80 FR 73841 - Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of Proposed Rule Change To Amend BATS Rule 14.11(i) To Adopt Generic Listing Standards for Managed Fund Shares
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 80, Issue 227 (November 25, 2015)
Federal Register Volume 80, Issue 227 (November 25, 2015)
| Page Range | 73841-73849 | |
| FR Document | 2015-29926 |
[Federal Register Volume 80, Number 227 (Wednesday, November 25, 2015)] [Notices] [Pages 73841-73849] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-29926] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-76478; File No. SR-BATS-2015-100] Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of Filing of Proposed Rule Change To Amend BATS Rule 14.11(i) To Adopt Generic Listing Standards for Managed Fund Shares November 19, 2015. 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 November 18, 2015, BATS Exchange, Inc. (the ``Exchange'' or ``BATS'') 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 Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing a rule change to adopt generic listing standards for shares listed under BATS Rule 14.11(i) (``Managed Fund Shares''). The text of the proposed rule change is available at the Exchange's Web site at www.batstrading.com, at the principal office of the Exchange, 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 parts of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rule 14.11(i) to adopt generic listing [[Page 73842]] standards for Managed Fund Shares. Under the Exchange's current rules, a proposed rule change must be filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') for the listing and trading of each new series of Managed Fund Shares. The Exchange believes that it is appropriate to codify certain rules within Rule 14.11(i) that would generally eliminate the need for such proposed rule changes, which would create greater efficiency and promote uniform standards in the listing process. Background Rule 14.11(i) sets forth certain rules related to the listing and trading of Managed Fund Shares.\3\ Under Rule 14.11(i)(3)(A), the term ``Managed Fund Share'' means a security that: --------------------------------------------------------------------------- \3\ See Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR-BATS-2011-018) (Order Approving Proposed Rule Change to Adopt Rules for the Qualification, Listing and Delisting of Companies on the Exchange) (the ``Approval Order''). The Approval Order approved the rules permitting the listing of both Tier I and Tier II securities on the Exchange and the requirements associated therewith, which includes the listing and trading of Index Fund Shares and Managed Fund Shares, trading hours and halts, and listing fees originally applicable to Managed Fund Shares. --------------------------------------------------------------------------- (a) represents an interest in a registered investment company (``Investment Company'') organized as an open-end management investment company or similar entity, that invests in a portfolio of securities selected by the Investment Company's investment adviser (hereafter ``Adviser'') consistent with the Investment Company's investment objectives and policies; (b) 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 (c) 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. Effectively, Managed Fund Shares are securities issued by an actively-managed open-end Investment Company (i.e., an exchange-traded fund (``ETF'') that is actively managed). Because Managed Fund Shares are actively-managed, they do not seek to replicate the performance of a specified passive index of securities. Instead, they generally use an active investment strategy to seek to meet their investment objectives. In contrast, an open-end Investment Company that issues Index Fund Shares, listed and traded on the Exchange pursuant to Rule 14.11(c), seeks to provide investment results that generally correspond to the price and yield performance of a specific foreign or domestic stock index, fixed income securities index, or combination thereof. All Managed Fund Shares listed pursuant to Rule 14.11(i) are included within the definition of ``security'' or ``securities'' as such terms are used in the Rules of the Exchange and, as such, are subject to the full panoply of Exchange rules and procedures that currently govern the trading of securities on the Exchange.\4\ --------------------------------------------------------------------------- \4\ See Rule 14.11(i)(2). --------------------------------------------------------------------------- In addition, Rule 14.11(i) currently provides for the criteria that Managed Fund Shares must satisfy for initial and continued listing on the Exchange, including, for example, that a minimum number of Managed Fund Shares are required to be outstanding at the time of commencement of trading on the Exchange. However, the current process for listing and trading new series of Managed Fund Shares on the Exchange requires that the Exchange submit a proposed rule change with the Commission. In this regard, Rule 14.11(i)(2)(A) specifies that the Exchange will file separate proposals under Section 19(b) of the Act (hereafter, a ``proposed rule change'') before the listing of Managed Fund Shares, which, in conjunction with the proposal to create generic listing standards for Managed Fund Shares, the Exchange is proposing to delete. Proposed Changes to Rule 14.11(i) The Exchange is proposing to amend Rule 14.11(i) to specify that the Exchange may approve Managed Fund Shares for listing pursuant to SEC Rule 19b-4(e) under the Act, which pertains to derivative securities products (``SEC Rule 19b-4(e)'').\5\ SEC Rule 19b-4(e)(1) provides that the listing and trading of a new derivative securities product by a self-regulatory organization (``SRO'') is not deemed a proposed rule change, pursuant to paragraph (c)(1) of Rule 19b-4,\6\ if the Commission has approved, pursuant to section 19(b) of the Act, the SRO's trading rules, procedures and listing standards for the product class that would include the new derivative securities product and the SRO has a surveillance program for the product class. This is the current method pursuant to which ``passive'' ETFs are listed under Rule 14.11. --------------------------------------------------------------------------- \5\ 17 CFR 240.19b-4(e). As provided under SEC Rule 19b-4(e), the term ``new derivative securities product'' means any type of option, warrant, hybrid securities product or any other security, other than a single equity option or a security futures product, whose value is based, in whole or in part, upon the performance of, or interest in, an underlying instrument. \6\ 17 CFR 240.19b-4(c)(1). As provided under SEC Rule 19b- 4(c)(1), a stated policy, practice, or interpretation of the SRO shall be deemed to be a proposed rule change unless it is reasonably and fairly implied by an existing rule of the SRO. --------------------------------------------------------------------------- The Exchange would also specify within Rule 14.11(i)(4)(C) that components of Managed Fund Shares listed pursuant to SEC Rule 19b-4(e) must satisfy the requirements of Rule 14.11(i) on an initial and continued basis, which includes certain specific criteria that the Exchange is proposing to include within Rule 14.11(i)(4)(C), as described in greater detail below. As proposed, the Exchange would continue to file separate proposed rule changes before the listing and trading of Managed Fund Shares with components that do not satisfy the additional criteria described below or components other than those specified below. For example, if the components of a Managed Fund Share exceeded one of the applicable thresholds, the Exchange would file a separate proposed rule change before listing and trading such Managed Fund Share. Similarly, if the components of a Managed Fund Share included a security or asset that is not specified below, the Exchange would file a separate proposed rule change. The Exchange would also amend the definition of the term ``Disclosed Portfolio'' under Rule 14.11(i)(3)(B) in order to require that the Web site for each series of Managed Fund Shares listed on the Exchange disclose the following information regarding the Disclosed Portfolio, to the extent applicable: ticker symbol, CUSIP or other identifier, a description of the holding, identity of the asset upon which the derivative is based, the strike price for any options, the quantity of each security or other asset held as measured by select metrics, maturity date, coupon rate, effective date, market value and percentage weight of the holding in the portfolio.\7\ --------------------------------------------------------------------------- \7\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included disclosure requirements with respect to each portfolio holding, as applicable to the type of holding. See, e.g., Securities Exchange Act Release No. 72666 (July 3, 2014), 79 FR 44224 (July 30, 2014) (SR-NYSEArca-2013-122) (the ``PIMCO Total Return Use of Derivatives Approval''). --------------------------------------------------------------------------- The Exchange would also add to Rule 14.11(i)(4)(A) by specifying that all Managed Fund Shares must have a stated investment objective, which must be adhered to under normal market conditions.\8\ --------------------------------------------------------------------------- \8\ The Exchange would also add a new defined term under Rule 14.11(i)(3)(E) to specify that 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 force majeure type events such as systems failure, natural or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption, or any similar intervening circumstance. --------------------------------------------------------------------------- [[Page 73843]] Finally, the Exchange would also amend the continued listing requirement in Rule 14.11(i)(4)(B) by changing the requirement that an Intraday Indicative Value for Managed Fund Shares be widely disseminated by one or more major market data vendors at least every 15 seconds during the time when the Managed Fund Shares trade on the Exchange to a requirement that an Intraday Indicative Value be widely disseminated by one or more major market data vendors at least every 15 seconds during Regular Trading Hours, as defined in Exchange Rule 1.5(w). Proposed Managed Fund Share Portfolio Standards The Exchange is proposing standards that would pertain to Managed Fund Shares to qualify for listing and trading pursuant to SEC Rule 19b-4(e). These standards would be grouped according to security or asset type. The Exchange notes that the standards proposed for a Managed Fund Share portfolio that holds equity securities, Derivative Securities Products, and Linked Securities are based in large part on the existing equity security standards applicable to Index Fund Shares in Exchange Rule 14.11(c)(3). The standards proposed for a Managed Fund Share portfolio that holds fixed income securities are based in large part on the existing fixed income security standards applicable to Index Fund Shares in Rule 14.11(c)(4). Many of the standards proposed for other types of holdings in a Managed Fund Share portfolio are based on previous proposed rule changes for specific series of Managed Fund Shares.\9\ --------------------------------------------------------------------------- \9\ Securities Exchange Act Release Nos. 74193 (February 3, 2015), 80 FR 7066 (February 9, 2015) (SR-BATS-2014-054) (the ``iShares Short Maturity Municipal Bond Approval''); 74297 (February 18, 2015), 80 FR 9788 (February 24, 2015) (SR-BATS-2014-056) (the ``iShares U.S. Fixed Income Balanced Risk Approval''); 66321 (February 3, 2012), 77 FR 6850 (February 9, 2012) (SR-NYSEArca-2011- 95) (the ``PIMCO Total Return Approval''); the PIMCO Total Return Use of Derivatives Approval; 69244 (March 27, 2013), 78 FR 19766 (April 2, 2013) (SR-NYSEArca-2013-08) (the ``SPDR Blackstone/GSO Senior Loan Approval''); 68870 (February 8, 2013), 78 FR 11245 (February 15, 2013) (SR-NYSEArca-2012-139) (the ``First Trust Preferred Securities and Income Approval''); 69591 (May 16, 2013), 78 FR 30372 (May 22, 2013) (SR-NYSEArca-2013-33) (the ``International Bear Approval''); 61697 (March 12, 2010), 75 FR 13616 (March 22, 2010) (SR-NYSEArca-2010-04) (the ``WisdomTree Real Return Approval''); and 67054 (May 24, 2012), 77 FR 32161 (May 31, 2012) (SR-NYSEArca-2012-25) (the ``WisdomTree Brazil Bond Approval''). Certain standards proposed herein for Managed Fund Shares are also based on previously proposed rule changes for specific index-based series of Index Fund Shares that did not satisfy the standards for those products on their respective listing exchange and for which Commission approval was required prior to listing and trading. See Securities Exchange Act Release Nos. 67985 (October 4, 2012), 77 FR 61804 (October 11, 2012) (SR-NYSEArca-2012- 92); 63881(February 9, 2011), 76 FR 9065 (February 16, 2011) (SR- NYSEArca-2010-120); 63176 (October 25, 2010), 75 FR 66815 (October 29, 2010) (SR-NYSEArca-2010-94); and 69373 (April 15, 2013), 78 FR 23601 (April 19, 2013) (SR-NYSEArca-2012-108) (the ``NYSE Arca U.S. Equity Synthetic Reverse Convertible Index Fund Approval''). --------------------------------------------------------------------------- Proposed Rule 14.11(i)(4)(C)(i) would describe the standards for a Managed Fund Share portfolio that holds equity securities, which are defined to be U.S. Component Stocks,\10\ Non-U.S. Component Stocks,\11\ Derivative Securities Products,\12\ and Linked Securities \13\ listed on a national securities exchange. For Derivative Securities Products and Linked Securities, no more than 25% of the equity weight of the portfolio could include leveraged and/or inverse leveraged Derivative Securities Products or Linked Securities. --------------------------------------------------------------------------- \10\ For the purposes of Rule 14.11(i) and this proposal, the term ``U.S. Component Stocks'' will have the same meaning as defined in Rule 14.11(c)(1)(D). \11\ For the purposes of Rule 14.11(i) and this proposal, the term ``Non-U.S. Component Stocks'' will have the same meaning as defined in Rule 14.11(c)(1)(E). \12\ For the purposes of Rule 14.11(i) and this proposal, the term ``Derivative Securities Products will have the same meaning as defined in Rule 14.11(c)(3)(A)(i)(a). \13\ Linked Securities are the securities eligible for listing on the Exchange under Rule 14.11(d). --------------------------------------------------------------------------- As proposed in Rule 14.11(i)(4)(C)(i)(a), the component stocks of the equity portion of a portfolio that are U.S. Component Stocks shall meet the following criteria initially and on a continuing basis: (1) Component stocks (excluding Derivative Securities Products and Linked Securities) that in the aggregate account for at least 90% of the equity weight of the portfolio (excluding such Derivative Securities Products and Linked Securities) each must have a minimum market value of at least $75 million; \14\ --------------------------------------------------------------------------- \14\ The proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(a), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities. --------------------------------------------------------------------------- (2) Component stocks (excluding Derivative Securities Products and Linked Securities) that in the aggregate account for at least 70% of the equity weight of the portfolio (excluding such Derivative Securities Products and Linked Securities) each must have a minimum monthly trading volume of 250,000 shares, or minimum notional volume traded per month of $25,000,000, averaged over the last six months; \15\ --------------------------------------------------------------------------- \15\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(b), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities. --------------------------------------------------------------------------- (3) The most heavily weighted component stock (excluding Derivative Securities Products and Linked Securities) must not exceed 30% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted component stocks (excluding Derivative Securities Products and Linked Securities) must not exceed 65% of the equity weight of the portfolio;\16\ --------------------------------------------------------------------------- \16\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(c), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities. --------------------------------------------------------------------------- (4) Where the equity portion of the portfolio does not include Non- U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 13 component stocks; provided, however, that there would be no minimum number of component stocks if (a) one or more series of Derivative Securities Products or Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (b) one or more series of Derivative Securities Products or Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; \17\ --------------------------------------------------------------------------- \17\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(d), except for the omission of the reference to ``index,'' which is not applicable, the addition of the reference to Linked Securities, the reference to the equity portion of the portfolio not including Non-U.S. Component Stocks, and the reference to the 100% limitation applying to the ``equity weight'' of the portfolio--this last difference is included because the proposed standards in Rule 14.11(i)(4)(C) permit the inclusion of non-equity securities, whereas Rule 14.11(c)(3) applies only to equity securities. --------------------------------------------------------------------------- (5) Except as provided in proposed Rule 14.11(i)(4)(C)(i)(a), equity securities in the portfolio must be U.S. Component Stocks listed on a national securities exchange and must be NMS Stocks as defined in Rule 600 of Regulation NMS; \18\ and --------------------------------------------------------------------------- \18\ 17 CFR 240.600. This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(i)(e), except for the addition of ``equity'' to make clear that the standard applies to ``equity securities'' and the omission of the reference to ``index,'' which is not applicable. --------------------------------------------------------------------------- (6) American Depositary Receipts (``ADRs'') may be sponsored or unsponsored. However no more than 10% of the equity weight of the portfolio shall consist of unsponsored ADRs. [[Page 73844]] As proposed in Rule 14.11(i)(4)(C)(i)(b), the component stocks of the equity portion of a portfolio that are Non-U.S. Component Stocks shall meet the following criteria initially and on a continuing basis: (1) Non-U.S. Component Stocks each shall have a minimum market value of at least $100 million; \19\ --------------------------------------------------------------------------- \19\ The proposed text is identical to the corresponding representation from the Non-U.S. Components Release, as defined in footnote 24, below. The proposed text is also identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(a), except for the omission of the reference to ``index,'' which is not applicable, and that each Non-U.S. Component Stock must have a minimum market value of at least $100 million instead of the 70% required under Rule 14.11(c)(3)(A)(ii)(a). --------------------------------------------------------------------------- (2) Non-U.S. Component Stocks each shall have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; \20\ --------------------------------------------------------------------------- \20\ The proposed text is identical to the corresponding representation from the Non-U.S. Components Release, as defined in footnote 24, below. This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(b), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities. --------------------------------------------------------------------------- (3) The most heavily weighted Non-U.S. Component Stock shall not exceed 25% of the equity weight of the portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks shall not exceed 60% of the equity weight of the portfolio; \21\ --------------------------------------------------------------------------- \21\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(c), except for the omission of the reference to ``index,'' which is not applicable, and the addition of the reference to Linked Securities. --------------------------------------------------------------------------- (4) Where the equity portion of the portfolio includes Non-U.S. Component Stocks, the equity portion of the portfolio shall include a minimum of 20 component stocks; provided, however, that there shall be no minimum number of component stocks if (a) one or more series of Derivative Securities Products or Linked Securities constitute, at least in part, components underlying a series of Managed Fund Shares, or (b) one or more series of Derivative Securities Products or Linked Securities account for 100% of the equity weight of the portfolio of a series of Managed Fund Shares; \22\ and --------------------------------------------------------------------------- \22\ This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(d), except for the omission of the reference to ``index,'' which is not applicable, the addition of the reference to Linked Securities, the reference to the equity portion of the portfolio including Non-U.S. Component Stocks, and the reference to the 100% limitation applying to the ``equity weight'' of the portfolio--this last difference is included because the proposed standards in Rule 14.11(i)(4)(C) permit the inclusion of non-equity securities, whereas Rule 14.11(c)(3) applies only to equity securities. --------------------------------------------------------------------------- (5) Each Non-U.S. Component Stock shall be listed and traded on an exchange that has last-sale reporting.\23\ --------------------------------------------------------------------------- \23\ 17 CFR 240.600. This proposed text is identical to the corresponding text of Rule 14.11(c)(3)(A)(ii)(e), except for the addition of ``equity'' to make clear that the standard applies to ``equity securities'' and the omission of the reference to ``index,'' which is not applicable. --------------------------------------------------------------------------- The Exchange notes that, as approved by the Commission for certain Managed Fund Shares \24\ and also not required under corresponding Rule 14.11(c)(3)(A)(ii) related to Index Fund Shares,\25\ it is not proposing to require that any of the equity portion of the equity portfolio composed of Non-U.S. Component Stocks be listed on markets that are either a member of the Intermarket Surveillance Group (``ISG'') or a market with which the Exchange has a comprehensive surveillance sharing agreement (``CSSA'').\26\ However, as further detailed below, the Exchange or the Financial Industry Regulatory Authority, Inc. (``FINRA''), on behalf of the Exchange, will communicate as needed regarding trading in Managed Fund Shares with other markets that are members of the ISG, including all U.S. securities exchanges and futures exchanges on which the components are traded. --------------------------------------------------------------------------- \24\ See Securities Exchange Act Release No. 75023 (May 21, 2015), 80 FR 30519 (May 28, 2015) (SR-NYSEArca-2014-100) (the ``Non- U.S. Components Release''). \25\ Under Rule 14.11(c)(3)(A)(ii), index fund shares with components that include Non-U.S. Component Stocks can hold a portfolio that is entirely composed of Non-U.S. Component Stocks that are listed on markets that are neither members of ISG, nor with which the Exchange has in place a CSSA. \26\ ISG is comprised of an international group of exchanges, market centers, and market regulators that perform front-line market surveillance in their respective jurisdictions. See https://www.isgportal.org/home.html. --------------------------------------------------------------------------- Proposed Rule 14.11(i)(4)(C)(ii) would describe the standards for a Managed Fund Share portfolio that holds fixed income securities, which are debt securities \27\ that are notes, bonds, debentures or evidence of indebtedness that include, but are not limited to, U.S. Department of Treasury securities (``Treasury Securities''), government-sponsored entity securities (``GSE Securities''), municipal securities, trust preferred securities, supranational debt and debt of a foreign country or a subdivision thereof, investment grade and high yield corporate debt, bank loans, mortgage and asset backed securities, and commercial paper. The components of the fixed income portion of a portfolio shall meet the following criteria initially and on a continuing basis: --------------------------------------------------------------------------- \27\ Debt securities include a variety of fixed income obligations, including, but not limited to, corporate debt securities, government securities, municipal securities, convertible securities, and mortgage-backed securities. Debt securities include investment-grade securities, non-investment-grade securities, and unrated securities. Debt securities also include variable and floating rate securities. To the extent a fund holds a convertible security, the equity security into which such security is converted would be required to meet the criteria of proposed Rule 14.11(i)(4)(C)(i). --------------------------------------------------------------------------- (1) Components that in the aggregate account for at least 75% of the fixed income weight of the portfolio shall each have a minimum original principal amount outstanding of $100 million or more; \28\ --------------------------------------------------------------------------- \28\ This proposed text of 14.11(i)(4)(C)(ii)(a)(1) is based on the corresponding text of 14.11(c)(4)(B)(i)(b). --------------------------------------------------------------------------- (2) No component fixed-income security (excluding Treasury Securities and GSE Securities) could represent more than 30% of the fixed income weight of the portfolio, and the five most heavily weighted fixed income securities in the portfolio shall not in the aggregate account for more than 65% of the fixed income weight of the portfolio; \29\ --------------------------------------------------------------------------- \29\ This proposed rule text is identical to the corresponding text of Rule 14.11(c)(4)(B)(i)(d), except for the omission of the reference to ``index,'' which is not applicable, and the exclusion of ``GSE Securities,'' which is consistent with the corresponding text of NYSE Arca, Inc. (``Arca'') Commentary .02(a)(4) to Rule 5.2(j)(3). --------------------------------------------------------------------------- (3) An underlying portfolio (excluding exempted securities) that includes fixed income securities shall include a minimum of 13 non- affiliated issuers, provided, however, that there shall be no minimum number of non-affiliated issuers required for fixed income securities if at least 70% of the weight of the portfolio consists of equity securities as described in Rule 14.11(i)(4)(C)(i); \30\ --------------------------------------------------------------------------- \30\ This proposed text is similar to the corresponding text of Rule 14.11(c)(4)(B)(i)(e), except for the omission of the reference to ``index,'' which is not applicable and the provision that there shall be no minimum number of non-affiliated issuers required for fixed income securities if at least 70% of the weight of the portfolio consists of equity securities as described in proposed Rule 14.11(i)(4)(C)(i). --------------------------------------------------------------------------- (4) Component securities that in aggregate account for at least 90% of the fixed income weight of the portfolio must be either: (a) From issuers that are required to file reports pursuant to Sections 13 and 15(d) of the Act; (b) from issuers that have a worldwide market value of its outstanding common equity held by non-affiliates of $700 million or more; (c) from issuers that have outstanding securities that are notes, bonds, debentures, or evidence of indebtedness having a total remaining principal amount of at least $1 billion; (d) exempted securities as defined in Section 3(a)(12) of the Act; or (e) from issuers that are a government of a [[Page 73845]] foreign country or a political subdivision of a foreign country; and (5) Non-agency, non-GSE and privately-issued mortgage-related and other asset-backed securities components of a portfolio shall not account, in the aggregate, for more than 20% of the weight of the fixed income portion of the portfolio. Proposed Rule 14.11(i)(4)(C)(iii) describes the standards for a Managed Fund Share portfolio that holds cash and cash equivalents.\31\ Specifically, the portfolio may hold short-term instruments with maturities of less than 3 months. There would be no limitation to the percentage of the portfolio invested in such holdings. Short-term instruments would include the following: \32\ (1) 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; (2) certificates of deposit issued against funds deposited in a bank or savings and loan association; (3) bankers' acceptances, which are short-term credit instruments used to finance commercial transactions; (4) repurchase agreements and reverse repurchase agreements; (5) 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; (6) commercial paper, which are short-term unsecured promissory notes; and (7) money market funds. --------------------------------------------------------------------------- \31\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included the ability for such Managed Fund Share holdings to include cash and cash equivalents. See, e.g., iShares U.S. Fixed Income Balanced Risk Approval at 9789, SPDR Blackstone/GSO Senior Loan Approval at 19768-69, and First Trust Preferred Securities and Income Approval at 76150. \32\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly specified short-term instruments with respect to their inclusion in Managed Fund Share holdings. See, e.g., First Trust Preferred Securities and Income Approval at 76150- 51. --------------------------------------------------------------------------- Proposed Rule 14.11(i)(4)(C)(iv) describes the standards for a Managed Fund Share portfolio that holds listed derivatives, including futures, options and swaps on commodities, currencies and financial instruments (e.g., stocks, fixed income, interest rates, and volatility) or a basket or index of any of the foregoing.\33\ There would be no limitation to the percentage of the portfolio invested in such holdings; provided, however, that, in the aggregate, at least 90% of the weight of such holdings invested in futures and exchange-traded options shall, on both an initial and continuing basis, consist of futures and options whose principal market is a member of the ISG or is a market with which the Exchange has a comprehensive surveillance sharing agreement CSSA.\34\ Such limitation will not apply to listed swaps because swaps are listed on swap execution facilities (``SEFs''), the majority of which are not members of ISG. --------------------------------------------------------------------------- \33\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included the ability for such Managed Fund Share holdings to include listed derivatives. See, e.g., Securities Exchange Act Release Nos. 75 FR 13616 (March 22, 2010) (SR-NYSEArca-2010-04) at 13617; and 67054 (May 24, 2012), 77 FR 32161 (May 31, 2012) (SR-NYSEArca-2012-25) at 32163. \34\ See supra note 26. --------------------------------------------------------------------------- Proposed Rule 14.11(i)(4)(C)(v) describes the standards for a Managed Fund Share portfolio that holds over the counter (``OTC'') derivatives, including forwards, options and swaps on commodities, currencies and financial instruments (e.g., stocks, fixed income, interest rates, and volatility) or a basket or index of any of the foregoing.\35\ Proposed Rule 14.11(i)(4)(C)(v) also provides that no more than 20% of the assets in the portfolio may be invested in OTC derivatives. --------------------------------------------------------------------------- \35\ Proposed rule changes for previously-listed series of Managed Fund Shares have similarly included the ability for such Managed Fund Shares to include OTC derivatives, specifically OTC down-and-in put options, which are not NMS Stocks as defined in Rule 600 of Regulation NMS and therefore would not satisfy the requirements of Rule 14.11(c)(3)(A)(i) or the analogous rule on another listing exchange. See, e.g., Securities Exchange Act Release No. 69373 (April 15, 2013), 78 FR 23601 (April 19, 2013) (SR- NYSEArca-2012-108) at 23602. --------------------------------------------------------------------------- Proposed Rule 14.11(i)(4)(C)(vi) provides that, to the extent that listed or OTC derivatives are used to gain exposure to individual equities and/or fixed income securities, or to indexes of equities and/ or fixed income securities, such equities and/or fixed income securities, as applicable, shall meet the criteria set forth in Rule 14.11(i)(4)(C)(i) and 14.11(i)(4)(C)(ii), respectively. The Exchange notes that, for purposes of this proposal, a portfolio's investment in OTC derivatives will be calculated as the amount of any margin required by a counterparty for the purchase of a derivative by a fund. The Exchange believes that the proposed standards would continue to ensure transparency surrounding the listing process for Managed Fund Shares. Additionally, the Exchange believes that the proposed portfolio standards for listing and trading Managed Fund Shares, many of which track existing Exchange rules relating to Index Fund Shares, are reasonably designed to promote a fair and orderly market for such Managed Fund Shares. These proposed standards would also work in conjunction with the existing initial and continued listing criteria related to surveillance procedures and trading guidelines. In support of this proposal, the Exchange represents that: (1) Generically listed Managed Fund Shares will conform to the initial and continued listing criteria under Rule 14.11(i)(4)(A) and (B); (2) the Exchange's surveillance procedures are adequate to continue to properly monitor the trading of the Managed Fund Shares in all trading sessions and to deter and detect violations of Exchange rules. Specifically, the Exchange intends to utilize its existing surveillance procedures applicable to derivative products, which will include Managed Fund Shares, to monitor trading in the Managed Fund Shares; (3) prior to the commencement of trading of a particular series of Managed Fund Shares, the Exchange will inform its Members in an information circular of the special characteristics and risks associated with trading the Managed Fund Shares, including procedures for purchases and redemptions of Managed Fund Shares, suitability requirements under Rule 3.7, the risks involved in trading the Managed Fund Shares during the Pre-Opening and After Hours Trading Sessions when an updated Intraday Indicative Value will not be calculated or publicly disseminated, how information regarding the Intraday Indicative Value and Disclosed Portfolio is disseminated, prospectus delivery requirements, and other trading information. In addition, the information circular will disclose that the Managed Fund Shares are subject to various fees and expenses, as described in the registration statement, and will discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Act. Finally, the Bulletin will disclose that the net asset value for the Managed Fund Shares will be calculated after 4 p.m. ET each trading day; and (4) the issuer of a series of Managed Fund Shares will be required to comply with Rule 10A-3 under the Act for the initial and continued listing of Managed Fund Shares, as provided under Rule 14.10(c)(3). The Exchange notes that the proposed change is not otherwise intended to address any other issues and that the Exchange is not aware of any problems that Members or issuers would have in complying with the proposed change. 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) [[Page 73846]] of the Act \36\ in general and Section 6(b)(5) of the Act \37\ 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. --------------------------------------------------------------------------- \36\ 15 U.S.C. 78f. \37\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest because it would facilitate the listing and trading of additional Managed Fund Shares, which would enhance competition among market participants, to the benefit of investors and the marketplace. Specifically, after more than six years under the current process, whereby an exchange is required to file a proposed rule change with the Commission for the listing and trading of each new series of Managed Fund Shares, the Exchange believes that it is appropriate to codify certain rules within Rule 14.11(i) that would generally eliminate the need for separate proposed rule changes. The Exchange believes that this would facilitate the listing and trading of additional types of Managed Fund Shares that have investment portfolios that are similar to investment portfolios for Index Fund Shares, which have been approved for listing and trading, thereby creating greater efficiencies in the listing process for the Exchange and the Commission. In this regard, the Exchange notes that the standards proposed for Managed Fund Share portfolios that include equity securities, Derivative Securities Products, and Linked Securities are based in large part on the existing equity security standards applicable to Index Fund Shares based on either a U.S. index or portfolio or an international or global index or portfolio found in Rule 14.11(c)(3)(A)(i) \38\ and (ii),\39\ respectively, and that the standards proposed for Managed Fund Share portfolios that include fixed income securities are based in large part on the existing fixed income standards applicable to Index Fund Shares in 14.11(c)(4). Additionally, many of the standards proposed for other types of holdings of series of Managed Fund Shares are based on previous proposed rule changes for specific series of Managed Fund Shares.\40\ --------------------------------------------------------------------------- \38\ See supra notes 14 through 18. \39\ See supra notes 19 through 26. \40\ See supra note 9. --------------------------------------------------------------------------- With respect to the proposed addition to the criteria of Rule 14.11(i)(3)(B) to provide that the Web site for each series of Managed Fund Shares shall disclose certain information regarding the Disclosed Portfolio, to the extent applicable, the Exchange notes that proposed rule changes approved by the Commission for previously-listed series of Managed Fund Shares have similarly included disclosure requirements with respect to each portfolio holding, as applicable to the type of holding.\41\ With respect to the proposed exclusion of Derivative Securities Products and Linked Securities from the requirements of proposed Rule 14.11(i)(4)(C)(i)(a) and (b), the Exchange believes it is appropriate to exclude Linked Securities as well as Derivative Securities Products from certain component stock eligibility criteria for Managed Fund Shares in so far as Derivative Securities Products and Linked Securities are themselves subject to specific quantitative listing and continued listing requirements of a national securities exchange on which such securities are listed. Derivative Securities Products and Linked Securities that are components of a fund's portfolio would have been listed and traded on a national securities exchange pursuant to a proposed rule change approved by the Commission pursuant to Section 19(b)(2) of the Act \42\ or submitted by a national securities exchange pursuant to Section 19(b)(3)(A) of the Act \43\ or would have been listed by a national securities exchange pursuant to the requirements of Rule 19b-4(e) under the Act.\44\ The Exchange also notes that Derivative Securities Products and Linked Securities are derivatively priced, and, therefore, the Exchange believes that it would not be necessary to apply the proposed generic quantitative criteria (e.g., market capitalization, trading volume, or portfolio component weighting) applicable to equity securities other than Derivative Securities Products or Linked Securities (e.g., common stocks) to such products. --------------------------------------------------------------------------- \41\ See supra note 7. \42\ 15 U.S.C. 78s(b)(2). \43\ 15 U.S.C. 78s(b)(3)(A). \44\ 17 CFR 240.19b-4(e). --------------------------------------------------------------------------- With respect to the proposed amendment to the continued listing requirement in Rule 14.11(i)(4)(B)(i) to require dissemination of an Intraday Indicative Value at least every 15 seconds during Regular Trading Hours, such requirement conforms to the requirement applicable to the dissemination of the Intraday Indicative Value for Index Fund Shares in Rule 14.11(c)(3)(C) and 14.11(c)(6)(A). In addition, such dissemination is consistent with representations made in proposed rule changes for issues of Managed Fund Shares previously approved by the Commission.\45\ --------------------------------------------------------------------------- \45\ See supra note 9. --------------------------------------------------------------------------- As proposed, pursuant to Rule 14.11(i)(4)(C)(ii)(c) an underlying portfolio (excluding exempted securities) that includes fixed income securities must include a minimum of 13 non-affiliated issuers, provided, however, that there would be no minimum number of non- affiliated issuers required for fixed income securities if at least 70% of the weight of the portfolio consists of equity securities. The Exchange notes that when evaluated in conjunction with proposed Rule 14.11(i)(4)(C)(ii)(b), the proposed rule is consistent with current Rules 14.11(c)(4)(B)(i)(d) and (e) in that it provides for a maximum weighting of a fixed income security in the fixed income portion of the portfolio of a fund that is comparable to the existing rules applicable to Index Fund Shares based on fixed income indexes. With respect to the proposed amendment to Rule 14.11(i)(4)(C)(iii) relating to cash and cash equivalents, while there is no limitation on the amount of cash and cash equivalents can make up of the portfolio, such instruments are short-term, highly liquid, and of high credit quality, making them less susceptible than other asset classes both to price manipulation and volatility. Further, the requirement is consistent with representations made in proposed rule changes for issues of Managed Fund Shares previously approved by the Commission.\46\ --------------------------------------------------------------------------- \46\ See supra note 31. --------------------------------------------------------------------------- With respect to proposed Rule 14.11(i)(4)(C)(iv) relating to listed derivatives, the Exchange believes that it is appropriate that there be no limit to the percentage of a portfolio invested in such holdings, provided that, in the aggregate, at least 90% of the weight of such holdings invested in futures and exchange-traded options would consist of futures and options whose principal market is a member of ISG or is a market with which the Exchange has a CSSA. Such a requirement would facilitate information sharing among market participants trading shares of a series of Managed Fund Shares as well as futures and options that such series may hold. Such limitation would not apply to listed swaps because swaps are listed on SEFs, the majority of which are not members of ISG. Thus, if the limitation applied to swaps, there would effectively be a cap of 10% of the [[Page 73847]] portfolio invested in listed swaps. In addition, listed swaps would be centrally cleared, reducing counterparty risk and thereby furthering investor protection.\47\ --------------------------------------------------------------------------- \47\ The Commission has noted that ``[c]entral clearing mitigates counterparty risk among dealers and other institutions by shifting that risk from individual counterparties to [central counterparties (``CCPs'')], thereby protecting CCPs from each other's potential failures.'' See Securities Exchange Act Release No. 67286 (June 28, 2012) (File No. S7-44-10) (Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies). --------------------------------------------------------------------------- With respect to proposed Rule 14.11(i)(4)(C)(v) relating to OTC derivatives, the Exchange believes that the limitation to 20% of a fund's assets would assure that, to the extent that a fund holds derivatives, the preponderance of fund investments would not be in derivatives that are not listed and centrally cleared. The Exchange believes that such a limitation is sufficient to mitigate the risks associated with price manipulation because a 20% cap on OTC derivatives will ensure that any series of Managed Fund Shares will be sufficiently broad-based in scope to minimize potential manipulation associated with OTC derivatives because the remaining 80% of the portfolio will consist of instruments subject to numerous restrictions designed to prevent manipulation, including equity securities (which, as proposed, would be subject to market cap, trading volume, and diversity requirements, among others), fixed income securities (which, as proposed, would be subject to principal amount outstanding, diversity, and issuer requirements, among others), cash and cash equivalents (which, as proposed, would be limited to short-term, highly liquid, and high credit quality instruments), and/or listed derivatives (which, as proposed, 90% of the weight of futures and options will be futures and options whose principal market is a member of ISG). With respect to proposed Rule 14.11(i)(4)(C)(vi) related to a fund's use of listed or OTC derivatives to gain exposure to individual equities and/or fixed income securities, or to indexes of equities and/or indexes of fixed income securities, the Exchange notes that such exposure would be required to meet the numerical and other criteria set forth in proposed Rule 14.11(i)(4)(C)(i) and 14.11(i)(4)(C)(ii), respectively. Quotation and other market information relating to listed futures and options is available from the exchanges listing such instruments as well as from market data vendors. With respect to centrally-cleared swaps \48\ and non-centrally-cleared swaps regulated by the Commodity Futures Trading Commission (the ``CFTC''),\49\ the Dodd-Frank Act mandates that swap information be reported to swap data repositories (``SDRs'').\50\ SDRs provide a central facility for swap data reporting and recordkeeping and are required to comply with data standards set by the CFTC, including real-time public reporting of swap transaction data to a derivatives clearing organization or SEF.\51\ SDRs require real- time reporting of all OTC and centrally cleared derivatives, including public reporting of the swap price and size. The parties responsible for reporting swaps information are CFTC-registered swap dealers (``RSDs''), major swap participants, and SEFs. If swap counterparties do not fall into the above categories, then one of the parties to the swap must report the trade to the SDR. Cleared swaps regulated by the CFTC must be executed on a Designated Contract Market (``DCM'') or SEF. Such cleared swaps have the same reporting requirements as futures, including end-of-day price, volume, and open interest. CFTC swaps reporting requirements require public dissemination of, among other items, product ID (if available); asset class; underlying reference asset, reference issuer, or reference index; termination date; date and time of execution; price, including currency; notional amounts, including currency; whether direct or indirect counterparties include an RSD; whether cleared or un-cleared; and platform ID of where the contract was executed (if applicable). --------------------------------------------------------------------------- \48\ There are currently five categories of swaps eligible for central clearing: interest rate swaps; credit default swaps; foreign exchange swaps; equity swaps; and commodity swaps. The following entities provide central clearing for OTC derivatives: ICE Clear Credit (U.S.); ICE Clear (E.U.); CME Group; LCH.Clearnet; and Eurex. \49\ Pursuant to the Dodd-Frank Act, OTC and centrally-cleared swaps are regulated by the CFTC with the exception of security-based swaps, which are regulated by the Commission. \50\ The following entities are provisionally registered with the CFTC as SDRs: BSDR LLC. Chicago Mercantile Exchange, Inc., DTCC Data Repository, and ICE Trade Vault. \51\ Approximately 21 entities are currently temporarily registered with the CFTC as SEFs. --------------------------------------------------------------------------- With respect to security-based swaps regulated by the Commission, the Commission has adopted Regulation SBSR under the Act implementing requirements for regulatory reporting and public dissemination of security-based swap transactions set forth in Title VII of the Dodd- Frank Act. Regulation SBSR provides for the reporting of security-based swap information to registered security-based swap data repositories (``Registered SDRs'') or the Commission, and the public dissemination of security-based swap transaction, volume, and pricing information by Registered SDRs.\52\ --------------------------------------------------------------------------- \52\ See Securities Exchange Act Release No. 74244 (February 11, 2015), 80 FR 14564 (March 19, 2015) (Regulation SBSR--Reporting and Dissemination of Security-Based Swap Information). --------------------------------------------------------------------------- Price information relating to forwards and OTC options will be available from major market data vendors. The Exchange notes that a fund's investments in derivative instruments would be subject to limits on leverage imposed by the 1940 Act. Section 18(f) of the 1940 Act and related Commission guidance limit the amount of leverage an investment company can obtain. A fund's investments would be consistent with its investment objective and would not be used to enhance leverage. To limit the potential risk associated with a fund's use of derivatives, a fund will segregate or ``earmark'' assets determined to be liquid by a fund in accordance with the 1940 Act (or, as permitted by applicable regulation, enter into certain offsetting positions) to cover its obligations under derivative instruments. A fund's investments will not be used to seek performance that is the multiple or inverse multiple (i.e., 2xs or 3xs) of a fund's broad-based securities market index (as defined in Form N-1A).\53\ --------------------------------------------------------------------------- \53\ See, e.g., Securities Exchange Act Release No. 7482 (April 29, 2015), 86 FR 25723 (May 5, 2015) (SR-NYSEArca-2014-89) (order approving listing and trading of shares of eight PIMCO exchange- traded funds). --------------------------------------------------------------------------- The proposed rule change is also designed to protect investors and the public interest because Managed Fund Shares listed and traded pursuant to Rule 14.11(i), including pursuant to the proposed new portfolio standards, would continue to be subject to the full panoply of Exchange rules and procedures that currently govern the trading of equity securities on the Exchange, as further described in the Approval Order. The proposed rule change is also designed to protect investors and the public interest as well as to promote just and equitable principles of trade in that any Non-U.S. Component Stocks will each meet the following criteria initially and on a continuing basis: (1) Have a minimum market value of at least $100 million; (2) have a minimum global monthly trading volume of 250,000 shares, or minimum global notional volume traded per month of $25,000,000, averaged over the last six months; (3) most heavily weighted Non-U.S. Component Stock shall not exceed 25% of the equity weight of the [[Page 73848]] portfolio, and, to the extent applicable, the five most heavily weighted Non-U.S. Component Stocks shall not exceed 60% of the equity weight of the portfolio; and (4) each Non-U.S. Component Stock shall be listed and traded on an exchange that has last-sale reporting. The Exchange believes that such quantitative criteria are sufficient to mitigate any concerns that may arise on the basis of a series of Managed Fund Shares potentially holding 100% of its assets in Non-U.S. Component Stocks that are neither listed on members of ISG nor exchanges with which the Exchange has in place a CSSA because, as stated above, such criteria are either the same or more stringent than the portfolio requirements for Index Fund Shares that hold Non-U.S. Component Stocks and there are no such requirements related to such securities being listed on an exchange that is a member of ISG or with which the Exchange has in place a CSSA. Further, the Exchange has not encountered and is not aware of any instances of manipulation or other negative impact in any series of Index Fund Shares that has occurred by virtue of the Index Fund Shares holding such Non-U.S. Component Stocks. As such, the Exchange believes that there should be no difference in the portfolio requirements for Managed Fund Shares and Index Fund Shares as it relates to holding Non-U.S. Component Stocks that are not listed on an exchange that is a member of ISG or with which the Exchange has in place a CSSA. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices because the Managed Fund Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in Rule 14.11(i). The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Managed Fund Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The Exchange or FINRA, on behalf of the Exchange, will communicate as needed regarding trading in Managed Fund Shares with other markets that are members of the ISG, including all U.S. securities exchanges and futures exchanges on which the components are traded. In addition, the Exchange or FINRA on behalf of the Exchange may obtain information regarding trading in Managed Fund Shares from other markets that are members of the ISG, including all U.S. securities exchanges and futures exchanges on which the components are traded, or with which the Exchange has in place a CSSA. The Exchange also believes that the proposed rule change would fulfill the intended objective of Rule 19b-4(e) under the Act by allowing Managed Fund Shares that satisfy the proposed listing standards to be listed and traded without separate Commission approval. However, as proposed, the Exchange would continue to file separate proposed rule changes before the listing and trading of Managed Fund Shares that do not satisfy the additional criteria described above. 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. Instead, the Exchange believes that the proposed rule change would facilitate the listing and trading of additional types of Managed Fund Shares and result in a significantly more efficient process surrounding the listing and trading of Managed Fund Shares, which will enhance competition among market participants, to the benefit of investors and the marketplace. The Exchange believes that this would reduce the time frame for bringing Managed Fund Shares to market, thereby reducing the burdens on issuers and other market participants and promoting competition. In turn, the Exchange believes that the proposed change would make the process for listing Managed Fund Shares more competitive by applying uniform listing standards with respect to Managed Fund Shares. 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 self-regulatory organization 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 CommentsUse 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-BATS-2015-100 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-BATS-2015-100. 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 Web site (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 Web site 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 such filing will also be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BATS-2015-100 and should be submitted on or before December 16, 2015. [[Page 73849]] For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\54\ --------------------------------------------------------------------------- \54\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2015-29926 Filed 11-24-15; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 80, No. 227 / Wednesday, November 25, 2015 / Notices 73841
expiration day. Also, by closely aligning • Send an email to rule-comments@ SECURITIES AND EXCHANGE
the trading hours for options and futures sec.gov. Please include File Number SR– COMMISSION
products which trade on the MSCI CBOE–2015–104 on the subject line.
[Release No. 34–76478; File No. SR–BATS–
EAFE Index, the Exchange would 2015–100]
provide investors and market makers Paper Comments
with greater opportunities to hedge • Send paper comments in triplicate Self-Regulatory Organizations; BATS
across markets. to Secretary, Securities and Exchange Exchange, Inc.; Notice of Filing of
B. Self-Regulatory Organization’s Commission, 100 F Street NE., Proposed Rule Change To Amend
Statement on Burden on Competition Washington, DC 20549–1090. BATS Rule 14.11(i) To Adopt Generic
Listing Standards for Managed Fund
This proposed rule change does not All submissions should refer to File Shares
impose any burden on competition that Number SR–CBOE–2015–104. This file
is not necessary or appropriate in number should be included on the November 19, 2015.
furtherance of the purposes of the Act. subject line if email is used. To help the Pursuant to Section 19(b)(1) of the
Specifically, CBOE believes that the Securities Exchange Act of 1934 (the
Commission process and review your
filing would enable cross-market ‘‘Act’’),1 and Rule 19b–4 thereunder,2
comments more efficiently, please use
competition and facilitate hedging notice is hereby given that on November
only one method. The Commission will 18, 2015, BATS Exchange, Inc. (the
opportunities by closely aligning the post all comments on the Commission’s
trading hours in expiring EAFE options ‘‘Exchange’’ or ‘‘BATS’’) filed with the
Internet Web site (http://www.sec.gov/ Securities and Exchange Commission
and futures. As a result, the Exchange rules/sro.shtml). Copies of the
does not believe that the filing would (‘‘Commission’’) the proposed rule
submission, all subsequent change as described in Items I and II
impose any burden on competition.
amendments, all written statements below, which Items have been prepared
C. Self-Regulatory Organization’s with respect to the proposed rule by the Exchange. The Commission is
Statement on Comments on the change that are filed with the publishing this notice to solicit
Proposed Rule Change Received From Commission, and all written comments on the proposed rule change
Members, Participants, or Others communications relating to the from interested persons.
No written comments were solicited proposed rule change between the I. Self-Regulatory Organization’s
or received with respect to the proposed Commission and any person, other than Statement of the Terms of Substance of
rule change. those that may be withheld from the the Proposed Rule Change
public in accordance with the
III. Date of Effectiveness of the provisions of 5 U.S.C. 552, will be The Exchange is proposing a rule
Proposed Rule Change and Timing for change to adopt generic listing
available for Web site viewing and
Commission Action standards for shares listed under BATS
printing in the Commission’s Public
Rule 14.11(i) (‘‘Managed Fund Shares’’).
Within 45 days of the date of Reference Room, 100 F Street NE., The text of the proposed rule change
publication of this notice in the Federal Washington, DC 20549, on official is available at the Exchange’s Web site
Register or within such longer period business days between the hours of at www.batstrading.com, at the
up to 90 days (i) as the Commission may 10:00 a.m. and 3:00 p.m. Copies of such principal office of the Exchange, and at
designate if it finds such longer period filing also will be available for the Commission’s Public Reference
to be appropriate and publishes its inspection and copying at the principal Room.
reasons for so finding or (ii) as to which office of the CBOE. All comments
the Exchange consents, the Commission II. Self-Regulatory Organization’s
received will be posted without change;
will: Statement of the Purpose of, and
the Commission does not edit personal
A. By order approve or disapprove Statutory Basis for, the Proposed Rule
identifying information from Change
such proposed rule change, or submissions. You should submit only
B. institute proceedings to determine information that you wish to make In its filing with the Commission, the
whether the proposed rule change available publicly. All submissions Exchange included statements
should be disapproved. should refer to File Number SR–CBOE– concerning the purpose of and basis for
The Exchange has requested 2015–104 and should be submitted on the proposed rule change and discussed
accelerated approval of the proposed any comments it received on the
or before December 10, 2015.
rule change. The Commission is proposed rule change. The text of these
considering granting accelerated For the Commission, by the Division of statements may be examined at the
approval of the proposed rule change at Trading and Markets, pursuant to delegated places specified in Item IV below. The
the end of a 15-day comment period. authority.13 Exchange has prepared summaries, set
Brent J. Fields, forth in Sections A, B, and C below, of
IV. Solicitation of Comments the most significant parts of such
Secretary.
Interested persons are invited to [FR Doc. 2015–29929 Filed 11–24–15; 8:45 am] statements.
submit written data, views, and BILLING CODE 8011–01–P A. Self-Regulatory Organization’s
arguments concerning the foregoing, Statement of the Purpose of, and the
including whether the proposed rule Statutory Basis for, the Proposed Rule
change is consistent with the Act. Change
tkelley on DSK3SPTVN1PROD with NOTICES
Comments may be submitted by any of
the following methods: 1. Purpose
Electronic Comments The Exchange proposes to amend
Rule 14.11(i) to adopt generic listing
• Use the Commission’s Internet
comment form (http://www.sec.gov/ 1 15 U.S.C. 78s(b)(1).
rules/sro.shtml); or 13 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4.
VerDate Sep<11>2014 19:15 Nov 24, 2015 Jkt 238001 PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 E:\FR\FM\25NON1.SGM 25NON1](https://thefederalregister.org/doc/80_FR_74068/page/1.svg)
![Federal Register / Vol. 80, No. 227 / Wednesday, November 25, 2015 / Notices 73847
portfolio invested in listed swaps. In respect to centrally-cleared swaps 48 and swap data repositories (‘‘Registered
addition, listed swaps would be non-centrally-cleared swaps regulated SDRs’’) or the Commission, and the
centrally cleared, reducing counterparty by the Commodity Futures Trading public dissemination of security-based
risk and thereby furthering investor Commission (the ‘‘CFTC’’),49 the Dodd- swap transaction, volume, and pricing
protection.47 Frank Act mandates that swap information by Registered SDRs.52
With respect to proposed Rule information be reported to swap data Price information relating to forwards
14.11(i)(4)(C)(v) relating to OTC repositories (‘‘SDRs’’).50 SDRs provide a and OTC options will be available from
derivatives, the Exchange believes that central facility for swap data reporting major market data vendors.
and recordkeeping and are required to The Exchange notes that a fund’s
the limitation to 20% of a fund’s assets
comply with data standards set by the investments in derivative instruments
would assure that, to the extent that a
CFTC, including real-time public would be subject to limits on leverage
fund holds derivatives, the
reporting of swap transaction data to a imposed by the 1940 Act. Section 18(f)
preponderance of fund investments of the 1940 Act and related Commission
derivatives clearing organization or
would not be in derivatives that are not SEF.51 SDRs require real-time reporting guidance limit the amount of leverage
listed and centrally cleared. The of all OTC and centrally cleared an investment company can obtain. A
Exchange believes that such a limitation derivatives, including public reporting fund’s investments would be consistent
is sufficient to mitigate the risks of the swap price and size. The parties with its investment objective and would
associated with price manipulation responsible for reporting swaps not be used to enhance leverage. To
because a 20% cap on OTC derivatives information are CFTC-registered swap limit the potential risk associated with
will ensure that any series of Managed dealers (‘‘RSDs’’), major swap a fund’s use of derivatives, a fund will
Fund Shares will be sufficiently broad- participants, and SEFs. If swap segregate or ‘‘earmark’’ assets
based in scope to minimize potential counterparties do not fall into the above determined to be liquid by a fund in
manipulation associated with OTC categories, then one of the parties to the accordance with the 1940 Act (or, as
derivatives because the remaining 80% swap must report the trade to the SDR. permitted by applicable regulation,
of the portfolio will consist of Cleared swaps regulated by the CFTC enter into certain offsetting positions) to
instruments subject to numerous must be executed on a Designated cover its obligations under derivative
restrictions designed to prevent Contract Market (‘‘DCM’’) or SEF. Such instruments. A fund’s investments will
manipulation, including equity cleared swaps have the same reporting not be used to seek performance that is
securities (which, as proposed, would requirements as futures, including end- the multiple or inverse multiple (i.e.,
be subject to market cap, trading of-day price, volume, and open interest. 2xs or 3xs) of a fund’s broad-based
volume, and diversity requirements, CFTC swaps reporting requirements securities market index (as defined in
among others), fixed income securities require public dissemination of, among Form N–1A).53
(which, as proposed, would be subject other items, product ID (if available); The proposed rule change is also
to principal amount outstanding, asset class; underlying reference asset, designed to protect investors and the
diversity, and issuer requirements, reference issuer, or reference index; public interest because Managed Fund
among others), cash and cash termination date; date and time of Shares listed and traded pursuant to
equivalents (which, as proposed, would execution; price, including currency; Rule 14.11(i), including pursuant to the
be limited to short-term, highly liquid, notional amounts, including currency; proposed new portfolio standards,
and high credit quality instruments), whether direct or indirect would continue to be subject to the full
and/or listed derivatives (which, as counterparties include an RSD; whether panoply of Exchange rules and
proposed, 90% of the weight of futures cleared or un-cleared; and platform ID procedures that currently govern the
and options will be futures and options of where the contract was executed (if trading of equity securities on the
whose principal market is a member of applicable). Exchange, as further described in the
ISG). With respect to proposed Rule With respect to security-based swaps Approval Order.
14.11(i)(4)(C)(vi) related to a fund’s use regulated by the Commission, the The proposed rule change is also
of listed or OTC derivatives to gain Commission has adopted Regulation designed to protect investors and the
exposure to individual equities and/or SBSR under the Act implementing public interest as well as to promote just
fixed income securities, or to indexes of requirements for regulatory reporting and equitable principles of trade in that
equities and/or indexes of fixed income and public dissemination of security- any Non-U.S. Component Stocks will
securities, the Exchange notes that such based swap transactions set forth in each meet the following criteria initially
exposure would be required to meet the Title VII of the Dodd-Frank Act. and on a continuing basis: (1) Have a
numerical and other criteria set forth in Regulation SBSR provides for the minimum market value of at least $100
proposed Rule 14.11(i)(4)(C)(i) and reporting of security-based swap million; (2) have a minimum global
14.11(i)(4)(C)(ii), respectively. information to registered security-based monthly trading volume of 250,000
Quotation and other market 48 There are currently five categories of swaps
shares, or minimum global notional
information relating to listed futures eligible for central clearing: interest rate swaps;
volume traded per month of
and options is available from the credit default swaps; foreign exchange swaps; $25,000,000, averaged over the last six
exchanges listing such instruments as equity swaps; and commodity swaps. The following months; (3) most heavily weighted Non-
entities provide central clearing for OTC U.S. Component Stock shall not exceed
well as from market data vendors. With derivatives: ICE Clear Credit (U.S.); ICE Clear (E.U.);
CME Group; LCH.Clearnet; and Eurex. 25% of the equity weight of the
47 The Commission has noted that ‘‘[c]entral 49 Pursuant to the Dodd-Frank Act, OTC and
clearing mitigates counterparty risk among dealers centrally-cleared swaps are regulated by the CFTC 52 See Securities Exchange Act Release No. 74244
tkelley on DSK3SPTVN1PROD with NOTICES
and other institutions by shifting that risk from with the exception of security-based swaps, which (February 11, 2015), 80 FR 14564 (March 19, 2015)
individual counterparties to [central counterparties are regulated by the Commission. (Regulation SBSR—Reporting and Dissemination of
(‘‘CCPs’’)], thereby protecting CCPs from each 50 The following entities are provisionally Security-Based Swap Information).
other’s potential failures.’’ See Securities Exchange registered with the CFTC as SDRs: BSDR LLC. 53 See, e.g., Securities Exchange Act Release No.
Act Release No. 67286 (June 28, 2012) (File No. S7– Chicago Mercantile Exchange, Inc., DTCC Data 7482 (April 29, 2015), 86 FR 25723 (May 5, 2015)
44–10) (Process for Submissions for Review of Repository, and ICE Trade Vault. (SR–NYSEArca–2014–89) (order approving listing
Security-Based Swaps for Mandatory Clearing and 51 Approximately 21 entities are currently and trading of shares of eight PIMCO exchange-
Notice Filing Requirements for Clearing Agencies). temporarily registered with the CFTC as SEFs. traded funds).
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![Federal Register / Vol. 80, No. 227 / Wednesday, November 25, 2015 / Notices 73849
For the Commission, by the Division of the Commission is granting the historically have received information
Trading and Markets, pursuant to delegated proposed exemption pursuant to about their transactions in shares of
authority.54 Exchange Act Section 36(a) 6 and Rule money market funds, including
Brent J. Fields, 10b–10(f),7 and providing certain institutional prime money market funds,
Secretary. clarifications to address comments on a monthly basis.
[FR Doc. 2015–29926 Filed 11–24–15; 8:45 am] received. Given that share prices of institutional
BILLING CODE 8011–01–P
II. Proposal for Exemptions Pursuant to prime money market funds likely will
Notice fluctuate under the Commission’s
amendments to Investment Company
SECURITIES AND EXCHANGE Exchange Act Rule 10b-10(a) Act Rule 2a–7,11 absent an exemption,
COMMISSION generally requires broker-dealers to broker-dealers would not be able to
provide customers with specified continue to rely on the exception under
[Release No. 34–76480; File No. S7–08–14]
information relating to their securities Exchange Act Rule 10b–10(b) for
Order Granting a Conditional transactions at or before the completion transactions in money market funds
Exemption Under the Securities of the transactions.8 Rule 10b-10(b),
operating in accordance with Rule 2a–
Exchange Act of 1934 From the however, provides an exception from
7(c)(1)(ii).12 Instead, broker-dealers
Confirmation Requirements of this requirement for certain transactions
would be required to provide immediate
Exchange Act Rule 10b–10(a) for in money market funds that attempt to
confirmations for such transactions in
Certain Transactions in Money Market maintain a stable NAV when no sales
accordance with Rule 10b–10(a).
Funds load or redemption fee is charged.9 The
exception permits broker-dealers to To address the potential burdens
November 19, 2015. provide transaction information to created by such a requirement, the
money market fund shareholders on a Commission published the Notice
I. Introduction proposing to exempt broker-dealers
monthly, rather than immediate, basis,
On July 23, 2014, the Securities and subject to the conditions set forth in from the requirements of Exchange Act
Exchange Commission (‘‘Commission’’) paragraphs (2) and (3) of Rule 10b– Rule 10b–10(a) when effecting
published a notice requesting comment 10(b).10 Accordingly, customers transactions in money market funds
on a proposal to grant a conditional operating in accordance with
exemption to broker-dealers, subject to President, The Dreyfus Corporation (Aug. 19, 2014) Investment Company Act Rule 2a–
certain conditions, from the immediate (‘‘Dreyfus Letter’’), http://www.sec.gov/comments/ 7(c)(1)(ii), for or with the account of a
confirmation requirements of Rule 10b– s7-08-14/s70814-2.pdf; and Dorothy Donohue, customer, where: (i) no sales load is
Acting General Counsel, Investment Company
10 of the Securities Exchange Act of Institute (Aug. 15, 2014) (‘‘ICI Letter’’), http://
deducted upon the purchase or
1934 (‘‘Exchange Act’’) for transactions www.sec.gov/comments/s7-08-14/s70814-1.pdf. redemption of shares in the money
effected in shares of institutional prime 6 Section 36(a) of the Exchange Act generally market fund, (ii) the broker-dealer
money market funds.1 Concurrent with authorizes the Commission to conditionally or complies with the provisions of Rule
the issuance of the Notice, the unconditionally exempt any person, security, or 10b–10(b)(2) and Rule 10b–10(b)(3) that
transaction, or any class or classes of persons,
Commission adopted amendments to securities, or transactions, from certain provisions are applicable to money market funds
Rule 2a–7 of the Investment Company of the Exchange Act or certain rules or regulations that attempt to maintain a stable NAV
Act of 1940 (‘‘Investment Company thereunder, by rule, regulation, or order, to the referenced in Rule 10b-10(b)(1),13 and
Act’’) 2 that, among other things, require extent that such exemption is necessary or (iii) the broker-dealer has notified the
appropriate in the public interest, and is consistent
institutional prime money market with the protection of investors. 15 U.S.C. 78mm. customer of its ability to request
funds 3 to sell and redeem fund shares 7 Exchange Act Rule 10b–10(f) provides that the delivery of an immediate confirmation
based on the current market-based value Commission may conditionally or unconditionally consistent with the written notification
of the securities held in their portfolios exempt any broker or dealer from the requirements requirements of Exchange Act Rule 10b–
(i.e., transact at a ‘‘floating’’ net asset of paragraphs (a) and (b) of Rule 10b–10 with regard
to specific transactions or specific classes of
value (‘‘NAV’’)).4 The Commission transactions for which the broker or dealer will of an immediate confirmation. 17 CFR 240.10b–
received two comments in response to provide alternative procedures to effect the 10(b)(3).
the Notice.5 After careful consideration purposes of the rule. 17 CFR 240.10b–10(f). 11 17 CFR 270.2a–7.
8 17 CFR 240.10b–10(a). 12 See generally Money Market Fund Reform;
54 17 CFR 200.30–3(a)(12). 9 17 CFR 240.10b–10(b). Amendments to Form PF, Securities Act Release
1 See Notice of Proposed Exemptive Order 10 With respect to such money market funds, No. 9408, Investment Advisers Act Release No.
Granting Permanent Exemptions Under the Exchange Act Rule 10b–10(b)(2) requires a broker- 3616, Investment Company Act Release No. 30551
Securities Exchange Act of 1934 from the dealer to give or send to a customer within five (June 5, 2013), 78 FR 36834, 36934 (June 19, 2013);
Confirmation Requirements of Exchange Act Rule business days after the end of each monthly period: see also Exchange Act Rule 10b–10(b)(1), 17 CFR
10b–10 for Certain Money Market Funds, Exchange A written statement disclosing, each purchase or 240.10b-10(b)(1) (limiting alternative monthly
Act Release No. 72658 (July 23, 2014), 79 FR 44076 redemption, effected for or with, and each dividend reporting to money market funds that attempt to
(July 29, 2014) (‘‘Notice’’). or distribution credited to or reinvested for, the maintain a stable NAV).
2 17 CFR 270.2a–7. account of such customer during the month; the As adopted, government and retail money market
3 ‘‘Institutional prime money market funds’’ are date of such transaction; the identity, number, and funds are exempt from the Investment Company
money market funds operating in accordance with price of any securities purchased or redeemed by Act Rule 2a–7(c)(1)(ii) floating NAV requirement,
Investment Company Act Rule 2a–7(c)(1)(ii), which such customer in each such transaction; the total and therefore, will continue to maintain a stable
include funds that are often referred to as (i) ‘‘tax number of shares of such securities in such NAV. See Money Market Fund Reform Adopting
exempt’’ or (ii) ‘‘municipal’’ funds that do not customer’s account; any remuneration received or Release, supra note 4, at sections III.C.1 and III.C.2.
qualify as a ‘‘retail money market fund’’ as defined to be received by the broker or dealer in connection Accordingly, for investor transactions in the exempt
in Rule 2a–7(a)(25). therewith; and that any other information required funds, broker-dealers would continue to qualify for
4 See Money Market Fund Reform; Amendments by [Rule 10b–10(a)] will be furnished upon written the exception under Rule 10b–10 and be permitted
tkelley on DSK3SPTVN1PROD with NOTICES
to Form PF, Securities Act Release No. 9616, request: Provided, however, that the written to send monthly transaction reports.
Investment Advisers Act Release No. 3879, statement may be delivered to some other person 13 The proposed conditions under ‘‘(i)’’ and ‘‘(ii)’’
Investment Company Act Release No. 31166 (July designated by the customer for distribution to the are consistent with the confirmation delivery
23, 2014), 79 FR 47736, at section III.B (Aug. 14, customer. 17 CFR 240.10b–10(b)(2). Exchange Act requirements in Exchange Act Rule 10b–10(b) for
2014) (‘‘Money Market Fund Reform Adopting Rule 10b–10(b)(3) requires the customer to be all transactions in investment company securities
Release’’). provided with prior notification in writing that attempt to maintain a stable NAV where no
5 See Letters to Kevin M. O’Neill, Deputy disclosing the intention to send the written sales load or redemption fee is charged. 17 CFR
Secretary, Commission, from J. Charles Cardona, information referred to in Rule 10b–10(b)(1) in lieu 240.10b–10(b).
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Document Created: 2018-03-01 11:14:21
Document Modified: 2018-03-01 11:14:21
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 80 FR 73841 |
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