, 
2018), 83 FR 46228 (Sept. 12, 2018) (SR-NYSEArca-2018-38) (order 
approving, among other things, revisions to the continued listing 
criteria applicable to the iShares New York AMT-Free Muni Bond ETF).
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b. Component Concentration
    Cboe BZX Rule 14.11(c)(4)(B)(i), the current generic listing rules 
for Shares based on a fixed-income index or portfolio, permits 
individual component securities to account for up to 30% of the weight 
of such index or portfolio and the top-five weighted component 
securities to account for up to 65% of the weight of such index or 
portfolio. The Exchange proposes to tighten these thresholds, proposing 
that under Cboe BZX Rule 14.11(c)(4)(B)(ii) an individual Municipal 
Security may comprise only 10% of the index or portfolio and that the 
five most heavily-weighted Municipal Securities in an index or 
portfolio may comprise only 30% of the index or portfolio. The Exchange 
asserts that its proposal will reduce the susceptibility to 
manipulation of a Municipal Securities index or portfolio underlying a 
series of Shares.\16\
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    \16\ See Notice, supra note 3, 84 FR at 16755.
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c. Issuer Diversification
    The current generic listing rules for Shares based on an index or 
portfolio of fixed-income securities require that an index or portfolio 
must include securities from at least 13 non-affiliated issuers. 
Notably, however, the current rules exempt indices consisting of either 
entirely exempted securities or exempted securities and cash from 
complying with this diversification requirement.\17\ Therefore, under 
the current generic listing criterion, an index or portfolio comprised 
of only Municipal Securities (or Municipal Securities and cash) is not 
required to satisfy any minimum issuer diversification requirement. The 
Exchange proposes that an index or portfolio of Municipal Securities or 
Municipal Securities and cash must include securities from at least 13 
non-affiliated issuers. The Exchange asserts that requiring such 
diversification will reduce the likelihood that an index or portfolio 
may be manipulated by ensuring that securities from a variety of 
issuers are represented in an index or portfolio of Municipal 
Securities.\18\
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    \17\ Municipal Securities are included in the definition of 
exempted securities. See Section 3(a)(12) of the Act.
    \18\ See Notice, supra note 3, 84 FR at 16755.
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d. Minimum Number of Components
    The current generic listing requirements for Shares based on an 
index or portfolio of fixed-income securities do not have an explicit 
requirement that an index or portfolio contain a minimum number of 
securities. However, given that such

[[Page 35700]]

rules require an index or portfolio to contain securities from at least 
thirteen non-affiliated issuers, there is an effective requirement that 
an index or portfolio of fixed-income securities contain at least 
thirteen component securities. As described above, a fixed-income index 
or portfolio comprised of exempted securities (including Municipal 
Securities) is not required to satisfy the issuer diversification test, 
and therefore such indices need not have a minimum number of component 
securities.
    The Exchange proposes to require that a Municipal Securities index 
or portfolio contain at least 500 component securities. According to 
the Exchange, this proposed requirement will ensure that a Municipal 
Securities index or portfolio is sufficiently broad-based and 
diversified to make it less susceptible to manipulation.\19\
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    \19\ See id.
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B. Proposed Amendments to Cboe BZX Rule 14.11(c)(5)

    The Exchange also proposes to amend Cboe BZX Rule 14.11(c)(5) to 
allow the generic listing and trading of Shares based on a combination 
of two or more types of indexes, including a combination index that 
includes Municipal Securities. Currently, the scope of the rule allows 
the Exchange to generically list Shares overlying on a combination of 
indexes or an index or portfolio of component securities representing: 
(1) The U.S. or domestic equity market; (2) the international equity 
market; and (3) the fixed income market. To the extent that an index or 
portfolio of Municipal Securities is included in a combination, the 
proposed rule specifies the Municipal Securities index or portfolio 
must satisfy all requirements of Cboe BZX Rule 14.11(c)(4)(B)(ii). The 
Exchange also proposes another conforming change to Cboe BZX Rule 
14.11(c)(5) to specify that the current requirements related to index 
value dissemination and related continued listing standards will apply 
to indexes of Municipal Securities. The Exchange notes that a 
combination index or portfolio that includes an index or portfolio of 
Municipal Securities will not be permitted to seek to provide 
investment results in a multiple of the direct or inverse performance 
of such combination index or portfolio.\20\
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    \20\ See Notice, supra note 3, 84 FR at 16756.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2019-023 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \21\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \21\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\22\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade,'' and ``to protect investors and the public 
interest.'' \23\ Specifically, the Commission seeks comment regarding 
the following:
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    \22\ Id.
    \23\ 15 U.S.C. 78f(b)(5).

    1. The Exchange's current generic listing requirement that at 
least 75% of the Fixed Income Securities portion of the weight of an 
underlying index or portfolio be comprised of components that each 
have a minimum original principal amount outstanding of $100 million 
is designed to ensure that adequate information is available about a 
substantial portion of the index components.\24\ Do the Exchange' 
proposed alternative thresholds for Municipal Securities indexes or 
portfolios similarly ensure that adequate information is available 
about a majority of the index components? Should one or more 
alternative criteria be employed to achieve the objective of the 
current generic listing requirement?
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    \24\ C.f., Securities Exchange Act Release No. 55783 (May 17, 
2007), 72 FR 29194, 29199 (May 24, 2007) (order approving generic 
listing standards for Shares based on fixed income indexes) (``The 
Commission believes that [the requirements of Commentary .02] are 
reasonably designed to ensure that a substantial portion of any 
underlying index or portfolio consists of securities about which 
information is publicly available . . .'').
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    2. Would the Exchange's proposed requirements that the 
underlying index or portfolio of Municipal Securities include at 
least 500 components from at least 13 non-affiliated issuers 
mitigate manipulation concerns? Should one or more alternative 
criteria be employed to achieve diversification sufficient to 
mitigate manipulation concerns?
    3. Taken collectively, would the proposed generic listing 
criteria adequately ensure that each index or portfolio of Municipal 
Securities underlying an issue of Shares is not susceptible to 
manipulation?

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 
is consistent with Section 6(b)(5) or any other provision of the Act, 
or the rules and regulations thereunder. Although there do not appear 
to be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4 under the Act,\25\ any 
request for an opportunity to make an oral presentation.\26\
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    \25\ 17 CFR 240.19b-4.
    \26\ 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 should be approved 
or disapproved by August 14, 2019. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
August 28, 2019. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in Notice,\27\ in addition to any other comments 
they may wish to submit about the proposed rule change.
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    \27\ See supra note 3.
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    In this regard, the Commission seeks comment on the Exchange's 
proposed generic listing standards for Shares based on an index or 
portfolio of Municipal Securities. The Commission specifically seeks 
comment on whether the proposed requirement that an underlying index or 
portfolio must include a minimum of 500 component

[[Page 35701]]

Municipal Securities is consistent with the requirement 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.'' \28\
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    \28\ 15 U.S.C. 78f(b)(5).
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    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2019-023 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-2019-023. 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-2019-023 and should be submitted 
by August 14, 2019. Rebuttal comments should be submitted by August 28, 
2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15657 Filed 7-23-19; 8:45 am]
 BILLING CODE 8011-01-P