82 FR 35256 - Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change to Rule 14.11(c), Index Fund Shares, To List and Trade Shares of the Aptus Fortified Value ETF, a Series of ETF Series Solutions

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 82, Issue 144 (July 28, 2017)

[Federal Register Volume 82, Number 144 (Friday, July 28, 2017)]
[Notices]
[Pages 35256-35259]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2017-15904]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81191; File No. SR-BatsBZX-2017-46]


Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change to Rule 14.11(c), Index Fund Shares, 
To List and Trade Shares of the Aptus Fortified Value ETF, a Series of 
ETF Series Solutions

July 24, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 10, 2017, Bats BZX Exchange, Inc. (``Exchange'' or ``BZX'') 
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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange filed a proposal to list and trade shares of the Aptus 
Fortified Value ETF (the ``Fund''), a series of ETF Series Solutions 
(the ``Trust''), under Rule 14.11(c) (``Index Fund Shares'').
    The text of the proposed rule change is available at the Exchange's 
Web site at www.bats.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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade the Shares under Rule 
14.11(c)(3), which governs the listing and trading of Index Fund Shares 
on the Exchange.\3\ The Fund will be an index-based exchange traded 
fund (``ETF''). The Exchange is submitting this proposed rule change 
because the Index, as defined below, does not meet all of the 
``generic'' listing requirements of Rule 14.11(c)(3)(A)(i), applicable 
to the listing of Index Fund Shares based upon an index of ``U.S. 
Component Stocks.'' \4\ Specifically, Rule 14.11(c)(3)(A)(i) sets forth 
the requirements to be met by components of an index or portfolio of 
U.S. Component Stocks. Because the

[[Page 35257]]

Index may purchase put options on a security that tracks the broader 
U.S. equity market, as further described below, which are not included 
in the definition of ``U.S. Component Stocks'' as defined in Rule 
14.11(c)(1)(D), the Index does not satisfy the requirements of Rule 
14.11(c)(3)(A)(i). The Index will otherwise conform to the initial and 
continued listing criteria under Rule 14.11(c). Rule 14.11(i), which 
covers the listing and trading of actively managed ETFs (``Managed Fund 
Shares''), does however provide generic listing standards related to 
funds holding listed derivatives in Rule 14.11(i)(4)(C)(iv), which 
includes the kinds of options that may be held by the Index. The 
Exchange believes that, while the Index wouldn't necessarily meet the 
requirements of Rule 14.11(i)(4)(C)(iv), the listing and trading of the 
Shares would not give rise to the policy concerns on which the 
substance of Rule 14.11(i)(4)(C)(iv) is based, as further described 
below.
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    \3\ The Commission originally approved BZX Rule 14.11(c) in 
Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 
55148 (September 6, 2011) (SR-BATS-2011-018).
    \4\ As defined in Rule 14.11(c)(1)(D), the term ``U.S. Component 
Stock'' shall mean an equity security that is registered under 
Sections 12(b) or 12(g) of the Act, or an American Depositary 
receipt, the underlying equity security of which is registered under 
Sections 12(b) or 12(g) of the Act.
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    The Shares will be offered by the Trust, which was established as a 
Delaware statutory trust on February 9, 2012. The Trust is registered 
with the Commission as an open-end investment company and has filed a 
registration statement on behalf of the Fund on Form N-1A 
(``Registration Statement'') with the Commission.\5\
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    \5\ See Registration Statement on Form N-1A for the Trust, dated 
June 8, 2017 (File Nos. 333-179562 and 811-22668). The descriptions 
of the Fund and the Shares contained herein are based, in part, on 
information in the Registration Statement.
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    The Fund intends to qualify each year as a regulated investment 
company under Subchapter M of the Internal Revenue Code of 1986, as 
amended.
Aptus Fortified Value ETF
    According to the Registration Statement, the Fund will seek to 
track the performance, before fees and expenses, of the Aptus Fortified 
Value Index (the ``Index''). The Index is a rules-based, equal-weighted 
index that is designed to gain exposure to 50 of the most undervalued 
U.S.-listed common stocks and real estate investment trusts 
(``REITs''), while hedging against significant U.S. equity market 
declines when the market is overvalued.
    The Index is composed of two components: An equity component of 50 
common stocks and REITs and, when the Index determines that the U.S. 
equity market is overvalued, a ``tail hedge'' of long put options on a 
security that tracks the broader U.S. equity market.\6\ When the tail 
hedge is not in effect, the Index will be composed 100% of the equity 
component. At the time the tail hedge is implemented, the Index will be 
composed 99.5% of the equity component and 0.50% of the tail hedge, as 
described below.
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    \6\ The Exchange notes that the equity component of the Index 
meets the requirements of Rule 14.11(c)(3)(A)(i).
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    When the tail hedge is implemented, the Index will reallocate 0.50% 
of its weight to buy put options on a large, highly liquid ETF that 
tracks the performance of the large-cap U.S. equity market (the 
``Underlying ETF''). The Underlying ETF will be the ETF that tracks the 
large-cap U.S. equity market and has the highest average daily options 
volume as determined annually by the Index rules. A put option gives 
the purchaser the right to sell shares of the underlying asset at a 
specified price (``strike price'') prior to a specified date 
(``expiration date''). The purchaser pays a cost (premium) to purchase 
the put option. In the event the underlying asset declines in value, 
the value of the put option will generally increase, and in the event 
the underlying asset appreciates in value, the put option may end up 
worthless and the premium may be lost.
    At the time the tail hedge is implemented, the put options on the 
Underlying ETF will have an expiration date of approximately three 
months from the date the tail hedge is implemented, and the strike 
price will be approximately 30% less than the most recent closing price 
of the Underlying ETF.
    On the last business day of each month, any options held by the 
Index are sold. If the tail hedge will not be in effect for the 
following month, the weight of such options, if any, will be 
reallocated pro rata to the securities in the Index's equity component. 
If the tail hedge will continue in effect for the following month, the 
Index is rebalanced (i.e., no equity securities are added or deleted) 
such that the tail hedge (with new options purchased) has a weight of 
0.50% and the equity component securities are adjusted up or down pro 
rata to have a weight of 99.5%.\7\
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    \7\ This calculation is based on the cost to purchase the put 
contracts. While the Index would not necessarily meet the 
requirements of Rule 14.11(i)(4)(C)(iv)(b) applicable to options 
holdings for Managed Fund Shares, which prevents the aggregate gross 
notional value of listed derivatives based on any single underlying 
reference asset from exceeding 30% of the weight of the portfolio 
(including gross notional exposures) and the aggregate gross 
notional value of listed derivatives based on any five or fewer 
underlying reference assets from exceeding 65% of the weight of the 
portfolio (including gross notional exposures), the actual potential 
downside associated with purchased put contracts is limited to the 
cost of the contract. The Exchange believes that this, combined with 
the relatively small percentage of the Index's exposure to options 
on the Underlying ETF and the liquidity in the options market for 
the Underlying ETF mitigates the concerns that Rule 
14.11(i)(4)(C)(iv)(b) is intended to address and would prevent the 
Shares from being susceptible to manipulation.
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    The Exchange represents that, except for the 0.50% options position 
that the Index might hold, the Index will satisfy, on an initial and 
continued listing basis, all of the generic listing standards under 
Rule 14.11(c)(3)(A)(i) and all other applicable requirements for Index 
Fund Shares under Rule 14.11(c), including, but not limited to, 
requirements relating to the dissemination of key information such as 
the Net Asset Value, the Intraday Indicative Value, rules governing the 
trading of equity securities, trading hours, trading halts, 
surveillance, and the information circular, as set forth in Exchange 
rules applicable to Index Fund Shares and the orders approving such 
rules. Moreover, all of the equity securities and options contracts 
held by the Index trade on markets that are a member of Intermarket 
Surveillance Group (``ISG'') or affiliated with a member of ISG or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement.\8\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules shall constitute continued listing requirements for 
listing the Shares on the Exchange. The issuer has represented to the 
Exchange that it will advise the Exchange of any failure by the Fund or 
the Shares to comply with the continued listing requirements, and, 
pursuant to its obligations under Section 19(g)(1) of the Act, the 
Exchange will surveil for compliance with the continued listing 
requirements. If the Fund or the Shares are not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under Exchange Rule 14.12.
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    \8\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange notes that not all 
components of the Disclosed Portfolio for the Fund may trade on 
markets that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \9\ in general and Section 6(b)(5) of the Act \10\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of

[[Page 35258]]

trade, to foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system and, in general, to protect investors and the public interest.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and, in general, to 
protect investors and the public interest in that the Shares will meet 
each of the initial and continued listing criteria in BZX Rule 14.11(c) 
with the exception of the possible 0.50% of assets used to purchase put 
options.\11\ While the Index would not necessarily meet the 
requirements of Rule 14.11(i)(4)(C)(iv)(b) applicable to options 
holdings for Managed Fund Shares, which prevents the aggregate gross 
notional value of listed derivatives based on any single underlying 
reference asset from exceeding 30% of the weight of the portfolio 
(including gross notional exposures) and the aggregate gross notional 
value of listed derivatives based on any five or fewer underlying 
reference assets from exceeding 65% of the weight of the portfolio 
(including gross notional exposures), the actual potential downside 
associated with purchased put contracts is limited to the cost of the 
contract. The Exchange believes that this, combined with the relatively 
small percentage of the Index's exposure to options on the Underlying 
ETF and the liquidity in the options market for the Underlying ETF 
mitigates the concerns that Rule 14.11(i)(4)(C)(iv)(b) is intended to 
address and would prevent the Shares from being susceptible to 
manipulation. The Exchange believes that its surveillance procedures 
are adequate to properly monitor the trading of the Shares on the 
Exchange during all trading sessions and to deter and detect violations 
of Exchange rules and the applicable federal securities laws. All of 
the futures contracts held by the Fund will trade on markets that are a 
member of ISG or affiliated with a member of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
The Exchange may obtain information regarding trading in the Shares and 
the underlying equities and options contracts held by the Fund via the 
ISG from other exchanges who are members or affiliates of the ISG or 
with which the Exchange has entered into a comprehensive surveillance 
sharing agreement.\12\ The Exchange further notes that the Fund will 
meet and be subject to all other requirements of Rule 14.11(c) and 
other applicable continued [sic] Net Asset Value, the Intraday 
Indicative Value, rules governing the trading of equity securities, 
trading hours, trading halts, surveillance, and the information 
circular, as set forth in Exchange rules applicable to Index Fund 
Shares and the orders approving such rules.
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    \11\ As noted above, the Exchange is proposing that the Fund be 
exempt from the requirement of Rule 14.11(i)(4)(C)(iv)(b) that 
prevents the aggregate gross notional value of listed derivatives 
based on any single underlying reference asset from exceeding 30% of 
the weight of the portfolio (including gross notional exposures) and 
the aggregate gross notional value of listed derivatives based on 
any five or fewer underlying reference assets from exceeding 65% of 
the weight of the portfolio (including gross notional exposures).
    \12\ See note 11, supra.
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    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change, rather will facilitate the listing and trading of 
an additional exchange-traded product that will enhance competition 
among both market participants and listing venues, to the benefit of 
investors and the marketplace.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the 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 proposal is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File No. SR-BatsBZX-2017-46 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 No. SR-BatsBZX-2017-46. 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 No. SR-BatsBZX-2017-46 and should be 
submitted on or before August 18, 2017.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15904 Filed 7-27-17; 8:45 am]
 BILLING CODE 8011-01-P