[Federal Register Volume 84, Number 152 (Wednesday, August 7, 2019)]
[Notices]
[Pages 38689-38696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16855]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86546; File No. SR-CboeBZX-2019-068]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To List and Trade Shares of the
iShares California Short Maturity Muni Bond ETF of the iShares U.S. ETF
Trust Under Rule 14.11(i), Managed Fund Shares
August 1, 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 July 19, 2019, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``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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[[Page 38690]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a rule change to list and trade shares of the
iShares California Short Maturity Muni Bond ETF (the ``Fund'') of the
iShares U.S. ETF Trust (the ``Trust'' or the ``Issuer'') under Rule
14.11(i) (``Managed Fund Shares''). The shares of the Fund are referred
to herein as the ``Shares.''
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 list and trade the Shares under Rule
14.11(i), which governs the listing and trading of Managed Fund Shares
on the Exchange.\3\ The Fund will be an actively managed fund. The
Shares will be offered by the Trust, which was established as a
Delaware statutory trust on June 21, 2011. The Trust is registered with
the Commission as an open-end investment company and has filed a
registration statement on behalf of the Fund on Form N-1A
(``Registration Statement'') with the Commission.\4\
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\3\ The Commission approved Rule 14.11(i) in Securities Exchange
Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6,
2011) (SR-BATS-2011-018).
\4\ See Registration Statement on Form N-1A for the Trust, filed
on April 11, 2019 (File Nos. 333-179904 and 811-22649). The
description of the Fund and the Shares contained herein are based,
in part, on information in the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Trust under the Investment Company Act of 1940 (15 U.S.C. 80a-1)
(``1940 Act'') (the ``Exemptive Order''). See Investment Company Act
Release No. 29571 (January 24, 2011) (File No. 812-13601).
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Rule 14.11(i)(4)(C)(ii)(a) requires that component fixed income
securities that, in the aggregate, account for at least 75% of the
fixed income weight of the portfolio must each have a minimum principal
amount outstanding of $100 million or more. The Exchange submits this
proposal because the Fund will not meet this requirement. The Fund
will, however, meet all of the other requirements of Rule 14.11(i).\5\
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\5\ The Exchange notes that the Commission has approved several
proposals related to the listing and trading of index-based
municipal bond funds focused solely on issuers from California as
well as several other single-state index-based municipal bond funds.
See, e.g., Securities Exchange Act Release Nos. 72464 (June 25,
2014), 79 FR 37373 (July 1, 2014) (SR-NYSEArca-2014-45) (order
approving proposed rule change governing the continued listing and
trading of shares of the PowerShares Insured California Municipal
Bond Portfolio, PowerShares Insured National Municipal Bond
Portfolio, and PowerShares Insured New York Municipal Bond
Portfolio); and 82295 (December 12, 2017), 82 FR 60056 (December 18,
2017) (SR-NYSEArca-2017-56) (order approving proposed rule change to
list and trade shares of twelve series of investment company units,
including the iShares California Muni Bond ETF and the iShares New
York Muni Bond ETF).
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Description of the Shares and the Fund
BlackRock Fund Advisors is the investment adviser (``BFA'' or
``Adviser'') to the Fund.\6\ State Street Bank and Trust Company is the
administrator, custodian, and transfer agent (``Administrator,''
``Custodian,'' and ``Transfer Agent,'' respectively) for the Trust.
BlackRock Investments, LLC serves as the distributor (``Distributor'')
for the Trust.
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\6\ BFA is an indirect wholly owned subsidiary of BlackRock,
Inc.
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Rule 14.11(i)(7) provides that, if the investment adviser to the
investment company issuing Managed Fund Shares is affiliated with a
broker-dealer, such investment adviser shall erect a ``fire wall''
between the investment adviser and the broker-dealer with respect to
access to information concerning the composition and/or changes to such
investment company portfolio.\7\ In addition, Rule 14.11(i)(7) further
requires that 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. Rule 14.11(i)(7) is
similar to Rule 14.11(b)(5)(A)(i), however, Rule 14.11(i)(7) in
connection with the establishment of a ``fire wall'' between the
investment adviser and the broker-dealer reflects the applicable open-
end fund's portfolio, not an underlying benchmark index, as is the case
with index-based funds. The Adviser is not a registered broker-dealer,
but is affiliated with multiple broker-dealers and has implemented
``fire walls'' with respect to such broker-dealers regarding access to
information concerning the composition and/or changes to the Fund's
portfolio. In addition, Adviser personnel who make decisions regarding
the Fund's portfolio are subject to procedures designed to prevent the
use and dissemination of material nonpublic information regarding the
Fund's portfolio. In the event that (a) the Adviser becomes registered
as a broker-dealer or newly affiliated with another broker-dealer, or
(b) any new adviser or sub-adviser is a registered broker-dealer or
becomes affiliated with a broker-dealer, it will implement a fire wall
with respect to its relevant personnel or such broker-dealer affiliate,
as applicable, regarding access to information concerning the
composition and/or changes to the portfolio, and will be subject to
procedures designed to prevent the use and dissemination of material
non-public information regarding such portfolio.
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\7\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its related personnel are
subject to the provisions of Rule 204A-1 under the Advisers Act
relating to codes of ethics. This Rule requires investment advisers
to adopt a code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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iShares California Short Maturity Muni Bond ETF
According to the Registration Statement, the Fund will seek to
maximize tax-free current income from a portfolio composed of short
maturity, investment-grade municipal bonds issued in the State of
California. To achieve its objective, the Fund will invest, under
Normal Market Conditions,\8\ at least 80% of its net
[[Page 38691]]
assets in Municipal Securities, as defined below, issued in the State
of California by or on behalf of California state or local governments
or agencies, whose interest payments are exempt from U.S. federal,
including the federal alternative minimum tax, and California state
income taxes. The Fund will be classified as a ``non-diversified''
investment company under the 1940 Act.\9\
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\8\ The term ``Normal Market Conditions'' includes, but is not
limited to, the absence of trading halts in the applicable financial
markets generally; operational issues causing dissemination of
inaccurate market information or system failures; or force majeure
type events such as natural or man-made disaster, act of God, armed
conflict, act of terrorism, riot or labor disruption, or any similar
intervening circumstance.
\9\ The diversification standard is set forth in Section 5(b)(1)
of the 1940 Act.
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The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended. The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
Principal Holdings--Municipal Securities
To achieve its objective, the Fund will invest, under Normal Market
Conditions, in U.S.-dollar denominated investment-grade short-term
fixed- and floating-rate Municipal Securities, as defined below, with
remaining maturities of five years or less. Investment-grade securities
are rated BBB- or higher by S&P Global Ratings and/or Fitch Ratings,
Inc., or Baa3 or higher by Moody's Investors Service, Inc., or if
unrated, determined by the Adviser to be of equivalent quality.\10\
Under Normal Market Conditions, the Fund will seek to maintain a
weighted average maturity that is less than three years.\11\
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\10\ According to the Adviser, BFA may determine that unrated
securities are of ``equivalent quality'' based on such credit
quality factors that it deems appropriate, which may include among
other things, performing an analysis similar, to the extent
possible, to that performed by a nationally recognized statistical
ratings organization when rating similar securities and issuers. In
making such a determination, BFA may consider internal analyses and
risk ratings, third party research and analysis, and other sources
of information, as deemed appropriate by the Adviser.
\11\ Weighted average maturity is a U.S. dollar-weighted average
of the remaining term to maturity of the underlying securities in
the Fund's portfolio. For the purposes of determining the Fund's
weighted average maturity, a security's final maturity date will be
used for calculation purposes.
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Municipal securities (``Municipal Securities'') are fixed and
variable rate securities issued in the U.S. by U.S. states and
territories, municipalities and other political subdivisions, agencies,
authorities, and instrumentalities of states and multi-state agencies
and authorities and will include only the following instruments:
General obligation bonds,\12\ limited obligation bonds (or revenue
bonds),\13\ municipal notes,\14\ municipal commercial paper,\15\ tender
option bonds,\16\ variable rate demand notes and demand obligations
(``VRDOs''),\17\ municipal lease obligations,\18\ stripped
securities,\19\ structured securities,\20\ zero coupon securities,\21\
and exchange traded and non-exchange traded investment companies
(including investment companies advised by BFA or its affiliates) that
invest in such Municipal Securities.\22\
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\12\ General obligation bonds are obligations involving the
credit of an issuer possessing taxing power and are payable from
such issuer's general revenues and not from any particular source.
\13\ Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific
revenue source, and also include industrial development bonds issued
pursuant to former U.S. federal tax law. Industrial development
bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of industrial
development bonds are usually related to the credit of the corporate
user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
\14\ Municipal notes are shorter-term municipal debt obligations
that may provide interim financing in anticipation of tax
collection, receipt of grants, bond sales, or revenue receipts.
\15\ Municipal commercial paper is generally unsecured debt that
is issued to meet short-term financing needs.
\16\ Tender option bonds are synthetic floating-rate or
variable-rate securities issued when long-term bonds are purchased
in the primary or secondary market and then deposited into a trust.
Custodial receipts are then issued to investors, such as the Fund,
evidencing ownership interests in the trust.
\17\ VRDOs are tax-exempt obligations that contain a floating or
variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period
not to exceed seven days.
\18\ Municipal lease obligations include certificates of
participation issued by government authorities or entities to
finance the acquisition or construction of equipment, land, and/or
facilities.
\19\ Stripped securities are created when an issuer separates
the interest and principal components of an instrument and sells
them as separate securities. In general, one security is entitled to
receive the interest payments on the underlying assets and the other
to receive the principal payments.
\20\ Structured securities are privately negotiated debt
obligations where the principal and/or interest is determined by
reference to the performance of an underlying investment, index, or
reference obligation, and may be issued by governmental agencies.
While structured securities are part of the principal holdings of
the Fund, the Issuer represents that such securities, when combined
with those instruments held as part of the other portfolio holdings
described below, will not exceed 20% of the Fund's net assets.
\21\ Zero coupon securities are securities that are sold at a
discount to par value and do not pay interest during the life of the
security. The discount approximates the total amount of interest the
security will accrue and compound over the period until maturity at
a rate of interest reflecting the market rate of the security at the
time of issuance. Upon maturity, the holder of a zero coupon
security is entitled to receive the par value of the security.
\22\ The Fund currently anticipates investing in only registered
open-end investment companies, including mutual funds and the open-
end investment company funds described in Rule 14.11. The Fund may
invest in the securities of other investment companies to the extent
permitted by law.
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In the absence of Normal Market Conditions, the Fund may
temporarily depart from its normal investment process, provided that
such departure is, in the opinion of the Adviser, consistent with the
Fund's investment objective and in the best interest of the Fund. For
example, the Fund may hold a higher than normal proportion of its
assets in cash in response to adverse market, economic or political
conditions.
The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended.\23\ The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
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\23\ 26 U.S.C. 851.
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Other Portfolio Holdings
The Fund may also, to a limited extent (under Normal Market
Conditions, less than 20% of the Fund's net assets), invest in certain
futures, options and swap contracts,\24\ cash and cash equivalents,
including shares of money market funds advised by BFA or its
affiliates, as well as in Municipal Securities of issuers located
outside of California whose interest payments are exempt from regular
federal income taxes.\25\ The Fund's investments will be consistent
with its investment objective and will not be used to achieve leveraged
returns (i.e. two times or three
[[Page 38692]]
times the Fund's benchmark, as described in the Registration
Statement).
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\24\ Such futures, options and swap contracts will include only
the following: Interest rate futures, interest rate options, and
interest rate swaps. The derivatives will be centrally cleared and
they will be collateralized. At least 90% of the Fund's net assets
that are invested in listed derivatives will be invested in
instruments that trade in markets that are members or affiliates of
members of the Intermarket Surveillance Group (``ISG'') or are
parties to a comprehensive surveillance sharing with the Exchange.
\25\ Issuers located outside of California may be states,
territories and possessions of the U.S., including the District of
Columbia, and their political subdivisions, agencies and
instrumentalities.
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The Fund may also enter into repurchase and reverse repurchase
agreements for Municipal Securities (collectively, ``Repurchase
Agreements''). Repurchase Agreements involve the sale of securities
with an agreement to repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics of borrowing as
part of the Fund's principal holdings.\26\
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\26\ The Fund's exposure to reverse repurchase agreements will
be covered by liquid assets having a value equal to or greater than
such commitments. The use of reverse repurchase agreements is a form
of leverage because the proceeds derived from reverse repurchase
agreements may be invested in additional securities. As further
stated below, the Fund's investments will be consistent with its
investment objective and will not be used to achieve leveraged
returns.
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The Fund may also invest in short-term instruments (``Short-Term
Instruments''),\27\ which includes exchange traded and non-exchange
traded investment companies (including investment companies advised by
BFA or its affiliates) that invest in money market instruments.
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\27\ The Fund may invest in Short-Term Instruments, including
money market instruments, on an ongoing basis to provide liquidity
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of
money market funds (including those advised by BFA or otherwise
affiliated with BFA); (ii) obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities (including
government-sponsored enterprises); (iii) negotiable certificates of
deposit (``CDs''), bankers' acceptances, fixed-time deposits and
other obligations of U.S. and non-U.S. banks (including non-U.S.
branches) and similar institutions; (iv) commercial paper, including
asset-backed commercial paper; (v) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at
the date of purchase of not more than 397 days and that satisfy the
rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of non-U.S.
banks (including U.S. branches) that, in the opinion of BFA, are of
comparable quality to obligations of U.S. banks which may be
purchased by the Fund. All money market securities acquired by the
Fund will be rated investment grade. The Fund does not intend to
invest in any unrated money market securities. However, it may do
so, to a limited extent, such as where a rated money market security
becomes unrated, if such money market security is determined by the
Adviser to be of comparable quality. BFA may determine that unrated
securities are of comparable quality based on such credit quality
factors that it deems appropriate, which may include, among other
things, performing an analysis similar, to the extent possible, to
that performed by a nationally recognized statistical rating
organization rating similar securities and issuers.
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Investment Restrictions
The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment), as
deemed illiquid by the Adviser \28\ under the 1940 Act.\29\ The Fund
will monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets are defined by
Rule 22e-4.
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\28\ In reaching liquidity decisions, the Adviser may consider
factors including: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer); any legal or contractual
restrictions on the ability to transfer the security or asset;
significant developments involving the issuer or counterparty
specifically (e.g., default, bankruptcy, etc.) or the securities
markets generally; and settlement practices, registration
procedures, limitations on currency conversion or repatriation, and
transfer limitations (for foreign securities or other assets).
\29\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
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The Fund will launch with at least 500,000 Shares outstanding. The
portfolio will hold a minimum of 15 different Municipal Securities from
at least 15 unique issuers. No single obligor will account for more
than 10% of the weight of the Fund's portfolio and no 10 obligors will
account for more than 75% of the weight of the Fund's portfolio. The
Exchange notes that the California AMT-Free municipal bond market value
is estimated to be ~$151 billion and is the second largest as measured
by state. As of June 5, 2019, California represented 21.02% of all
issuances in the U.S.\30\ Additionally, as a registered investment
company, no more than 50% of the Fund's assets will be invested in
issuers that are more than 5% of the value of the Fund's assets. In
addition, the Fund will not invest more than 25% of its assets in any
single issuer. As noted above, the Fund will satisfy all of the generic
listing requirements for Managed Fund Shares that hold fixed income
securities, except for the minimum principal amount outstanding
requirement in 14.11(i)(4)(C)(ii)(a).
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\30\ Statistics are based on the universe included in the S&P
National AMT-Free Muni Bond Index. New York ($160b) is the largest
municipal bond market by state, registering 22.07% of all issuances
in the U.S.
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Availability of Information
The Fund's website, which will be publicly available prior to the
public offering of Shares, will include a form of the prospectus for
the Fund that may be downloaded. The website will include additional
quantitative information updated on a daily basis, including: (1) The
prior business day's reported NAV, daily trading volume, and a
calculation of the premium and discount of the Bid/Ask Price against
the NAV; and (2) data in chart format displaying the frequency
distribution of discounts and premiums of the daily Bid/Ask Price
against the NAV, within appropriate ranges, for each of the four
previous calendar quarters. Daily trading volume information for the
Shares will also be available in the financial section of newspapers,
through subscription services such as Bloomberg, Thomson Reuters, and
International Data Corporation, which can be accessed by authorized
participants and other investors, as well as through other electronic
services, including major public websites. On each business day, the
Fund will disclose on its website the identities and quantities of the
portfolio of securities and other assets in the daily disclosed
portfolio held by the Fund that formed the basis for the Fund's
calculation of NAV at the end of the previous business day. The daily
disclosed portfolio will include, as applicable: The ticker symbol;
CUSIP number or other identifier, if any; a description of the holding
(including the type of holding, such as the type of swap); the identity
of the security, index or other asset or instrument underlying the
holding, if any; for options, the option strike price; quantity held
(as measured by, for example, par value, notional value or number of
shares, contracts, or units); maturity date, if any; coupon rate, if
any; effective date, if any; market value of the holding; and the
percentage weighting of the holding in the Fund's portfolio. The
website and information will be publicly available at no charge.
In addition, an estimated value, defined in BZX Rule (i)(4)(B)(i)
as the intraday indicative value (the ``IIV'') that reflects an
estimated intraday value
[[Page 38693]]
of the Fund's portfolio, will be disseminated. Moreover, the IIV will
be based upon the current value for the components of the daily
disclosed portfolio and will be updated and widely disseminated by one
or more major market data vendors at least every 15 seconds during the
Exchange's Regular Trading Hours.\31\ In addition, the quotations of
certain of the Fund's holdings may not be updated during U.S. trading
hours if updated prices cannot be ascertained.
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\31\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available IIVs
published via the CTA or other data feeds.
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The dissemination of the IIV, together with the daily disclosed
portfolio, will allow investors to determine the value of the
underlying portfolio of the Fund on a daily basis and provide a close
estimate of that value throughout the trading day.
Quotation and last sale information for the Shares will be
available via the CTA high speed line. Price information regarding
Municipal Securities and other non-exchange traded assets including
certain derivatives, money market funds and other instruments, and
repurchase agreements is available from third party pricing services
and major market data vendors. Price information regarding Municipal
Securities can also be obtained from the Municipal Securities
Rulemaking Board's Electronic Municipal Market Access (``EMMA'')
system. For exchange-traded assets, including futures, and certain
options, such intraday information is available directly from the
applicable listing exchange. In addition, price information for U.S.
exchange-traded options will be available from the Options Price
Reporting Authority.
Initial and Continued Listing
The Shares will be subject to Rule 14.11(i), which sets forth the
initial and continued listing criteria applicable to Managed Fund
Shares. The Exchange represents that, for initial and/or continued
listing, the Fund must be in compliance with Rule 10A-3 under the
Act.\32\ A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange. The Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share
will be calculated daily and that the NAV and the Disclosed Portfolio
will be made available to all market participants at the same time.
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\32\ See 17 CFR 240.10A-3.
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The Trust is required to comply with Rule 10A-3 under the Act for
the initial and continued listing of the Shares of the Fund. In
addition, the Exchange represents that the Shares of the Fund will
continue to comply with all other requirements applicable to Managed
Fund Shares, which include the dissemination of key information such as
the Disclosed Portfolio,\33\ Net Asset Value,\34\ and the Intraday
Indicative Value,\35\ suspension of trading or removal,\36\ trading
halts,\37\ surveillance,\38\ minimum price variation for quoting and
order entry,\39\ the information circular,\40\ and firewalls \41\ as
set forth in Exchange rules applicable to Managed Fund Shares and the
orders approving such rules. All statements and representations made in
this filing regarding the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of reference asset and intraday
indicative values (as applicable), or the applicability of Exchange
listing rules specified in this filing shall constitute continued
listing requirements for the Shares. The Fund has represented to the
Exchange that it will advise the Exchange of any failure by the Fund or
Shares to comply with the continued listing requirements, and, pursuant
to its obligations under Section 19(g)(1) of the Act, the Exchange will
surveil for compliance with the continued listing requirements. The
Financial Industry Regulatory Authority (``FINRA'') conducts certain
cross-market surveillances on behalf of the Exchange pursuant to a
regulatory services agreement. The Exchange is responsible for FINRA's
performance under this regulatory services agreement. If the Fund is
not in compliance with the applicable listing requirements, the
Exchange will commence delisting procedures with respect to the Fund
under Exchange Rule 14.12.
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\33\ See Rule 14.11(i)(4)(A)(ii) and 14.11(i)(4)(B)(ii).
\34\ See Rule 14.11(i)(4)(A)(ii).
\35\ See Rule 14.11(i)(4)(B)(i).
\36\ See Rule 14.11(i)(4)(B)(iii).
\37\ See Rule 14.11(i)(4)(B)(iv).
\38\ See Rule 14.11(i)(2)(C).
\39\ See Rule 14.11(i)(2)(B).
\40\ See Rule 14.11(i)(6).
\41\ See Rule 14.11(i)(7).
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Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund. The Exchange will halt trading in
the Shares under the conditions specified in Rule 11.18. Trading may be
halted because of market conditions or for reasons that, in the view of
the Exchange, make trading in the Shares inadvisable. These may
include: (1) The extent to which trading is not occurring in the
securities and/or the financial instruments composing the Disclosed
Portfolio of the Fund; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present. Trading in the Shares also will be subject to Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which trading
in the Shares of the Fund may be halted.
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. The Exchange will
allow trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern
Time. The Exchange has appropriate rules to facilitate transactions in
the Shares during all trading sessions. As provided in Rule 11.11(a),
the minimum price variation for quoting and entry of orders in Managed
Fund Shares 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 represents that trading in the Shares will be subject
to the existing trading surveillances, administered by FINRA on behalf
of the Exchange, or by regulatory staff of the Exchange, which are
designed to detect violations of Exchange rules and applicable federal
securities laws. The Exchange represents that these procedures are
adequate to properly monitor Exchange trading of the Shares in all
trading sessions and to deter and detect violations of Exchange rules
and federal securities laws applicable to trading on the Exchange.
The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the ISG, and the
Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in the Shares from such markets
[[Page 38694]]
and other entities. In addition, the Exchange may obtain information
regarding trading in the Shares from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. In addition, FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income securities held by the Fund reported to
FINRA's Trade Reporting and Compliance Engine (``TRACE''). FINRA also
can access data obtained from the Municipal Securities Rulemaking
Board's EMMA system relating to municipal bond trading activity for
surveillance purposes in connection with trading in the Shares.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \42\ in general and Section 6(b)(5) of the Act \43\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, 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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\42\ 15 U.S.C. 78f.
\43\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in Rule 14.11(i). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Rule 14.11(i)(7) provides that, if
the investment adviser to the investment company issuing Managed Fund
Shares is affiliated with a broker-dealer, such investment adviser
shall erect a ``fire wall'' between the investment adviser and the
broker-dealer with respect to access to information concerning the
composition and/or changes to such investment company portfolio. The
Adviser is not a registered broker-dealer, but is affiliated with
multiple broker-dealers and has implemented ``fire walls'' with respect
to such broker-dealers regarding access to information concerning the
composition and/or changes to a Fund's portfolio. In addition, Adviser
personnel who make decisions regarding a Fund's portfolio are subject
to procedures designed to prevent the use and dissemination of material
nonpublic information regarding the Fund's portfolio. The Exchange may
obtain information regarding trading in the Shares and the underlying
shares in exchange traded equity securities via the ISG, from other
exchanges that are members or affiliates of the ISG, or with which the
Exchange has entered into a comprehensive surveillance sharing
agreement. In addition, the Exchange, or FINRA, on behalf of the
Exchange, is able to access, as needed, trade information for certain
fixed income instruments reported to TRACE and Municipal Securities
reported to MSRB. FINRA also can access data obtained from the MSRB
relating to municipal bond trading activity for surveillance purposes
in connection with trading in the Shares. The Fund will launch with at
least 500,000 Shares outstanding. The portfolio will hold a minimum of
15 different Municipal Securities from at least 15 unique issuers. No
single obligor will account for more than 10% of the weight of the
Fund's portfolio and no 10 obligors will account for more than 75% of
the weight of the Fund's portfolio. The Exchange notes that the
California AMT-Free municipal bond market value is estimated to be
~$151 billion and is the second largest as measured by state. As of
June 5, 2019, California represented 21.02% of all issuances in the
U.S.\44\ Additionally, as a registered investment company, no more than
50% of the Fund's assets will be invested in issuers that are more than
5% of the value of the Fund's assets. In addition, the Fund will not
invest more than 25% of its assets in any single issuer.
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\44\ Statistics are based on the universe included in the S&P
National AMT-Free Muni Bond Index. New York ($160b) is the largest
municipal bond market by state, registering 22.07% of all issuances
in the U.S.
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Further, the Exchange represents that: (1) Except for Rule
14.11(i)(4)(C)(ii)(a), the Fund will satisfy all of the generic listing
standards under Rule 14.11(i)(4); (2) the continued listing standards
under Rule 14.11(i), as applicable to Managed Fund Shares that hold
fixed income securities, will apply to the Shares of the Fund; and (3)
the issuer of the Fund is required to comply with Rule 10A-3 \45\ under
the Act for the initial and continued listing of the Shares. In
addition, the Exchange represents that the Fund will meet and be
subject to all other requirements of the Generic Listing Rules and
other applicable continued listing requirements for Managed Fund Shares
under Exchange Rule 14.11(i), including those requirements regarding
the Disclosed Portfolio (as defined in the Exchange rules) and the
requirement that the Disclosed Portfolio and the net asset value
(``NAV'') will be made available to all market participants at the same
time,\46\ intraday indicative value,\47\ suspension of trading or
removal,\48\ trading halts,\49\ disclosure,\50\ and firewalls.\51\
Further, at least 100,000 Shares will be outstanding upon the
commencement of trading of the Fund.\52\
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\45\ 17 CFR 240.10A-3.
\46\ See Exchange Rules 14.11(i)(4)(A)(ii) and
14.11(i)(4)(B)(ii).
\47\ See Exchange Rule 14.11(i)(4)(B)(i).
\48\ See Exchange Rule 14.11(i)(4)(B)(iii).
\49\ See Exchange Rule 14.11(i)(4)(B)(iv).
\50\ See Exchange Rule 14.11(i)(6).
\51\ See Exchange Rule 14.11(i)(7).
\52\ See Exchange Rule 14.11(i)(4)(A)(i).
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The Fund will invest, under Normal Market Conditions, at least 80%
of its net assets in Municipal Securities, as defined below, issued in
the State of California by or on behalf of California state or local
governments or agencies, whose interest payments are exempt from U.S.
federal, including the federal alternative minimum tax, and California
state income taxes. Additionally, the Fund may hold up to an aggregate
amount of 15% of its net assets in illiquid assets (calculated at the
time of investment), as deemed illiquid by the Adviser under the 1940
Act. The Fund will monitor its portfolio liquidity on an ongoing basis
to determine whether, in light of current circumstances, an adequate
level of liquidity is being maintained, and will consider taking
appropriate steps in order to maintain adequate liquidity if, through a
change in values, net assets, or other circumstances, more than 15% of
the Fund's net assets are held in illiquid assets. Illiquid assets are
defined by Rule 22e-4.
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 the
Shares that the NAV per Share will be calculated daily and that the NAV
and the Disclosed Portfolio will be made available to all market
participants at the same time. In addition, a large amount of
information is publicly available regarding the Fund and the Shares,
thereby promoting market transparency. Moreover, the Intraday
Indicative Value will be disseminated by one or more major market data
vendors at least every 15 seconds during Regular Trading Hours.
[[Page 38695]]
On each business day, before commencement of trading in Shares during
Regular Trading Hours, the Fund will disclose on its website the
Disclosed Portfolio that will form the basis for the Fund's calculation
of NAV at the end of the business day. Pricing information will include
additional quantitative information updated on a daily basis,
including, for the Fund: (1) The prior business day's NAV and the
market closing price or mid-point of the Bid/Ask Price,\53\ and a
calculation of the premium or discount of the market closing price or
Bid/Ask Price against the NAV; and (2) data in chart format displaying
the frequency distribution of discounts and premiums of the daily
market closing price or Bid/Ask Price against the NAV, within
appropriate ranges, for each of the four previous calendar quarters.
Additionally, information regarding market price and trading of the
Shares will be continually available on a real-time basis throughout
the day on brokers' computer screens and other electronic services, and
quotation and last sale information for the Shares will be available on
the facilities of the CTA. The website for the Fund will include a form
of the prospectus for the Fund and additional data relating to NAV and
other applicable quantitative information. Trading in Shares of a Fund
will be halted under the conditions specified in Rule 11.18. Trading
may also be halted because of market conditions or for reasons that, in
the view of the Exchange, make trading in the Shares inadvisable.
Finally, trading in the Shares will be subject to Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which Shares
may be halted. In addition, as noted above, investors will have ready
access to information regarding the Fund's holdings, the Intraday
Indicative Value, the Disclosed Portfolio, and quotation and last sale
information for the Shares.
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\53\ The Bid/Ask Price of a Fund will be determined using the
highest bid and the lowest offer on the Exchange as of the time of
calculation of the Fund's NAV. The records relating to Bid/Ask
Prices will be retained by the Fund or its service providers.
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Intraday, executable price quotations on assets held by the Fund
are available from major broker-dealer firms and for exchange-traded
assets, including investment companies, such intraday information is
available directly from the applicable listing exchange. All such
intraday price information is available through subscription services,
such as Bloomberg, Thomson Reuters and International Data Corporation,
which can be accessed by authorized participants and other investors.
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, the Exchange, or FINRA, on
behalf of the Exchange, is able to access, as needed, trade information
for certain fixed income instruments reported to TRACE and Municipal
Securities reported to MSRB. FINRA also can access data obtained from
the MSRB relating to municipal bond trading activity for surveillance
purposes in connection with trading in the Shares. As noted above,
investors will also have ready access to information regarding the
Fund's holdings, the Intraday Indicative Value, the Disclosed
Portfolio, 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 will facilitate the listing and trading of an
additional actively-managed exchange-traded product that will enhance
competition among market participants, 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 Comment
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-2019-068 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-2019-068. 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
[[Page 38696]]
submissions should refer to File Number SR-CboeBZX-2019-068 and should
be submitted on or before August 28, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16855 Filed 8-6-19; 8:45 am]
BILLING CODE 8011-01-P