[Federal Register Volume 85, Number 112 (Wednesday, June 10, 2020)]
[Notices]
[Pages 35467-35473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12518]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89012; File No. SR-CboeBYX-2020-017]


Self-Regulatory Organizations; Cboe BYX Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt 
Rule 14.13 To Permit the Trading, Pursuant to Unlisted Trading 
Privileges, of Tracking Fund Shares

June 4, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 3, 2020, Cboe BYX Exchange, Inc. (``Exchange'' or ``BYX'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange filed the proposal as 
a ``non-controversial'' proposed rule change pursuant to Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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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 14.13 to permit 
the trading, pursuant to unlisted trading privileges, of Tracking Fund 
Shares. Additionally, the Exchange proposes to make corresponding 
changes to Rule 14.1(a) to reference Tracking Fund Shares and proposed 
Rule 14.13, where applicable. The text of the proposed rule change is 
provided in Exhibit 5.
    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/byx/), 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 adopt Rule 14.13 to permit the trading, 
pursuant to unlisted trading privileges (``UTP''), of Tracking Fund 
Shares,\5\ which substantially conforms to Cboe BZX Exchange, Inc. 
(``BZX'') Rule 14.11(m).\6\

[[Page 35468]]

Additionally, the Exchange proposes to make corresponding changes to 
Rule 14.1(a) to reference Tracking Fund Shares and proposed Rule 14.13, 
where applicable.
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    \5\ The term ``Tracking Fund Share'' means a security that: (i) 
Represents an interest in an investment company registered under the 
Investment Company Act of 1940 (``Investment Company'') organized as 
an open-end management investment company, that invests in a 
portfolio of securities selected by the Investment Company's 
investment adviser consistent with the Investment Company's 
investment objectives and policies; (ii) is issued in a specified 
aggregate minimum number in return for a deposit of a specified 
Tracking Basket and/or a cash amount with a value equal to the next 
determined net asset value; (iii) when aggregated in the same 
specified minimum number, may be redeemed at a holder's request, 
which holder will be paid a specified Tracking Basket and/or a cash 
amount with a value equal to the next determined net asset value; 
and (iv) the portfolio holdings for which are disclosed within at 
least 60 days following the end of every fiscal quarter. See 
proposed Rule 14.13(c)(1).
    \6\ See Securities and Exchange Act Release No. 88887 (May 15, 
2020) 85 FR 30990 (May 21, 2020) (SR-CboeBZX-2019-107) (the ``BZX 
Approval Order''). The BZX proposal resulting in the BZX Approval 
Order involved several applications for exemptive relief that were 
filed with the Commission and for which public notice was issued on 
November 14, 2019 and a 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 ``Application,'' ``Notice,'' and ``Order,'' 
respectively, and, collectively, the ``Exemptive Order''). See 
Investment Company Act Release Nos. 33683 (November 14, 2019), 84 FR 
64140 (November 20, 2019) (the Notice) and 33712 (the Order). The 
Order specifically notes that ``granting the requested exemptions is 
appropriate in and consistent with the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act. It is further 
found that the terms of the proposed transactions, including the 
consideration to be paid or received, are reasonable and fair and do 
not involve overreaching on the part of any person concerned, and 
that the proposed transactions are consistent with the policy of 
each registered investment company concerned and with the general 
purposes of the Act.'' The Exchange notes that it also referred to 
the application for exemptive relief orders (collectively, with the 
Application, the ``Proxy Applications'') and notices thereof 
(collectively, with the Notice, the ``Proxy Notices'') 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 Tracking Fund Shares under BZX Rule 14.11(m).
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    The Exchange does not currently list any securities as a primary 
listing market.\7\ Consistent with this fact, Exchange Rule 14.1(a) 
currently states that all securities traded on the Exchange are traded 
pursuant to UTP and that the Exchange will not list any securities 
before first filing and obtaining Commission approval of rules that 
incorporate qualitative listing criteria and comply with Rules 10A-3 
\8\ (``Rule 10A-3'') and 10C-1 \9\ (``Rule 10C-1'') under the Act. 
Therefore, the provisions of existing Rules 14.2 through 14.9, 14.11 
through 14.12, and proposed Rule 14.13 that permit the listing of 
certain Equity Securities \10\ will not be effective until the Exchange 
files a proposed rule change under Section 19(b)(2) under the Act to 
amend its rules to comply with Rule 10A-3 and 10C-1 under the Exchange 
Act and to incorporate qualitative listing criteria, and such proposed 
rule change is approved by the Commission. Considering the foregoing, 
the Exchange proposes to adopt Rule 14.13 as set forth below.
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    \7\ The Exchange notes that it does not currently list any 
securities nor does it intend to list any securities in the 
foreseeable future and, accordingly, plans to submit in the near 
future a proposal to amend its applicable Rules set forth in Chapter 
XIV in order to reflect this fact.
    \8\ Rule 10A-3 obligates the Exchange to prohibit the initial or 
continued listing of any security of an issuer that is not in 
compliance with certain required standards. See 17 CFR 240.10A-3.
    \9\ Rule 10C-1 obligates the Exchange to establish listing 
standards that require each member of a listed issuer's compensation 
committee to be a member of the issuer's board and to be 
independent, as well as establish certain factors that an issuer 
must consider when evaluating the independence of a director. See 17 
CFR 240.10C-1.
    \10\ As provided in Rule 14.1(a), the term ``Equity Security'' 
means, but is not limited to, common stock, secondary classes of 
common stock, preferred stock and similar issues, shares or 
certificates of beneficial interest of trusts, notes, limited 
partnership interests, warrants, certificates of deposit for common 
stock, convertible debt securities, ADRs, CVRs, Investment Company 
Units, Trust Issued Receipts (including those based on Investment 
Shares), Commodity-Based Trust Shares, Currency Trust Shares, 
Partnership Units, Equity-Linked Securities, Commodity-Linked 
Securities, Currency-Linked Securities, Portfolio Depositary 
Receipts, Equity-Linked Debt Securities, Managed Portfolio Shares, 
and Exchange-Traded Funds. Further, the Exchange now proposes to 
include the term ``Tracking Fund Shares'' to the definition of 
Equity Security.
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Proposed Listing Rules
    Proposed Rule 14.13 is substantially similar to BZX Rule 14.11(m) 
with the exception that BZX Rules provide for the delisting of 
securities,\11\ while the Exchange only trades securities pursuant to 
UTP.\12\ Accordingly, the proposed Rule \13\ provides that the Exchange 
will consider the termination of UTP for a series of Tracking Fund 
Shares under certain circumstances,\14\ while no such provision is 
provided in BZX Rule 14.11(m). Nonetheless, the Exchange believes the 
proposal will not significantly affect the protection of investors or 
the public interest and will not impose any significant burden on 
competition as it is substantially similar to Exchange Rules applicable 
to other product types which allow for the termination of UTP in those 
products.\15\ As such, the Exchange believes the proposal raises no 
novel issues.
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    \11\ See BZX Rule 14.11(m)(4)(B)(iii).
    \12\ See proposed Exchange Rule 14.13(d)(2)(C).
    \13\ See proposed Exchange Rule 14.13(d)(2)(C).
    \14\ See proposed Exchange Rules 14.13(d)(2)(C)(i) through 
14.13(d)(2)(C)(vi).
    \15\ See Exchange Rules 14.3(g)(2), 14.11(d)(2)(B), and 
14.12(d)(2)(A).
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Policy Discussion
    The purpose of the structure of Tracking Fund Shares is to provide 
investors with the traditional benefits of Exchange-Traded Funds 
(``ETFs'') \16\ 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 Tracking Fund 
Shares will be actively managed and, to that extent, similar to certain 
Investment Company Units (as defined in Rule 14.2), Tracking Fund 
Shares differ from Investment Company Units in one key way.\17\ A 
series of Tracking Fund Shares will disclose the Tracking 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 
Investment Company Units.\18\
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    \16\ For purposes of this filing, the term ETF will include only 
Portfolio Depositary Receipts as defined in Rule 14.8, Investment 
Company Units as defined in Rule 14.2, and Exchange-Traded Fund 
Shares as defined in Rule 14.12, along with the equivalent products 
defined in the rules of other national securities exchanges.
    \17\ The Exchange notes that there is one additional substantive 
difference between proposed Rule 14.13 and Rule 14.2: Proposed Rule 
14.13 would require a rule filing under Section 19(b) prior to 
listing any product on the Exchange meaning that no series of 
Tracking 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 14.2.
    \18\ Proposed Rule 14.13(d)(2)(C) will, however, require each 
series of Tracking 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 Investment Company Act of 1940 (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 Tracking Basket is designed to closely track the 
daily performance of the Fund Portfolio.
    Given the correlation between the Tracking Basket and the Fund 
Portfolio,\19\ the Exchange believes that the Tracking 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 
Tracking Fund Shares diverge. If shares began trading at a discount to 
the Tracking Basket, an authorized participant could purchase the 
shares in secondary market transactions and, after accumulating enough 
shares to comprise a creation unit,\20\ redeem them in exchange for a

[[Page 35469]]

redemption basket reflecting the NAV per share of the Fund Portfolio. 
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 
Tracking Basket, Market Makers may sell shares short and take a long 
position in the Tracking 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 Tracking Basket securities in 
an attempt to profit when shares are trading at a discount to the 
Tracking Basket.
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    \19\ As provided in the Proxy 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 Proxy Applications 
and Proxy 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%.
    \20\ Tracking Fund Shares will be purchased or redeemed only in 
large aggregations, or ``creation units,'' and the Tracking 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 Tracking 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.\21\ Consistent with the 
Commission's view, the Exchange believes that the arbitrage mechanism 
for Tracking Fund Shares will be sufficient to keep secondary market 
prices in line with NAV.
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    \21\ See Notice at 64144. 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. See Id., at 64145.
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    The Exchange notes that a significant amount of information about 
each fund and its Fund Portfolio will be publicly available at all 
times. Each series will disclose the Tracking Basket, which is designed 
to closely track the daily performance of the Fund Portfolio, on a 
daily basis. Each series of Tracking Fund Shares will at a minimum 
publicly 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 the percentage 
weight overlap between the holdings of the Tracking Basket compared to 
the Fund Holdings for the prior business day and 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 website and 
information will be publicly available at no charge.
    While not providing daily disclosure of the Fund Portfolio could 
open the door to potential information leakage and misuse of material 
non-public information, the Exchange believes that proposed Rules 
14.13(b)(5) and (6) provide sufficient safeguards to prevent such 
leakage and misuse of information. The Exchange believes that these 
proposed rules are designed to prevent fraudulent and manipulative acts 
and practices related to the listing and trading of Tracking Fund 
Shares because they provide meaningful requirements about both the data 
that will be made publicly available about the Shares as well as the 
information that will only be available to certain parties and the 
controls on such information. Specifically, the Exchange believes that 
the requirements related to information protection enumerated under 
proposed Rule 14.13(d)(6) will act as a strong safeguard against any 
misuse and improper dissemination of information related to a Fund 
Portfolio, the Tracking Basket, or changes thereto. The requirement 
that any person or entity, including a custodian, Reporting Authority, 
distributor, or administrator, who has access to nonpublic information 
regarding the Fund Portfolio or the Tracking Basket or changes thereto, 
must be subject to procedures designed to prevent the use and 
dissemination of material nonpublic information regarding the 
applicable Fund Portfolio or the Tracking Basket or changes thereto 
will act to prevent any individual or entity from sharing such 
information externally. Additionally, the requirement that any such 
person or entity that is registered as a broker-dealer or affiliated 
with a broker-dealer will erect and maintain a ``fire wall'' between 
the person or entity and the broker-dealer with respect to access to 
information concerning the composition and/or changes to such Fund 
Portfolio or Tracking Basket will act to make sure that no entity will 
be able to misuse the data for their own purposes. As such, the 
Exchange believes that this proposal is designed to prevent fraudulent 
and manipulative acts and practices.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of Tracking 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 
Tracking 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 Tracking Fund Shares 
traded 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. In addition, the Exchange also 
has a general policy prohibiting the distribution of material, non-
public information by its employees.
    As noted in proposed Rule 14.13(b)(4), the Investment Company's 
investment adviser will upon request make available to the Exchange 
and/or FINRA, on behalf of the Exchange, the daily Fund Portfolio of 
each series of Tracking Fund Shares. The Exchange believes that this is 
appropriate because it will provide the Exchange or FINRA, on behalf of 
the Exchange, with access to the daily Fund Portfolio of any series of 
Tracking Fund Shares upon request on an as needed basis. The Exchange 
believes that the ability to access the

[[Page 35470]]

information on an as needed basis will provide it with sufficient 
information to perform the necessary regulatory functions associated 
with trading series of Tracking Fund Shares on the Exchange, including 
the ability to monitor compliance with the initial and continued 
listing requirements as well as the ability to surveil for manipulation 
of the shares.
Trading Halts
    As described above, proposed Rule 14.13(d)(2)(D) provides that (i) 
the Exchange may consider all relevant factors in exercising its 
discretion to halt trading in a series of Tracking Fund Shares. Trading 
may be halted because of market conditions or for reasons that, in the 
view of the Exchange, make trading in the series of Tracking Fund 
Shares inadvisable. These may include: The extent to which trading is 
not occurring in the securities and/or the financial instruments 
composing the Tracking Basket or Fund Portfolio; or whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present; and (ii) if the Exchange becomes 
aware that one of the following is not being made available to all 
market participants at the same time: The net asset value, the Tracking 
Basket, or the Fund Portfolio with respect to a series of Tracking Fund 
Shares, then the Exchange will halt trading in such series until such 
time as the net asset value, the Tracking 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. The Exchange also notes that the 
Proxy Applications provide that an issuer will comply with Regulation 
Fair Disclosure, which prohibits selective disclosure of any material 
non-public information, which otherwise do not apply to issuers of 
Tracking Fund Shares.
    Information regarding market price and trading volume of the shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the shares will be published daily in the financial 
section of newspapers. Quotation and last sale information for the 
shares will be available via the Consolidated Tape Association 
(``CTA'') high-speed line.
Trading Rules
    The Exchange deems Tracking 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.\22\ As provided in 
proposed Rule 14.13(b)(3), the minimum price variation for quoting and 
entry of orders in securities traded on the Exchange is $0.01. The 
Exchange has appropriate rules to facilitate trading in Tracking Fund 
Shares during all trading sessions.
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    \22\ With respect to trading in Tracking Fund Shares, all of the 
BYX Member obligations relating to product description and 
prospectus delivery requirements will continue to apply in 
accordance with Exchange rules and federal securities laws, and the 
Exchange will continue to monitor its Members for compliance with 
such requirements.
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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 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 14.13 is designed to 
prevent fraudulent and manipulative acts and practices in that the 
proposed rules relating to listing and trading of Tracking Fund Shares 
provide specific initial and continued listing criteria required to be 
met by such securities. Proposed Rule 14.13(d)(1) provides the initial 
listing criteria for a series of Tracking Fund Shares, which include 
the following: (i) For each series, the Exchange will establish a 
minimum number of Tracking 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 Tracking 
Fund Shares that the NAV 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 NAV, the 
Tracking Basket, and the Fund Portfolio; and (iii) all Tracking Fund 
Shares will have a stated investment objective which shall be adhered 
to under Normal Market Conditions.\25\
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    \25\ See proposed Rule 14.13(c)(4).
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    Proposed Rule 14.13(d)(2) provides that each series of Tracking 
Fund Shares will be listed and traded (including trading pursuant to 
UTP) on the Exchange subject to application of the following continued 
listing criteria: (i) The Tracking Basket will be disseminated at least 
once daily and will be made available to all market participants at the 
same time; (ii) the Fund Portfolio will at a minimum be publicly 
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; (iii) upon termination of an Investment Company, the 
Exchange requires that Tracking 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 14.13(d)(2)(C) provides that the 
Exchange will consider the suspension of trading in or removal from 
listing of or termination of UTP for a series of Tracking Fund Shares 
under any of the following circumstances: (i) If, following the initial 
twelve-month period after commencement of trading on the Exchange of a 
series of Tracking Fund Shares, there are fewer than 50 beneficial 
holders of the series of Tracking Fund Shares for 30 or more 
consecutive trading days; (ii) if either the Tracking Basket or Fund 
Portfolio is not made available to all market participants at the same 
time; (iii) if the Investment Company issuing the Tracking 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 
Tracking Fund Shares; (iv) if any of the requirements set forth in this 
rule are not continuously maintained; (v) if any of the applicable 
Continued Listing Representations for the issue of Tracking Fund Shares 
are not continuously met; or (vi) if such other event shall occur or 
condition exists which, in the opinion of the Exchange,

[[Page 35471]]

makes further dealings on the Exchange inadvisable.
    Proposed Rule 14.13(d)(2)(D)(i) provides that the Exchange may 
consider all relevant factors in exercising its discretion to halt 
trading in a series of Tracking Fund Shares. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the series of Tracking Fund Shares 
inadvisable. These may include: (i) The extent to which trading is not 
occurring in the securities and/or the financial instruments composing 
the Tracking Basket or Fund Portfolio; or (ii) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present. Proposed Rule 14.13(d)(2)(D)(ii) if the 
Exchange becomes aware that one of the following is not being made 
available to all market participants at the same time: The net asset 
value, the Tracking Basket, or the Fund Portfolio with respect to a 
series of Tracking Fund Shares, then the Exchange will halt trading in 
such series until such time as the net asset value, the Tracking 
Basket, or the Fund Portfolio is available to all market participants, 
as applicable.
    While not providing daily disclosure of the Fund Portfolio could 
open the door to potential information leakage and misuse of material 
non-public information, the Exchange believes that proposed Rules 
14.13(b)(5) and (6) provide sufficient safeguards to prevent such 
leakage and misuse of information. The Exchange believes that these 
proposed rules are designed to prevent fraudulent and manipulative acts 
and practices related to the listing and trading of Tracking Fund 
Shares because they provide meaningful requirements about both the data 
that will be made publicly available about the Shares as well as the 
information that will only be available to certain parties and the 
controls on such information. Specifically, the Exchange believes that 
the requirements related to information protection enumerated under 
proposed Rule 14.13(b)(6) will act as a strong safeguard against any 
misuse and improper dissemination of information related to a Fund 
Portfolio, the Tracking Basket, or changes thereto. The requirement 
that any person or entity, including a custodian, Reporting Authority, 
distributor, or administrator, who has access to nonpublic information 
regarding the Fund Portfolio or the Tracking Basket or changes thereto, 
must be subject to procedures designed to prevent the use and 
dissemination of material nonpublic information regarding the 
applicable Fund Portfolio or the Tracking Basket or changes thereto 
will act to prevent any individual or entity from sharing such 
information externally. Additionally, the requirement that any such 
person or entity that is registered as a broker-dealer or affiliated 
with a broker-dealer will erect and maintain a ``fire wall'' between 
the person or entity and the broker-dealer with respect to access to 
information concerning the composition and/or changes to such Fund 
Portfolio or Tracking Basket will act to make sure that no entity will 
be able to misuse the data for their own purposes. As such, the 
Exchange believes that this proposal is designed to prevent fraudulent 
and manipulative acts and practices.
    The Exchange believes that these proposed rules are designed to 
prevent fraudulent and manipulative acts and practices related to the 
listing and trading of Tracking Fund Shares because they provide 
meaningful requirements about both the data that will be made publicly 
available about Tracking Fund Shares (the Tracking Basket) as well as 
the information that will only be available to certain parties and the 
controls on such information. Specifically, the Exchange believes that 
the requirements related to firewalls and information protection 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 Tracking Basket.
    As noted above, the purpose of the structure of Tracking 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 Tracking Fund Shares will 
be actively managed and, to that extent, similar to certain Investment 
Company Units (as defined in Rule 14.2), Tracking Fund Shares differ 
from Investment Company Units in one key way.\26\ A series of Tracking 
Fund Shares will disclose the Tracking 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.\27\
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    \26\ See supra note 11.
    \27\ See supra note 12.
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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 
Tracking Basket is designed to closely track the daily performance of 
the holdings of a series of Tracking Fund Shares.
    Given the correlation between the Tracking Basket and the Fund 
Portfolio,\28\ the Exchange believes that the Tracking 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 
Tracking Fund Shares diverge. If shares began trading at a discount to 
the Tracking Basket, an authorized participant could purchase the 
shares in secondary market transactions and, after accumulating enough 
shares to comprise a creation unit,\29\ 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 
Tracking Basket, Market Makers may sell shares short and take a long 
position in the Tracking 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 Tracking Basket securities in 
an attempt to profit when shares are trading at a discount to the 
Tracking Basket.
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    \28\ See supra note 13.
    \29\ See supra note 14.
---------------------------------------------------------------------------

    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

[[Page 35472]]

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 Tracking 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.\30\ Consistent with the 
Commission's view, the Exchange believes that the arbitrage mechanism 
for Tracking Fund Shares will be sufficient to keep secondary market 
prices in line with NAV.
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    \30\ See supra note 15.
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    The Exchange notes that a significant amount of information about 
each series of Tracking Fund Shares and its Fund Portfolio will be 
required to be made publicly available at all times. Each series of 
Tracking Fund Shares will be required to disclose the Tracking Basket, 
which is designed to closely track the daily performance of the Fund 
Portfolio, on a daily basis. Each series of Tracking Fund Shares will 
at a minimum be required to publicly 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 for each series of Tracking Fund Shares will be required to 
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 for each 
series of Tracking Fund Shares will also be required disclose the 
percentage weight overlap between the holdings of the Tracking Basket 
compared to the Fund Holdings for the prior business day and any 
information regarding the bid/ask spread for each series of Tracking 
Fund Shares as may be required for other ETFs under Rule 6c-11 under 
the 1940 Act, as amended.
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of Tracking 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 
Tracking 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 Tracking Fund Shares 
traded 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. In addition, the Exchange also 
has a general policy prohibiting the distribution of material, non-
public information by its employees.
    As noted in proposed Rule 14.13(b)(4), the Investment Company's 
investment adviser will upon request make available to the Exchange 
and/or FINRA, on behalf of the Exchange, the daily portfolio holdings 
of each series of Tracking Fund Shares. The Exchange believes that this 
is appropriate because it will provide the Exchange and/or FINRA, on 
behalf of the Exchange, with access to the daily Fund Portfolio of any 
series of Tracking Fund Shares upon request on an as needed basis. The 
Exchange believes that the ability to access the information on an as 
needed basis will provide it with sufficient information to perform the 
necessary regulatory functions associated with trading series of 
Tracking Fund Shares on the Exchange, including the ability to monitor 
compliance with the initial and continued listing requirements as well 
as the ability to surveil for manipulation of the shares.
    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. The Exchange also notes that the 
Proxy Applications provide that an issuer will comply with Regulation 
Fair Disclosure, which prohibits selective disclosure of any material 
non-public information, which otherwise do not apply to issuers of 
Tracking Fund Shares.
    Information regarding market price and trading volume of the shares 
for each series of Tracking Fund Shares will be required to 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 of each series of Tracking Fund Shares will 
be required to be published daily in the financial section of 
newspapers. Quotation and last sale information for the shares for each 
series of Tracking Fund Shares will be required to be available via the 
CTA high-speed line. The Exchange deems Tracking Fund Shares to be 
equity securities, thus rendering trading in such shares to be subject 
to the Exchange's existing rules governing the trading of equity 
securities. As provided in proposed Rule 14.13(b)(3), the minimum price 
variation for quoting and entry of orders in securities traded on the 
Exchange is $0.01.
    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 trading pursuant to 
UTP of a new type of actively-managed exchange-traded product, 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 neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative for 30 
days from the date on which it was filed, or such shorter time as the 
Commission may designate, it has become effective pursuant to Section 
19(b)(3)(A) of the Act \31\ and Rule 19b-4(f)(6) thereunder.\32\
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    \31\ 15 U.S.C. 78s(b)(3)(A).
    \32\ 17 CFR 240.19b-4(f)(6). In addition, Rule19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.

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[[Page 35473]]

    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \33\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \34\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative upon filing. The Exchange states that 
a waiver of the operative delay is consistent with the protection of 
investors and the public interest because it would allow for the 
immediate trading, pursuant to UTP, of Tracking Fund Shares on the 
Exchange and therefore would provide investors with an additional 
trading venue option. The Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Therefore, the Commission hereby waives the operative 
delay and designates the proposed rule change operative upon 
filing.\35\
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    \33\ 17 CFR 240.19b-4(f)(6).
    \34\ 17 CFR 240.19b-4(f)(6)(iii).
    \35\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-CboeBYX-2020-017 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-CboeBYX-2020-017. 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-CboeBYX-2020-017 and should be submitted 
on or before July 1, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12518 Filed 6-9-20; 8:45 am]
 BILLING CODE 8011-01-P