[Federal Register Volume 86, Number 155 (Monday, August 16, 2021)]
[Notices]
[Pages 45792-45795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17412]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92626; File No. SR-CboeBZX-2021-053]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 14.11(m) (Tracking Fund 
Shares) To Provide for the Use of Custom Baskets Consistent With the 
Exemptive Relief Issued Pursuant to the Investment Company Act of 1940 
Applicable to a Series of Tracking Fund Shares

August 10, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on August 3, 2021, Cboe BZX Exchange, Inc. (``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') proposes to 
amend Rule 14.11(m) (Tracking Fund Shares) to provide for the use of 
``Custom Baskets'' consistent with the exemptive relief issued pursuant 
to the Investment Company Act of 1940 (``Investment Company Act'') 
applicable to a series of Tracking Fund Shares. 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/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 amend Rule 14.11(m) (Tracking Fund Shares) 
\3\ to provide for the use of ``Custom Baskets'' consistent with the 
exemptive relief issued pursuant to the Investment Company Act \4\ 
applicable to a series of Tracking Fund Shares.
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    \3\ Rule 14.11(m)(3)(A) defines the term ``Tracking Fund Share'' 
as 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.
    \4\ 15 U.S.C. 80a et seq.
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    To effectuate this change, the Exchange proposes the following 
amendments to Rule 14.11(m). First, the proposed rule change adopts new 
subparagraph (F) under Rule 14.11(m)(3) (Definitions), which defines 
``Custom Basket'', for the purposes of Rule 14.11(m), to mean a 
portfolio of securities that is different from the Tracking Basket and 
is otherwise consistent with the exemptive relief issued pursuant to 
the Investment Company Act applicable to a series of Tracking Fund 
Shares. The proposed rule change makes conforming amendments to the 
definition of Tracking Fund Shares in Rule 14.11(m)(3)(A) and Reporting 
Authority in Rule 14.11(m)(3)(C). The proposed rule change amends the 
definition of ``Tracking Fund Share'' in Rule 14.11(m)(3)(A) to provide 
for creations of shares in return for a deposit by the purchaser of, 
and redemptions of shares at a holder's request in return for, a Custom 
Basket rather than a Tracking Basket to the extent permitted by a 
fund's exemptive relief. In addition, the proposed rule change amends 
the definition of ``Reporting Authority'' in respect of a particular 
series of Tracking Fund Shares in Rule 14.11(m)(3)(C) to provide for 
Custom Baskets to the extent permitted by a fund's exemptive relief. 
Currently, ``Reporting Authority'' in respect of a particular series of 
Tracking 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 Tracking 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 Tracking Basket; the Fund 
Portfolio; the amount of any cash distribution to holders of Tracking 
Fund Shares, net asset value, or other information relating to the 
issuance, redemption or trading of Tracking Fund Shares. Rule 
14.11(m)(3)(C) further provides that a series of Tracking Fund Shares 
may have more than one Reporting Authority, each having different 
functions. The proposed rule change adds ``Custom Basket'' to the non-
exclusive list of information relating to Tracking Fund Shares that a 
Reporting Authority calculates and reports, i.e., including, but not 
limited to, the Tracking Basket; the Fund Portfolio; the amount of any 
cash distribution to holders of Tracking Fund Shares, net asset value, 
or other information relating to the issuance, redemption or trading of 
Tracking Fund Shares.
    Second, the proposed rule change amends Rule 14.11(m)(4) (Initial 
and Continued Listing), which currently provides criteria that Tracking 
Fund Shares must satisfy for initial and continued listing on the 
Exchange, to incorporate specific initial and continued listing 
criteria for Custom Baskets. Specifically, Rule 14.11(m)(4)(A)(ii) 
currently provides that the Exchange will obtain a representation from 
the issuer of each series of Tracking 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

[[Page 45793]]

Tracking Basket, and the Fund Portfolio. The proposed rule change 
adopts an additional requirement in Rule 14.11(m)(4)(A)(ii) providing 
that the Exchange will also obtain a representation from the issuer of 
each series of Tracking Fund Shares that the issuer and any person 
acting on behalf of the series of Tracking Fund Shares will comply with 
Regulation Fair Disclosure under the Securities Exchange Act of 1934 
(``Exchange Act'') \5\, including with respect to any Custom Basket.\6\
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    \5\ 17 CFR 243.100-243.103. Regulation Fair Disclosure provides 
that whenever an issuer, or any person acting on its behalf, 
discloses material nonpublic information regarding that issuer or 
its securities to certain individuals or entities--generally, 
securities market professionals, such as stock analysts, or holders 
of the issuer's securities who may well trade on the basis of the 
information--the issuer must make public disclosure of that 
information.
    \6\ The proposed rule change also delineates each of the three 
representation requirements, as proposed, as (a) through (c) within 
the text of Rule 14.11(m)(4)(A)(ii) for ease of reading.
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    Third, the proposed Rule change adopts new Rule 14.11(m)(4)(B)(ii), 
which provides that, with respect to each Custom Basket utilized by a 
series of Tracking Fund Shares, each business day, before the opening 
of trading in Regular Trading Hours (as defined in Rule 1.5(w)), the 
investment company shall make publicly available on its website the 
composition of any Custom Basket transacted on the previous business 
day, except a Custom Basket that differs from the applicable Tracking 
Basket only with respect to cash.\7\
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    \7\ As a result of the addition of subparagraph (4)(B)(ii), the 
proposed rule change also updates the subsequent numbering of 
current subparagraphs (4)(b)(ii), (4)(b)(iii), (4)(b)(iv), (4)(b)(v) 
and (4)(b)(vi) to (4)(b)(iii), (4)(b)(iv) (4)(b)(v), (4)(b)(vi) and 
(4)(b)(vii) respectively.
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    Finally, the proposed rule change makes conforming amendments to 
Rule 14.11(m)(2)(E) and (F). In particular, Rule 14.11(m)(2)(E) 
currently provides that, if the investment adviser to the Investment 
Company issuing Tracking Fund Shares is registered as a broker-dealer 
or is affiliated with a broker-dealer, such investment adviser will 
erect and maintain a ``fire wall'' between the investment adviser and 
personnel of the broker-dealer or broker-dealer affiliate, as 
applicable, with respect to access to information concerning the 
composition of and/or changes to the Fund Portfolio and/or the Tracking 
Basket. Any person related to the investment adviser or Investment 
Company who makes decisions pertaining to the Investment Company's Fund 
Portfolio and/or the Tracking Basket or has access to nonpublic 
information regarding the Fund Portfolio and/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 
Fund Portfolio and/or the Tracking Basket or changes thereto. The 
proposed rule change amends 14.11(m)(2)(E) to provide for Custom 
Baskets to the extent permitted by a fund's exemptive relief. As 
proposed, Rule 14.11(m)(2)(E) provides that if the investment adviser 
to the Investment Company issuing Tracking Fund Shares is registered as 
a broker-dealer or is affiliated with a broker-dealer, such investment 
adviser will erect and maintain a ``fire wall'' between the investment 
adviser and personnel of the broker-dealer or broker-dealer affiliate, 
as applicable, with respect to access to information concerning the 
composition of and/or changes to the Fund Portfolio, the Tracking 
Basket, and/or the Custom Basket, as applicable. In addition, proposed 
Rule 14.11(m)(2)(E) provides that any person related to the investment 
adviser or Investment Company who makes decisions pertaining to the 
Investment Company's Fund Portfolio, the Tracking Basket, and/or the 
Custom Basket or has access to nonpublic information regarding the Fund 
Portfolio, the Tracking Basket, and/or the Custom Basket, as 
applicable, or changes thereto must be subject to procedures designed 
to prevent the use and dissemination of material nonpublic information 
regarding the Fund Portfolio, the Tracking Basket, and/or the Custom 
Basket, as applicable, or changes thereto.
    Rule 14.11(m)(2)(F) currently provides 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. Moreover, if any such person 
or entity is registered as a broker-dealer or affiliated with a broker-
dealer, such person or entity 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. The proposed rule change similarly 
amends Rule 14.11(m)(2)(F) to provide for Custom Baskets to the extent 
permitted by a fund's exemptive relief. As proposed, Rule 
14.11(m)(2)(F) provides that any person or entity, including a 
custodian, Reporting Authority, distributor, or administrator, who has 
access to nonpublic information regarding the Fund Portfolio, the 
Tracking Basket, or the Custom Basket, as applicable, or changes 
thereto, must be subject to procedures designed to prevent the use and 
dissemination of material nonpublic information regarding the 
applicable Fund Portfolio, the Tracking Basket, or the Custom Basket, 
as applicable, or changes thereto. Moreover, if any such person or 
entity is registered as a broker-dealer or affiliated with a broker-
dealer, such person or entity 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, Tracking Basket, or Custom Basket, as applicable.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Exchange Act and the rules and regulations thereunder applicable to 
the Exchange and, in particular, the requirements of Section 6(b) of 
the Exchange Act.\8\ Specifically, the Exchange believes the proposed 
rule change is consistent with the Section 6(b)(5) \9\ requirements 
that the rules of an exchange be 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 regulating, clearing, settling, processing 
information with respect to, and 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. Additionally, the Exchange 
believes the proposed rule change is consistent with the Section 
6(b)(5) \10\ requirement that the rules of an exchange not be designed 
to permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ Id.
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    In particular, the Exchange believes that proposed rule change to 
provide for the use of Custom Baskets consistent with the applicable 
exemptive relief applicable to a series of Tracking Fund Shares will 
perfect the mechanism of a free and open market and, in general, to 
protect investors and the public interest

[[Page 45794]]

in that it will permit use of Custom Baskets, consistent with the 
applicable exemptive relief, in a manner that will benefit investors by 
increasing efficiencies in the creation and redemption process. More 
specifically, Custom Baskets provide an issuer with flexibility in 
portfolio construction that may assist in reducing taxable capital 
gains distributions for investors and may generally improve tax 
efficiencies. Further, the use of Custom Baskets, to the extent 
permitted by a fund's exemptive relief, may also result in narrower 
bid/ask spreads and smaller premiums and discounts to the net asset 
value for Tracking Fund Shares to the extent that the Investment 
Company utilizes Custom Baskets with fewer securities which may, in 
turn, allow Authorized Participants to more efficiently hedge and 
participate generally in the Tracking Fund Shares. In addition to this, 
the flexibility provided in the creation of Custom Baskets may serve to 
increase competition between issuers. The Exchange believes the 
proposed rule change will enhance competition among market participants 
overall, to the benefit of investors and the marketplace.
    The Exchange also believes that amending Rule 14.11(m) to 
incorporate specific initial listing criteria required to be met by 
Tracking Fund Shares that utilize Custom Baskets is designed to prevent 
fraudulent and manipulative acts and practices. The Exchange believes 
that the daily dissemination of the composition of any Custom Basket 
transacted on the previous day, except a Custom Basket that differs 
from the applicable Tracking Basket only with respect to cash, together 
with the right of Authorized Participants to create and redeem each day 
at the net asset value, will enable market participants to value and 
trade shares in a manner that will not lead to significant deviations 
between the bid/ask price and net asset value of shares of a series of 
Tracking Fund Shares. Further, including Custom Baskets in the 
requirements of Rules 14.11(m)(2)(E) and (F) would act as a safeguard 
against any misuse and improper dissemination of nonpublic information 
related to a fund's Custom Basket or changes thereto. The requirement 
that any person or entity implement procedures reasonably designed to 
prevent the use and dissemination of material non-public information 
regarding a Custom Basket will act to prevent any individual or entity 
from sharing such information externally and the internal ``fire wall'' 
requirements applicable where an entity is a registered broker-dealer 
or affiliated with a broker-dealer 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 the proposed rule change to Rule 14.11(m) is 
designed to prevent fraudulent and manipulative acts and practices.
    The Exchange also believes that the proposed initial and continued 
listing standards are designed to promote disclosure and transparency 
with respect to the use of Custom Baskets consistent with the 
applicable exemptive relief. Specifically, the Exchange believes that 
requiring as an initial listing condition that an issuer and any person 
acting on behalf of the series of Tracking Fund Shares comply with 
Regulation Fair Disclosure under the Exchange Act, including with 
respect to any Custom Basket, would further the full and fair 
disclosure objectives of Regulation Fair Disclosure to the benefit of 
the investing public and all market participants. Further, with respect 
to each Custom Basket utilized by a series of Tracking Fund Shares, the 
Exchange believes that requiring, as a continued listing condition, 
that each business day, before the opening of trading in Regular 
Trading Hours (as defined in Rule 1.5(w)), an investment company make 
publicly available on its website the composition of any Custom Basket 
transacted on the previous business day, except a Custom Basket that 
differs from the applicable Tracking Basket only with respect to cash, 
also furthers the goals of transparency and full and fair disclosure, 
to the benefit of investors and the public interest.

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 purposes of the Exchange Act. The Exchange 
believes the proposed rule change, by permitting the use of Custom 
Baskets, consistent with a fund's exemptive relief, would introduce 
additional competition among various ETF products to the benefit of 
investors.

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

    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 Exchange 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-2021-053 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-2021-053. 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

[[Page 45795]]

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-2021-053 and should 
be submitted on or before September 7, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17412 Filed 8-13-21; 8:45 am]
BILLING CODE 8011-01-P