[Federal Register Volume 84, Number 250 (Tuesday, December 31, 2019)]
[Notices]
[Pages 72414-72424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28217]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87856; File No. SR-CboeBZX-2019-107]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Adopt Rule 14.11(m), Portfolio Fund
Shares, and To List and Trade Shares of the Fidelity Value ETF,
Fidelity Growth ETF, and Fidelity Opportunistic ETF, Each a Series of
the Fidelity Beach Street Trust, Under Proposed Rule 14.11(m)
December 23, 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 December 12, 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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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes a rule change to adopt Rule 14.11(m),
Portfolio Fund Shares, and to list and trade shares of the Fidelity
Value ETF, Fidelity Growth ETF, and Fidelity Opportunistic ETF (each a
``Fund'' and, collectively, the ``Funds''), each a series of the
Fidelity Beach Street Trust (the ``Trust''), under such proposed Rule
14.11(m). The shares of each 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 add new Rule 14.11(m) \3\ for the purpose
of permitting the listing and trading, or trading pursuant to unlisted
trading privileges, of Portfolio Fund Shares, which are securities
issued by an actively managed open-end management investment
company.\4\
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\3\ The Exchange notes that it is proposing new Rule 14.11(m)
because it has also proposed a new Rule 14.11(k) and new Rule
14.11(l) under two separate proposals. See Securities Exchange Act
Release Nos. 87062 (September 23, 2019), 84 FR 51193 (September 27,
2019) (SR-CboeBZX-2019-047) and 87560 (November 18, 2019), 84 FR
64607 (November 22, 2019) (CboeBZX-2019-097).
\4\ The basis of this proposal are several applications for
exemptive relief that were filed with the Commission and for which
public notice was issued on November 14, 2019 (the ``Notice'') and
subsequent order granting certain exemptive relief to, among others,
Fidelity Management & Research Company and FMR Co., Inc., Fidelity
Beach Street Trust, and Fidelity Distributors Corporation (File No.
812-14364), issued on December 10, 2019 (the ``Order'' and,
collectively, with the Application and the Notice, the ``Exemptive
Order''). See Investment Company Act Release Nos. 33683 and 33712.
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.'' The Exchange notes that it also referred to
the application for exemptive relief orders for T. Rowe Price
Associates, Inc. and T. Rowe Price Equity Series, Inc. (File No.
812-14214 and Investment Company Act Release Nos. 33685 and 33713),
Natixis ETF Trust II, et al. (File No. 812-14870 and Investment
Company Act Release Nos. 33684 and 33711), Blue Tractor ETF Trust
and Blue Tractor Group, LLC (File No. 812-14625 and Investment
Company Act Release Nos. 33682 and 33710), and Gabelli ETFs Trust,
et al. (File No. 812-15036 and Investment Company Act Release Nos.
33681 and 33708). While there are certain differences between the
applications, the Exchange believes that each would qualify as
Portfolio Fund Shares under proposed Rule 14.11(m).
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Proposed Rule 14.11(m)
Proposed Rule 14.11(m)(3)(A) provides that the term ``Portfolio
Fund Share'' means a security that: (i) Represents an interest in a
registered investment company (``Investment Company'') organized as an
open-end management investment company or
[[Page 72415]]
similar entity, that: (a) Invests in a portfolio of securities selected
by the Investment Company's investment adviser consistent with the
Investment Company's investment objectives and policies; and (b) will
at a minimum disclose the Fund Portfolio within at least 60 days
following the end of every fiscal quarter; (ii) is issued in a
specified aggregate minimum number in return for a deposit of a
specified portfolio of securities and/or a cash amount with a value
equal to the next determined net asset value; and (iii) when aggregated
in the same specified minimum number, may be redeemed at a holder's
request, which holder will be paid a specified portfolio of securities
and/or cash with a value equal to the next determined net asset value.
Proposed Rule 14.11(m)(1) provides that the Exchange will consider
for trading, whether by listing or pursuant to unlisted trading
privileges, Portfolio Fund Shares that meet the criteria of this Rule.
Proposed Rule 14.11(m)(2) provides that this proposed Rule is
applicable only to Portfolio Fund Shares. Except to the extent
inconsistent with this Rule, or unless the context otherwise requires,
the rules and procedures of the Board of Directors shall be applicable
to the trading on the Exchange of such securities. Portfolio Fund
Shares are included within the definition of ``security'' or
``securities'' as such terms are used in the Rules of the Exchange.
Proposed Rule 14.11(m)(2)(A)-(D) provide that the Exchange will
file separate proposals under Section 19(b) of the Act before the
listing of Portfolio Fund Shares; that transactions in Portfolio Fund
Shares will occur throughout the Exchange's trading hours; the minimum
price variation for quoting and entry of orders in Portfolio Fund
Shares is $0.01; and that the Exchange will implement written
surveillance procedures for Portfolio Fund Shares.
Proposed Rule 14.11(m)(3)(B) provides that the term ``Fund
Portfolio'' means 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 net asset value at the end
of the business day.
Proposed Rule 14.11(m)(3)(C) provides that the term ``Reporting
Authority'' in respect of a particular series of Portfolio Fund Shares
means the Exchange, an institution, or a reporting service designated
by the Exchange or by the exchange that lists a particular series of
Portfolio Fund Shares (if the Exchange is trading such series pursuant
to unlisted trading privileges) as the official source for calculating
and reporting information relating to such series, including, but not
limited to, the Proxy Basket; the Fund Portfolio; the amount of any
cash distribution to holders of Portfolio Fund Shares, net asset value,
or other information relating to the issuance, redemption or trading of
Portfolio Fund Shares. A series of Portfolio Fund Shares may have more
than one Reporting Authority, each having different functions.
Proposed Rule 14.11(m)(3)(D) provides that the term ``Proxy
Basket'' means the identities and quantities of the securities and
other assets included in a basket that is designed to closely track the
daily performance of the holdings of a series of Portfolio Fund Shares,
as provided in the exemptive relief applicable to a series of Portfolio
Fund Shares. The Proxy Basket also serves as the creation and
redemption basket for a series of Portfolio Fund Shares. The Proxy
Basket will be constructed as provided in the applicable exemptive
relief and will be fully described in the proposal required under Rule
14.11(m)(2)(A). The website for each series of Portfolio Fund Shares
shall disclose the following information regarding the Proxy Basket as
required under this Rule 14.11(m), to the extent applicable: (i) Ticker
symbol; (ii) CUSIP or other identifier; (iii) Description of the
holding; (iv) Identity of the security, commodity, index, or other
asset upon which the derivative is based; (v) The strike price for any
options; (vi) The quantity of each security or other asset held as
measured by: (a) Par value; (b) Notional value; (c) Number of shares;
(d) Number of contracts; (e) Number of units; (vii) Maturity date;
(viii) Coupon rate; (ix) Effective date; (x) Market value; and (xi)
Percentage weighting of the holding in the portfolio.
Proposed Rule 14.11(m)(4)(A) provides the initial listing criteria
for a series of Portfolio Fund Shares, which include the following: (A)
Each series of Portfolio Fund Shares will be listed and traded on the
Exchange subject to application of the following initial listing
criteria: (i) For each series, the Exchange will establish a minimum
number of Portfolio Fund Shares required to be outstanding at the time
of commencement of trading on the Exchange; (ii) the Exchange will
obtain a representation from the issuer of each series of Portfolio
Fund Shares that the net asset value per share for the series will be
calculated daily and that each of the following will be made available
to all market participants at the same time when disclosed: The net
asset value, the Proxy Basket, and the Fund Portfolio.
Proposed Rule 14.11(m)(4)(B) provides that each series of Portfolio
Fund Shares will be listed and traded on the Exchange subject to
application of the following continued listing criteria: (i)(a) The
Proxy Basket will be disseminated at least once daily and will be made
available to all market participants at the same time; and (b) the
Reporting Authority that provides the Proxy Basket must implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Proxy Basket; (ii) the Fund Portfolio will at a
minimum be disclosed within at least 60 days following the end of every
fiscal quarter and will be made available to all market participants at
the same time; and (b) the Reporting Authority that provides the Fund
Portfolio must implement and maintain, or be subject to, procedures
designed to prevent the use and dissemination of material non-public
information regarding the actual components of the Fund Portfolio;
(iii) upon termination of an Investment Company, the Exchange requires
that Portfolio Fund Shares issued in connection with such entity be
removed from listing on the Exchange; and (iv) voting rights shall be
as set forth in the applicable Investment Company prospectus or
Statement of Additional Information.
Additionally, proposed Rule 14.11(m)(4)(B)(iv) provides that the
Exchange will consider the suspension of trading in and will commence
delisting proceedings for a series of Portfolio Fund Shares pursuant to
Rule 14.12 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 Portfolio Fund Shares, there are fewer than 50
beneficial holders of the series of Portfolio Fund Shares for 30 or
more consecutive trading days; (b) if either the Proxy Basket or Fund
Portfolio is not made available to all market participants at the same
time; (c) if the Investment Company issuing the Portfolio Fund 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 Commission to the Investment Company with respect to the series of
Portfolio Fund Shares; (d) if any of the requirements set forth in this
rule are not continuously maintained; (e) if any of the applicable
Continued
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Listing Representations for the issue of Portfolio Fund Shares are not
continuously met; or (f) 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(m)(5) 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 Portfolio Fund Shares; the amount of any
dividend equivalent payment or cash distribution to holders of
Portfolio Fund Shares; net asset value; or other information relating
to the purchase, redemption, or trading of Portfolio Fund 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.
Proposed Rule 14.11(m)(6) provides that the provisions of this
subparagraph apply only to series of Portfolio Fund Shares that are the
subject of an order by the Commission exempting such series from
certain prospectus delivery requirements under Section 24(d) of the
Investment Company Act of 1940 (the ``1940 Act'') and are not otherwise
subject to prospectus delivery requirements under the Securities Act of
1933. The Exchange will inform its members regarding application of
these provisions of this subparagraph to a particular series of
Portfolio Fund Shares by means of an information circular prior to
commencement of trading in such series. The Exchange requires that
members provide to all purchasers of a series of Portfolio Fund Shares
a written description of the terms and characteristics of those
securities, in a form prepared by the open-end management investment
company issuing such securities, not later than the time a confirmation
of the first transaction in such series is delivered to such purchaser.
In addition, members shall include such a written description with any
sales material relating to a series of Portfolio Fund Shares that is
provided to customers or the public. Any other written materials
provided by a member to customers or the public making specific
reference to a series of Portfolio Fund Shares as an investment vehicle
must include a statement in substantially the following form: ``A
circular describing the terms and characteristics of (the series of
Portfolio Fund Shares) has been prepared by the (open-end management
investment company name) and is available from your broker. It is
recommended that you obtain and review such circular before purchasing
(the series of Portfolio Fund Shares).'' A member carrying an omnibus
account for a non-member broker-dealer is required to inform such non-
member that execution of an order to purchase a series of Portfolio
Fund Shares for such omnibus account will be deemed to constitute
agreement by the non-member to make such written description available
to its customers on the same terms as are directly applicable to
members under this rule. Upon request of a customer, a member shall
also provide a prospectus for the particular series of Portfolio Fund
Shares.
Proposed Rule 14.11(m)(7) provides that if the investment adviser
to the Investment Company issuing Portfolio Fund Shares is affiliated
with a broker-dealer, such investment adviser shall erect and maintain
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 and Proxy Basket.
Personnel who make decisions on the Investment Company's portfolio
composition and/or Proxy Basket must be subject to procedures designed
to prevent the use and dissemination of material nonpublic information
regarding the applicable Investment Company portfolio and/or Proxy
Basket.
Policy Discussion--Proposed Rule 14.11(m)
The purpose of the structure of Portfolio Fund Shares is to provide
investors with the traditional benefits of ETFs while protecting funds
from the potential for front running or free riding of portfolio
transactions, which could adversely impact the performance of a fund.
While each series of Portfolio Fund Shares will be actively managed
and, to that extent, similar to Managed Fund Shares (as defined in Rule
14.11(i)), Portfolio Fund Shares differ from Managed Fund Shares in one
key way.\5\ A series of Portfolio Fund Shares will disclose the Proxy
Basket on a daily basis which, as described above, is designed to
closely track the performance of the holdings of the Investment
Company, instead of the actual holdings of the Investment Company, as
provided by a series of Managed Fund Shares.\6\
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\5\ The Exchange notes that there are two additional differences
between proposed Rule 14.11(m) and Rule 14.11(i): (i) Proposed Rule
14.11(m) would require a rule filing under Section 19(b) prior to
listing any product on the Exchange meaning that no series of
Portfolio Fund Shares could be listed on the Exchange pursuant to
Rule 19b-4(e) and there are no proposed rules comparable to the
quantitative portfolio holdings standards from Rule 14.11(i); and
(ii) proposed Rule 14.11(m) would not require the dissemination of
an intraday indicative value. The Exchange has submitted a proposal
to eliminate the requirement for series of Managed Fund Shares and
generally agrees with the Commission's sentiment that the intraday
indicative value is not necessary to support the arbitrage
mechanism. See SR-CboeBZX-2019-104 and Investment Company Act
Release No. 10695 (October 24, 2019) (84 FR 57162).
\6\ Proposed Rule 14.11(m)(4)(B)(iii) will, however, require
each series of Portfolio Fund Shares to at a minimum disclose the
entirety of its portfolio holdings within at least 60 days following
the end of every fiscal quarter in accordance with normal disclosure
requirements otherwise applicable to open-end investment companies
registered under the 1940 Act.
Form N-PORT requires reporting of a fund's complete portfolio
holdings on a position-by-position basis on a quarterly basis within
60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its
Form N-CSR, filed twice a year, and its Form N-CEN, filed annually.
A fund's SAI and Shareholder Reports are available free upon request
from the Investment Company, and those documents and the Form N-
PORT, Form N-CSR, and Form N-CEN may be viewed on-screen or
downloaded from the Commission's website at www.sec.gov.
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For the arbitrage mechanism for any ETF to function effectively,
authorized participants, arbitrageurs, and other market participants
(collectively, ``Market Makers'') need sufficient information to
accurately value shares of a fund to transact in both the primary and
secondary market. The Proxy Basket, constructed as provided in the
applicable exemptive relief, is designed to closely track the daily
performance of the holdings of a series of Portfolio Fund Shares.
Given the correlation between the Proxy Basket and the Fund
Portfolio,\7\
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the Exchange believes that the Proxy Basket would serve as a pricing
signal to identify arbitrage opportunities when its value and the
secondary market price of the shares of a series of Portfolio Fund
Shares diverge. If shares began trading at a discount to the Proxy
Basket, an authorized participant could purchase the shares in
secondary market transactions and, after accumulating enough shares to
comprise a creation unit,\8\ redeem them in exchange for a redemption
basket reflecting the Net Asset Value (``NAV'') per share of the fund's
portfolio holdings. The purchases of Shares would reduce the supply of
Shares in the market, and thus tend to drive up the Shares' market
price closer to the fund's NAV. Alternatively, if shares are trading at
a premium, the transactions in the arbitrage process are reversed.
Market Makers also can engage in arbitrage without using the creation
or redemption processes. For example, if a fund is trading at a premium
to the Proxy Basket, Market Makers may sell shares short and take a
long position in the Proxy Basket securities, wait for the trading
prices to move toward parity, and then close out the positions in both
the shares and the securities, to realize a profit from the relative
movement of their trading prices. Similarly, a Market Maker could buy
shares and take a short position in the Proxy Basket securities in an
attempt to profit when shares are trading at a discount to the Proxy
Basket.
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\7\ As provided in the Notices, funds and their respective
advisers will take remedial actions as necessary if the funds do not
function as anticipated. For the first three years after a launch, a
fund will establish certain thresholds for its level of tracking
error, premiums/discounts, and spreads, so that, upon the fund's
crossing a threshold, the adviser will promptly call a meeting of
the fund's board of directors and will present the board or
committee with recommendations for appropriate remedial measures.
The board would then consider the continuing viability of the fund,
whether shareholders are being harmed, and what, if any, action
would be appropriate. Specifically, the Applications and Notices
provide that such a meeting would occur: (1) If the tracking error
exceeds 1%; or (2) if, for 30 or more days in any quarter or 15 days
in a row (a) the absolute difference between either the market
closing price or bid/ask price, on one hand, and NAV, on the other,
exceeds 2%, or (b) the bid/ask spread exceeds 2%.
\8\ Portfolio Fund Shares will be purchased or redeemed only in
large aggregations, or ``creation units,'' and the Proxy Basket will
constitute the names and quantities of instruments for both
purchases and redemptions of Creation Units.
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Overall, the Exchange believes that the arbitrage process would
operate similarly to the arbitrage process in place today for existing
ETFs that use in-kind baskets for creations and redemptions that do not
reflect the ETF's complete holdings but nonetheless produce performance
that is highly correlated to the performance of the ETF's actual
portfolio. The Exchange has observed highly efficient trading of ETFs
that invest in markets where security values are not fully known at the
time of ETF trading, and where a perfect hedge is not possible, such as
international equity and fixed-income ETFs. While the ability to value
and hedge many of these existing ETFs in the market may be limited,
such ETFs have generally maintained an effective arbitrage mechanism
and traded efficiently.
As provided in the Notice, the Commission believes that an
arbitrage mechanism based largely on the combination of a daily
disclosed Proxy Basket and at a minimum quarterly disclosure of the
Fund Portfolio can work in an efficient manner to maintain a fund's
secondary market prices close to its NAV.\9\ Consistent with the
Commission's view, the Exchange believes that because the arbitrage
mechanism for Portfolio Fund Shares will be sufficient to keep
secondary market prices in line with NAV and because the proposed rules
are except as described above nearly identical to the generic listing
standards for Managed Fund Shares, proposed Rule 14.11(m) is consistent
with the Act.
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\9\ See Fidelity Notice at 17. The Commission also notes that as
long as arbitrage continues to keep the Fund's secondary market
price and NAV close, and does so efficiently so that spreads remain
narrow, that investors would benefit from the opportunity to invest
in active strategies through a vehicle that offers the traditional
benefits of ETFs.
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The Exchange notes that while the Proxy Basket does not reflect the
1-for-1 holdings of each series of Portfolio Fund Shares, a significant
amount of information about the holdings is publicly available at all
times. Each series will disclose the Proxy Basket on a daily basis.
Each series of Portfolio Fund Shares will at a minimum disclose the
entirety of its portfolio holdings, including the name, identifier,
market value and weight of each security and instrument in the
portfolio within at least 60 days following the end of every fiscal
quarter in a manner consistent with normal disclosure requirements
otherwise applicable to open-end investment companies registered under
the 1940 Act.
While not providing daily disclosure of the Fund Portfolio could
open the door to potential information leakage and misuse of material
non-public information. However, the Exchange believes that proposed
Rule 14.11(m)(7) provides sufficient safeguards to prevent such leakage
and misuse because the fire wall requirement will act to make sure that
no entity will be able to misuse the data for their own purposes and
the requirement related to information protection will act as a
deterrent to any misuse and improper dissemination of a fund's
portfolio composition and other material non-public information.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of Portfolio Fund 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 Portfolio Fund Shares through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products. The
Exchange will require the issuer of each series of Portfolio Fund
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.
Trading Halts
As described above, proposed Rule 14.11(m)(4)(B)(iv) provides that
if the Exchange becomes aware that one of the following is not being
made available to all market participants at the same time,
respectively: The net asset value, the Proxy Basket, or the Fund
Portfolio with respect to a series of Portfolio Fund Shares; then the
Exchange will halt trading in such series until such time as the net
asset value, the Proxy Basket, or the Fund Portfolio is available to
all market participants, as applicable.
Availability of Information
As noted above, Form N-PORT requires reporting of a fund's complete
portfolio holdings on a position-by-position basis on a quarterly basis
within 60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its Form
N-CSR, filed twice a year, and its Form N-CEN, filed annually. A fund's
SAI and Shareholder Reports are available free upon request from the
Investment Company, and those documents and the Form N-PORT, Form N-
CSR, and Form N-CEN 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
[[Page 72418]]
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.
Trading Rules
The Exchange deems Portfolio Fund Shares to be equity securities,
thus rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. As provided in
proposed Rule 14.11(m)(2)(C), the minimum price variation for quoting
and entry of orders in securities traded on the Exchange is $0.01.
Information Circular
Prior to the commencement of trading of a series of Portfolio Fund
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 Proxy Basket 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 Fund Portfolio 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.
The Shares
The Shares are offered by the Trust, which is organized as a
business trust under the laws of The Commonwealth of Massachusetts. The
Trust is registered with the Commission as an open-end investment
company and will file a registration statement on behalf of the Funds
on Form N-1A (``Registration Statement'') with the Commission.\10\
Fidelity Management & Research Company or FMR Co., Inc. (the
``Adviser'') will be the investment adviser to the Funds. The Adviser
is not registered as a broker-dealer, but is affiliated with numerous
broker-dealers. The Adviser represents that a fire wall exists and will
be maintained between the respective personnel at the Adviser and
affiliated broker-dealers with respect to access to information
concerning the composition and/or changes to each Fund's portfolio and
Proxy Basket. Personnel who make decisions on a Fund's portfolio
composition and/or Proxy Basket shall be subject to procedures designed
to prevent the use and dissemination of material non-public information
regarding such portfolio and/or Proxy Basket. The Funds' sub-advisers,
FMR Investment Management (UK) Limited, Fidelity Management & Research
(Hong Kong) Limited, and Fidelity Management & Research (Japan) Limited
(each a ``Sub-Adviser'' and, collectively, the ``Sub-Advisers''), are
not registered as a broker-dealer but are affiliated with numerous
broker-dealers. Sub-Adviser personnel who make decisions regarding a
Fund's portfolio and/or Proxy Basket are subject to procedures designed
to prevent the use and dissemination of material nonpublic information
regarding the Fund's portfolio and/or Proxy Basket. In the event that
(a) the Adviser or a Sub-Adviser becomes registered as a broker-dealer
or newly affiliated with a broker-dealer; or (b) any new adviser or
sub-adviser is a registered broker-dealer or becomes newly affiliated
with a broker-dealer; it will implement and maintain 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/or Proxy Basket, and will be
subject to procedures designed to prevent the use and dissemination of
material non-public information regarding such portfolio and/or Proxy
Basket. Each Fund intends to qualify each year as a regulated
investment company under Subchapter M of the Internal Revenue Code of
1986, as amended.
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\10\ The Trust intends to file a post-effective amendment to the
Registration Statement in the near future. The descriptions of the
Funds and the Shares contained herein are based, in part, on
information that will be included 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).
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The Shares will conform to the initial and continued listing
criteria under Rule 14.11(l) as well as all terms in the Exemptive
Order. The Exchange represents that, for initial and/or continued
listing, each Fund will be in compliance with Rule 10A-3 under the
Act.\11\ A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange. The Exchange will
obtain a representation from the issuer of the Shares of each Fund that
the NAV per share of each Fund will be calculated daily and will be
made available to all market participants at the same time.
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\11\ See 17 CFR 240.10A-3.
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Fidelity Value ETF
The Fund seeks long-term growth of capital. In order to achieve its
investment objective, under Normal Market Conditions,\12\ the Fund will
primarily invest its assets in: (i) Securities that the Adviser
believes are undervalued in the marketplace in relation to factors such
as assets, sales, earnings, growth potential, or cash flow, or in
relation to securities of other companies in the same industry (stocks
of these companies are often called ``value'' stocks) listed on a U.S.
national securities exchange or a foreign exchange that trade on such
exchange contemporaneously with the Fund's Shares; and (ii) cash and
Cash Equivalents.\13\
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\12\ 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.
\13\ For purposes of this proposal and as defined in Rule
14.11(i)(4)(C)(iii), Cash Equivalents are short-term instruments
with maturities of less than three months that are: (i) U.S.
Government securities, including bills, notes, and bonds differing
as to maturity and rates of interest, which are either issued or
guaranteed by the U.S. Treasury or by U.S. Government agencies or
instrumentalities; (ii) certificates of deposit issued against funds
deposited in a bank or savings and loan association; (iii) bankers
acceptances, which are short-term credit instruments used to finance
commercial transactions; (iv) repurchase agreements and reverse
repurchase agreements; (v) bank time deposits, which are monies kept
on deposit with banks or savings and loan associations for a stated
period of time at a fixed rate of interest; (vi) commercial paper,
which are short-term unsecured promissory notes; and (vii) money
market funds.
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The Fund may also invest the Fund's assets in other securities and
financial instruments, as summarized below. Under Normal Market
Conditions, the Fund may invest up to 5% of its assets in each of U.S.
exchange-traded index futures, preferred securities, and short-term US.
Treasuries. The Fund may invest in ETFs to facilitate creations and
redemptions using the Proxy Basket, as defined above. Except as
described above, the Fund will not invest in derivative instruments or
enter into short positions.\14\
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\14\ The Adviser notes that the Fund may by virtue of its
holdings be issued warrants and rights. The Fund will not purchase
such instruments and will dispose of such holdings as the Adviser
determines is in the best interest of the Fund's shareholders.
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[[Page 72419]]
The Exchange notes that the Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares.
Fidelity Growth ETF
The Fund seeks growth of capital over the long term. In order to
achieve its investment objective, under Normal Market Conditions, the
Fund will primarily invest its assets in: (i) Securities that the
Adviser believes have above-average growth potential (stocks of these
companies are often called ``growth'' stocks) that are listed on a U.S.
national securities exchange or a foreign exchange that trade on such
exchange contemporaneously with the Fund's Shares; and (ii) cash and
Cash Equivalents.
The Fund may also invest the Fund's assets in other securities and
financial instruments, as summarized below. Under Normal Market
Conditions, the Fund may invest up to 5% of its assets in each of U.S.
exchange-traded index futures, preferred securities, and short-term US.
Treasuries. The Fund may invest in ETFs to facilitate creations and
redemptions using the Proxy Basket, as defined above. Except as
described above, the Fund will not invest in derivative instruments or
enter into short positions.\15\
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\15\ The Adviser notes that the Fund may by virtue of its
holdings be issued warrants and rights. The Fund will not purchase
such instruments and will dispose of such holdings as the Adviser
determines is in the best interest of the Fund's shareholders.
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The Exchange notes that the Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares.
Fidelity Opportunistic ETF
The Fund seeks long-term growth of capital. In order to achieve its
investment objective, under Normal Market Conditions, the Fund will
primarily invest in (i) both ``growth'' and ``value'' stocks based on
fundamental analysis of factors such as each issuer's financial
condition and industry position, as well as market and economic
conditions that are listed on a U.S. national securities exchange or a
foreign exchange that trade on such exchange contemporaneously with the
Fund's Shares; and (ii) cash and Cash Equivalents.
The Fund may also invest the Fund's assets in other securities and
financial instruments, as summarized below. Under Normal Market
Conditions, the Fund may invest up to 5% of its assets in each of U.S.
exchange-traded index futures, preferred securities, and short-term
U.S. Treasuries. The Fund may invest in ETFs to facilitate creations
and redemptions using the Proxy Basket, as defined above. Except as
described above, the Fund will not invest in derivative instruments or
enter into short positions.\16\
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\16\ The Adviser notes that the Fund may by virtue of its
holdings be issued warrants and rights. The Fund will not purchase
such instruments and will dispose of such holdings as the Adviser
determines is in the best interest of the Fund's shareholders.
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The Exchange notes that the Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares.
Proxy Basket for the Proposed Funds
For the Funds, the Proxy Basket will consist of a combination of
the Fund's recently disclosed portfolio holdings and representative
ETFs.\17\ ETFs selected for inclusion in the Proxy Basket will be
consistent with the Fund's objective and selected based on certain
criteria, including, but not limited to, liquidity, assets under
management, holding limits and compliance considerations.
Representative ETFs can provide a useful mechanism to reflect a Fund's
holdings' exposures within the Proxy Basket without revealing a Fund's
exact positions.\18\ The Exchange notes that each Fund's NAV will form
the basis for creations and redemptions for the Funds and creations and
redemptions will work in a manner substantively identical to that of
series of Managed Fund Shares. The Adviser expects that the Shares of
the Funds will generally be created and redeemed in-kind, with limited
exceptions. The names and quantities of the instruments that constitute
the basket of securities for creations and redemptions will be the same
as a Fund's Proxy Basket, except to the extent purchases and
redemptions are made entirely or in part on a cash basis. In the event
that the value of the Proxy Basket is not the same as a Fund's NAV, the
creation and redemption baskets will consist of the securities included
in the Proxy Basket plus or minus an amount of cash equal to the
difference between the NAV and the value of the Proxy Basket, as
further described below.
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\17\ For purposes of this filing, the term ETF will include only
Portfolio Depositary Receipts as defined in Rule 14.11(b), Index
Fund Shares as defined in Rule 14.11(c), and Managed Fund Shares as
defined in Rule 14.11(i), along with the equivalent products defined
in the rules of other national securities exchanges.
\18\ The set of ETFs that are ``representative'' to be used in
the Proxy Basket will depend on certain factors, including the
Fund's investment objective, past holdings, and benchmark, and may
change from time to time. For example, a U.S. diversified fund
benchmarked to a diversified U.S. index would use liquid U.S.
exchange-traded ETFs to capture size (large, mid or small
capitalization), style (growth or value) and/or sector exposures in
the Fund's portfolio. Leveraged and inverse ETFs will not be
included in the Proxy Basket. ETFs may constitute no more than 50%
of the Proxy Basket's assets.
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The Proxy Basket will be constructed utilizing a covariance matrix
based on an optimization process to minimize deviations in the return
of the Proxy Basket relative to the Fund. The proprietary optimization
process mathematically seeks to minimize three key parameters that the
Adviser believes are important to the effectiveness of the Proxy Basket
as a hedge: Tracking error (standard deviation of return differentials
between the Proxy Basket and the Fund), turnover cost, and basket
creation cost.\19\ Typically, the Proxy Basket is expected to be
rebalanced on schedule with the public disclosure of the Fund's
holdings; however, a new optimized Proxy Basket may be generated as
frequently as daily, and therefore, rebalancing may occur more
frequently at the Adviser's discretion. In determining whether to
rebalance a new optimized Proxy Basket, the Adviser will consider
various factors, including liquidity of the securities in the Proxy
Basket, tracking error, and the cost to
[[Page 72420]]
create and trade the Proxy Basket.\20\ For example, if the Adviser
determines that a new Proxy Basket would reduce the variability of
return differentials between the Proxy Basket and the Fund when
balanced against the cost to trade the new Proxy Basket, rebalancing
may be appropriate. The Adviser will periodically review the Proxy
Basket parameters and Proxy Basket performance and process.
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\19\ Tracking error measures the deviations between the Proxy
Basket and Fund. Turnover cost and basket creation cost are measures
of the cost to create and maintain the Proxy Basket as a hedge.
\20\ The Adviser uses a trading cost model to develop estimates
of costs to trade a new Proxy Basket. There are essentially two
elements to this cost: (1) The cost to purchase securities
constituting the Proxy Basket, i.e., the cost to put on the hedge
for the Authorized Participant, and (2) the cost of any adjustments
that need to be made to the composition of the Proxy Basket, i.e.,
the cost to the Authorized Participant to change or maintain the
hedge position. The inclusion of the trading cost model in the
optimization process is intended to result in a Proxy Basket that is
cost effective and liquid without compromising its tracking ability.
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As noted above, each Fund will also disclose the entirety of its
portfolio holdings, including the name, identifier, market value and
weight of each security and instrument in the portfolio, at a minimum
within at least 60 days following the end of every fiscal quarter. As
described above, the Exchange notes that the concept of the Proxy
Basket employed under this structure is designed to provide investors
with the traditional benefits of ETFs while protecting the Funds from
the potential for front running or free riding of portfolio
transactions, which could adversely impact the performance of a Fund.
Policy Discussion--Proposed Funds
As discussed above, each Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares and, as such, any such concerns related to the portfolio are
mitigated.
Separately and in addition to the rationale supporting the
arbitrage mechanism for Portfolio Fund Shares more broadly above, the
Exchange also believes that the particular instruments that may be
included in each Fund's portfolio and Proxy Basket do not raise any
concerns related to the Proxy Baskets being able to closely track the
NAV of the Funds because such instruments include only instruments that
trade on an exchange contemporaneously with the Shares. In addition, a
Fund's Proxy Basket will be optimized so that it reliably and
consistently correlates to the performance of the Fund. The Notice
specifically states that ``in order to facilitate arbitrage, each
Fund's portfolio and Tracking Basket will only include certain
securities that trade on an exchange contemporaneously with the Fund's
Shares. Because the securities would be exchange traded, market
participants would be able to accurately price and readily trade the
securities in the Tracking Basket for purposes of assessing the
intraday value of the Fund's portfolio holdings and to hedge their
positions in the Fund's Shares.'' \21\ The Exchange and Adviser agree
with the Commission's conclusion.
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\21\ The Exchange notes that the instruments enumerated herein
are consistent with the investable universe contemplated in the
Notice. Specifically, the Notice provides that ``Each Fund may
invest only in ETFs, Exchange-traded notes, Exchange-traded common
stocks, common stocks listed on a foreign exchange that trade on
such exchange contemporaneously with the Shares, Exchange-traded
preferred stocks, Exchange-traded American depositary receipts,
Exchange-traded real estate investment trusts, Exchange-traded
commodity pools, Exchange-traded metals trusts, Exchange-traded
currency trusts, and exchange-traded futures that trade
contemporaneously with the Shares, as well as cash and cash
equivalents . . . All futures contracts that a Fund may invest in
will be traded on a U.S. futures exchange. For these purposes, an
``Exchange'' is a national securities exchange as defined in section
2(a)(26) of the [1940] Act.'' See Notice at 10.
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The Adviser anticipates that the returns between a Fund and its
respective Proxy Basket will have a consistent relationship and that
the deviation in the returns between a Fund and its Proxy Basket will
be sufficiently small such that the Proxy Basket will provide Market
Makers with a reliable hedging vehicle that they can use to effectuate
low-risk arbitrage trades in Fund Shares. The Exchange believes that
the disclosures provided by the Funds will allow Market Makers to
understand the relationship between the performance of a Fund and its
Proxy Basket. Market Makers will be able to estimate the value of and
hedge positions in a Fund's Shares, which the Exchange believes will
facilitate the arbitrage process and help ensure that the Fund's Shares
normally will trade at market prices close to their NAV. The Exchange
also believes that competitive market making, where traders are looking
to take advantage of differences in bid-ask spread, will aid in keeping
spreads tight.
While the Proxy Basket does not reflect the 1-for-1 holdings of
each Fund, a significant amount of information about each Fund's
holdings is publicly available at all times. Each Fund will disclose
the Proxy Basket on a daily basis. Each series of Portfolio Fund Shares
will at a minimum disclose the entirety of its portfolio holdings,
including the name, identifier, market value and weight of each
security and instrument in the portfolio within at least 60 days
following the end of every fiscal quarter in a manner consistent with
normal disclosure requirements otherwise applicable to open-end
investment companies registered under the 1940 Act. The website will
include additional quantitative information updated on a daily basis,
including, on a per Share basis for each Fund, the prior Business Day's
NAV and the Closing Price or Bid/Ask Price at the time of calculation
of such NAV, and a calculation of the premium or discount of the
Closing Price or Bid/Ask Price against such NAV. The website will also
disclose any information regarding the bid/ask spread for each Fund as
may be required for other ETFs under Rule 6c-11 under the 1940 Act, as
amended.
Additional Information
The Exchange represents that the Shares of the Funds will continue
to comply with all other proposed requirements applicable to Portfolio
Fund Shares, which also generally correspond to the requirements for
Managed Fund Shares, including the dissemination of key information
such as the Proxy Basket, the Fund Portfolio, and Net Asset Value,
suspension of trading or removal, trading halts, surveillance, minimum
price variation for quoting and order entry, the information circular,
and firewalls as set forth in the proposed Exchange rules applicable to
Portfolio Fund Shares and the orders approving such rules.
Price information for the exchange-listed instruments held by the
Funds, including both U.S. and non-U.S. listed equity securities and
U.S. exchange-listed futures will be available through major market
data vendors or securities exchanges listing and trading such
securities. Moreover, U.S.-listed equity securities held by the Funds
will trade on markets that are a member of Intermarket Surveillance
Group (``ISG'') or affiliated with a member of ISG or with which the
Exchange has in place a comprehensive surveillance sharing
agreement.\22\ All futures contracts that the Funds may invest in will
be traded on a U.S. futures exchange. The Exchange or the Financial
Industry
[[Page 72421]]
Regulatory Authority (``FINRA''), on behalf of the Exchange, or both,
will communicate as needed regarding trading in the Shares, underlying
U.S. exchange-listed equity securities, and U.S. exchange-listed
futures with other markets and other entities that are members of the
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA, on
behalf of the Exchange, or both, may obtain trading information
regarding trading such instruments from such markets and other
entities. In addition, the Exchange may obtain information regarding
trading in the Shares, underlying equity securities, and U.S. exchange-
listed futures from markets and other entities that are members of ISG
or with which the Exchange has in place a comprehensive surveillance
sharing agreement.
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\22\ For a list of the current members of ISG, see
www.isgportal.com. The Exchange notes that not all components of the
Funds may trade on markets that are members of ISG or with which the
Exchange has in place a comprehensive surveillance sharing
agreement.
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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
issuer has represented to the Exchange that it will advise the Exchange
of any failure by the Funds 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. 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 a Fund is not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures with respect to such Fund under Exchange
Rule 14.12.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \23\ in general and Section 6(b)(5) of the Act \24\ 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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\23\ 15 U.S.C. 78f.
\24\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that proposed Rule 14.11(m) is designed to
prevent fraudulent and manipulative acts and practices in that the
proposed rules relating to listing and trading of Portfolio Fund Shares
provide specific initial and continued listing criteria required to be
met by such securities. Proposed Rule 14.11(m)(4)(A) provides the
initial listing criteria for a series of Portfolio Fund Shares, which
include the following: (A) Each series of Portfolio Fund Shares will be
listed and traded on the Exchange subject to application of the
following initial listing criteria: (i) For each series, the Exchange
will establish a minimum number of Portfolio Fund Shares required to be
outstanding at the time of commencement of trading on the Exchange;
(ii) the Exchange will obtain a representation from the issuer of each
series of Portfolio Fund Shares that the net asset value per share for
the series will be calculated daily and that each of the following will
be made available to all market participants at the same time when
disclosed: The net asset value, the Proxy Basket, and the Fund
Portfolio.
Proposed Rule 14.11(m)(4)(B) provides that each series of Portfolio
Fund Shares will be listed and traded on the Exchange subject to
application of the following continued listing criteria: (i)(a) The
Proxy Basket will be disseminated at least once daily and will be made
available to all market participants at the same time; and (b) the
Reporting Authority that provides the Proxy Basket must implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Proxy Basket; (ii) the Fund Portfolio will at a
minimum be disclosed within at least 60 days following the end of every
fiscal quarter and will be made available to all market participants at
the same time; and (b) the Reporting Authority that provides the Fund
Portfolio must implement and maintain, or be subject to, procedures
designed to prevent the use and dissemination of material non-public
information regarding the actual components of the Fund Portfolio;
(iii) upon termination of an Investment Company, the Exchange requires
that Portfolio Fund Shares issued in connection with such entity be
removed from listing on the Exchange; and (iv) voting rights shall be
as set forth in the applicable Investment Company prospectus or
Statement of Additional Information.
Additionally, proposed Rule 14.11(m)(4)(B)(iv) provides that the
Exchange will consider the suspension of trading in and will commence
delisting proceedings for a series of Portfolio Fund Shares pursuant to
Rule 14.12 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 Portfolio Fund Shares, there are fewer than 50
beneficial holders of the series of Portfolio Fund Shares for 30 or
more consecutive trading days; (b) if either the Proxy Basket or Fund
Portfolio is not made available to all market participants at the same
time; (c) if the Investment Company issuing the Portfolio Fund 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 Commission to the Investment Company with respect to the series of
Portfolio Fund Shares; (d) if any of the requirements set forth in this
rule are not continuously maintained; (e) if any of the applicable
Continued Listing Representations for the issue of Portfolio Fund
Shares are not continuously met; or (f) 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(m)(7) proposed Rule 14.11(m)(7) provides that
if the investment adviser to the Investment Company issuing Portfolio
Fund Shares is affiliated with a broker-dealer, such investment adviser
shall erect and maintain 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 and
Proxy Basket. Personnel who make decisions on the Investment Company's
portfolio composition and/or Proxy Basket must be subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the applicable Investment Company portfolio and/
or Proxy Basket.
The Exchange believes that these proposed rules are designed to
prevent fraudulent and manipulative acts and practices related to the
listing and trading of Portfolio Fund Shares because they provide
meaningful requirements about both the data that will be made publicly
available about the Shares (the Proxy Basket) as well as the
information that will only be available to certain parties and the
controls on such
[[Page 72422]]
information. Specifically, the Exchange believes that the requirements
related to information protection enumerated under proposed Rule
14.11(m)(7) will act as a strong safeguard against any misuse and
improper dissemination of information related to the securities
included in or changes made to the Fund Portfolio and/or the Proxy
Basket. As such, the Exchange believes that this proposal is designed
to prevent fraudulent and manipulative acts and practices.
As noted above, the purpose of the structure of Portfolio Fund
Shares is to provide investors with the traditional benefits of ETFs
while protecting funds from the potential for front running or free
riding of portfolio transactions, which could adversely impact the
performance of a fund. While each series of Portfolio Fund Shares will
be actively managed and, to that extent, similar to Managed Fund Shares
(as defined in Rule 14.11(i)), Portfolio Fund Shares differ from
Managed Fund Shares in one key way.\25\ A series of Portfolio Fund
Shares will disclose the Proxy Basket on a daily basis which, as
described above, is designed to closely track the performance of the
holdings of the Investment Company, instead of the actual holdings of
the Investment Company, as provided by a series of Managed Fund
Shares.\26\
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\25\ The Exchange notes that there are two additional
differences between proposed Rule 14.11(m) and Rule 14.11(i): (i)
Proposed Rule 14.11(m) would require a rule filing under Section
19(b) prior to listing any product on the Exchange meaning that no
series of Portfolio Fund Shares could be listed on the Exchange
pursuant to Rule 19b-4(e) and there are no proposed rules comparable
to the quantitative portfolio holdings standards from Rule 14.11(i);
and (ii) proposed Rule 14.11(m) would not require the dissemination
of an intraday indicative value. The Exchange has submitted a
proposal to eliminate the requirement for series of Managed Fund
Shares and generally agrees with the Commission's sentiment that the
intraday indicative value is not necessary to support the arbitrage
mechanism. See SR-CboeBZX-2019-104 and Investment Company Act
Release No. 10695 (October 24, 2019) (84 FR 57162).
\26\ Proposed Rule 14.11(m)(4)(B)(iii) will, however, require
each series of Portfolio Fund Shares to at a minimum disclose the
entirety of its portfolio holdings within at least 60 days following
the end of every fiscal quarter in accordance with normal disclosure
requirements otherwise applicable to open-end investment companies
registered under the 1940 Act.
Form N-PORT requires reporting of a fund's complete portfolio
holdings on a position-by-position basis on a quarterly basis within
60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its
Form N-CSR, filed twice a year, and its Form N-CEN, filed annually.
A fund's SAI and Shareholder Reports are available free upon request
from the Investment Company, and those documents and the Form N-
PORT, Form N-CSR, and Form N-CEN may be viewed on-screen or
downloaded from the Commission's website at www.sec.gov.
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For the arbitrage mechanism for any ETF to function effectively,
Market Makers need sufficient information to accurately value shares of
a fund to transact in both the primary and secondary market. The Proxy
Basket, constructed as provided in the applicable exemptive relief, is
designed to closely track the daily performance of the holdings of a
series of Portfolio Fund Shares.
Given the correlation between the Proxy Basket and the Fund
Portfolio,\27\ the Exchange believes that the Proxy Basket would serve
as a pricing signal to identify arbitrage opportunities when its value
and the secondary market price of the shares of a series of Portfolio
Fund Shares diverge. If shares began trading at a discount to the Proxy
Basket, an authorized participant could purchase the shares in
secondary market transactions and, after accumulating enough shares to
comprise a creation unit,\28\ redeem them in exchange for a redemption
basket reflecting the NAV per share of the fund's portfolio holdings.
The purchases of Shares would reduce the supply of Shares in the
market, and thus tend to drive up the Shares' market price closer to
the fund's NAV. Alternatively, if shares are trading at a premium, the
transactions in the arbitrage process are reversed. Market Makers also
can engage in arbitrage without using the creation or redemption
processes. For example, if a fund is trading at a premium to the Proxy
Basket, Market Makers may sell shares short and take a long position in
the Proxy Basket securities, wait for the trading prices to move toward
parity, and then close out the positions in both the shares and the
securities, to realize a profit from the relative movement of their
trading prices. Similarly, a Market Maker could buy shares and take a
short position in the Proxy Basket securities in an attempt to profit
when shares are trading at a discount to the Proxy Basket.
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\27\ As provided in the Notices, funds and their respective
advisers will take remedial actions as necessary if the funds do not
function as anticipated. For the first three years after a launch, a
fund will establish certain thresholds for its level of tracking
error, premiums/discounts, and spreads, so that, upon the fund's
crossing a threshold, the adviser will promptly call a meeting of
the fund's board of directors and will present the board or
committee with recommendations for appropriate remedial measures.
The board would then consider the continuing viability of the fund,
whether shareholders are being harmed, and what, if any, action
would be appropriate. Specifically, the Applications and Notices
provide that such a meeting would occur: (1) If the tracking error
exceeds 1%; or (2) if, for 30 or more days in any quarter or 15 days
in a row (a) the absolute difference between either the market
closing price or bid/ask price, on one hand, and NAV, on the other,
exceeds 2%, or (b) the bid/ask spread exceeds 2%.
\28\ Portfolio Fund Shares will be purchased or redeemed only in
large aggregations, or ``creation units,'' and the Proxy Basket will
constitute the names and quantities of instruments for both
purchases and redemptions of Creation Units.
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Overall, the Exchange believes that the arbitrage process would
operate similarly to the arbitrage process in place today for existing
ETFs that use in-kind baskets for creations and redemptions that do not
reflect the ETF's complete holdings but nonetheless produce performance
that is highly correlated to the performance of the ETF's actual
portfolio. The Exchange has observed highly efficient trading of ETFs
that invest in markets where security values are not fully known at the
time of ETF trading, and where a perfect hedge is not possible, such as
international equity and fixed-income ETFs. While the ability to value
and hedge many of these existing ETFs in the market may be limited,
such ETFs have generally maintained an effective arbitrage mechanism
and traded efficiently.
As provided in the Notice, the Commission believes that an
arbitrage mechanism based largely on the combination of a daily
disclosed Proxy Basket and at a minimum quarterly disclosure of the
Fund Portfolio can work in an efficient manner to maintain a fund's
secondary market prices close to its NAV.\29\ Consistent with the
Commission's view, the Exchange believes that the arbitrage mechanism
for Portfolio Fund Shares will be sufficient to keep secondary market
prices in line with NAV. This, combined with the fact that the proposed
rules are, except as described above, nearly identical to the generic
listing standards for Managed Fund Shares, leads the Exchange to
believe that the proposed Rule 14.11(m) is consistent with the Act.
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\29\ See Fidelity Notice at 17. The Commission also notes that
as long as arbitrage continues to keep the Fund's secondary market
price and NAV close, and does so efficiently so that spreads remain
narrow, that investors would benefit from the opportunity to invest
in active strategies through a vehicle that offers the traditional
benefits of ETFs.
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The Exchange notes that while the Proxy Basket does not reflect the
1-for-1 holdings of each series of Portfolio Fund Shares, a significant
amount of information about the holdings is publicly available at all
times. Each series will disclose the Proxy Basket on a daily basis.
Each series of Portfolio Fund Shares will at a minimum disclose the
entirety of its portfolio holdings, including the name, identifier,
market value and weight of each security and instrument in the
portfolio within at least 60 days following the end of every
[[Page 72423]]
fiscal quarter in a manner consistent with normal disclosure
requirements otherwise applicable to open-end investment companies
registered under the 1940 Act.
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of Portfolio Fund 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 Portfolio Fund Shares through the Exchange will be subject to the
Exchange's surveillance procedures for derivative products. The
Exchange will require the issuer of each series of Portfolio Fund
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.
As noted above, Form N-PORT requires reporting of a fund's complete
portfolio holdings on a position-by-position basis on a quarterly basis
within 60 days after fiscal quarter end. Investors can obtain a fund's
Statement of Additional Information, its Shareholder Reports, its Form
N-CSR, filed twice a year, and its Form N-CEN, filed annually. A fund's
SAI and Shareholder Reports are available free upon request from the
Investment Company, and those documents and the Form N-PORT, Form N-
CSR, and Form N-CEN 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 CTA high-speed line. The Exchange
deems Portfolio Fund Shares to be equity securities, thus rendering
trading in the Shares subject to the Exchange's existing rules
governing the trading of equity securities. As provided in proposed
Rule 14.11(m)(2)(C), the minimum price variation for quoting and entry
of orders in securities traded on the Exchange is $0.01.
The Funds
As discussed above, each Fund's holdings will meet the generic
listing standards applicable to series of Managed Fund Shares under
Rule 14.11(i)(4)(C). While such standards do not apply directly to
series of Portfolio Fund Shares, the Exchange believes that the
overarching policy issues related to liquidity, market cap, diversity,
and concentration of portfolio holdings that Rule 14.11(i)(4)(C) is
intended to address are equally applicable to series of Portfolio Fund
Shares and, as such, any such concerns related to the portfolio are
mitigated.
Separately and in addition to the rationale supporting the
arbitrage mechanism for Portfolio Fund Shares more broadly above, the
Exchange also believes that the particular instruments that may be
included in each Fund's portfolio and Proxy Basket do not raise any
concerns related to the Proxy Baskets being able to closely track the
NAV of the Funds because such instruments include only instruments that
trade on an exchange contemporaneously with the Shares. In addition, a
Fund's Proxy Basket will be optimized so that it reliably and
consistently correlates to the performance of the Fund. The Notice
specifically states that ``in order to facilitate arbitrage, each
Fund's portfolio and Tracking Basket will only include certain
securities that trade on an exchange contemporaneously with the Fund's
Shares. Because the securities would be exchange traded, market
participants would be able to accurately price and readily trade the
securities in the Tracking Basket for purposes of assessing the
intraday value of the Fund's portfolio holdings and to hedge their
positions in the Fund's Shares.'' \30\ The Exchange and Adviser agree
with the Commission's conclusion.
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\30\ The Exchange notes that the instruments enumerated herein
are consistent with the investable universe contemplated in the
Notice. Specifically, the Notice provides that ``Each Fund may
invest only in ETFs, Exchange-traded notes, Exchange-traded common
stocks, common stocks listed on a foreign exchange that trade on
such exchange contemporaneously with the Shares, Exchange-traded
preferred stocks, Exchange-traded American depositary receipts,
Exchange-traded real estate investment trusts, Exchange-traded
commodity pools, Exchange-traded metals trusts, Exchange-traded
currency trusts, and exchange-traded futures that trade
contemporaneously with the Shares, as well as cash and cash
equivalents . . . All futures contracts that a Fund may invest in
will be traded on a U.S. futures exchange. For these purposes, an
``Exchange'' is a national securities exchange as defined in section
2(a)(26) of the [1940] Act.'' See Notice at 10.
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The Adviser anticipates that the returns between a Fund and its
respective Proxy Basket will have a consistent relationship and that
the deviation in the returns between a Fund and its Proxy Basket will
be sufficiently small such that the Proxy Basket will provide Market
Makers with a reliable hedging vehicle that they can use to effectuate
low-risk arbitrage trades in Fund Shares. The Exchange believes that
the disclosures provided by the Funds will allow Market Makers to
understand the relationship between the performance of a Fund and its
Proxy Basket. Market Makers will be able to estimate the value of and
hedge positions in a Fund's Shares, which the Exchange believes will
facilitate the arbitrage process and help ensure that the Fund's Shares
normally will trade at market prices close to their NAV. The Exchange
also believes that competitive market making, where traders are looking
to take advantage of differences in bid-ask spread, will aid in keeping
spreads tight.
While the Proxy Basket does not reflect the 1-for-1 holdings of
each Fund, a significant amount of information about each Fund's
holdings is publicly available at all times. Each Fund will disclose
the Proxy Basket on a daily basis. Each series of Portfolio Fund Shares
will at a minimum disclose the entirety of its portfolio holdings,
including the name, identifier, market value and weight of each
security and instrument in the portfolio within at least 60 days
following the end of every fiscal quarter in a manner consistent with
normal disclosure requirements otherwise applicable to open-end
investment companies registered under the 1940 Act. The website will
include additional quantitative information updated on a daily basis,
including, on a per Share basis for each Fund, the prior Business Day's
NAV and the Closing Price or Bid/Ask Price at the time of calculation
of such NAV, and a calculation of the premium or discount of the
Closing Price or Bid/Ask Price against such NAV. The website will also
disclose any information regarding the bid/ask spread for each Fund as
may be required for other ETFs under Rule 6c-11 under the 1940 Act, as
amended.
The Exchange represents that the Shares of the Funds will continue
to comply with all other proposed requirements applicable to Portfolio
Fund Shares, which also generally correspond to the requirements for
Managed Fund Shares, including the dissemination of key information
such as the Proxy Basket, the Fund Portfolio,
[[Page 72424]]
and Net Asset Value, suspension of trading or removal, trading halts,
surveillance, minimum price variation for quoting and order entry, the
information circular, and firewalls as set forth in the proposed
Exchange rules applicable to Portfolio Fund Shares and the orders
approving such rules. Moreover, U.S.-listed equity securities held by
the Funds will trade on markets that are a member of ISG or affiliated
with a member of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.\31\ 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 issuer has
represented to the Exchange that it will advise the Exchange of any
failure by a 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. 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 a Fund is not in compliance with the
applicable listing requirements, the Exchange will commence delisting
procedures with respect to such Fund under Exchange Rule 14.12.
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\31\ For a list of the current members of ISG, see
www.isgportal.com. The Exchange notes that not all components of the
Funds may trade on markets that are members of ISG or with which the
Exchange has in place a comprehensive surveillance sharing
agreement.
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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. Rather, the Exchange notes
that the proposed rule change will facilitate the listing of a new type
of actively-managed exchange-traded products, thus enhancing
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-2019-107 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-2019-107. 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-2019-107, and should be
submitted on or before January 21, 2020.
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\32\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-28217 Filed 12-30-19; 8:45 am]
BILLING CODE 8011-01-P