83 FR 24367 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Adopt BZX Rule 14.11(k) To Permit the Listing and Trading of Managed Portfolio Shares and To List and Trade Shares of the ClearBridge Appreciation ETF, ClearBridge Large Cap ETF, ClearBridge Mid Cap Growth ETF, ClearBridge Select ETF, and ClearBridge All Cap Value ETF

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 102 (May 25, 2018)

Page Range		24367-24372
FR Document		2018-11223

Federal Register, Volume 83 Issue 102 (Friday, May 25, 2018)

[Federal Register Volume 83, Number 102 (Friday, May 25, 2018)]
[Notices]
[Pages 24367-24372]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2018-11223]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83293; File No. SR-CboeBZX-2018-010]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To Adopt BZX Rule 14.11(k) To Permit the Listing
and Trading of Managed Portfolio Shares and To List and Trade Shares of
the ClearBridge Appreciation ETF, ClearBridge Large Cap ETF,
ClearBridge Mid Cap Growth ETF, ClearBridge Select ETF, and ClearBridge
All Cap Value ETF

May 21, 2018.
On February 5, 2018, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt BZX Rule 14.11(k) to
permit the listing and trading of Managed Portfolio Shares, and to list
and trade shares (``Shares'') of the ClearBridge Appreciation ETF,
ClearBridge Large Cap ETF, ClearBridge Mid Cap Growth ETF, ClearBridge
Select ETF, and ClearBridge All Cap Value ETF under proposed BZX Rule
14.11(k). The proposed rule change was published for comment in the
Federal Register on February 20, 2018.\3\ On April 3, 2018, pursuant to
Section 19(b)(2) of the Exchange Act,\4\ the Commission designated a
longer period within which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether to disapprove the proposed rule change.\5\ The
Commission has received four comment letters on the proposed rule
change.\6\ This order institutes proceedings under Section 19(b)(2)(B)
of the Exchange Act \7\ to determine whether to approve or disapprove
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 82705 (February 13,
2018), 83 FR 7256 (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 82984, 83 FR 15181
(April 9, 2018). The Commission designated May 21, 2018, as the date
by which the Commission shall approve or disapprove, or institute
proceedings to determine whether to disapprove, the proposed rule
change.
\6\ See letters to Brent J. Fields, Secretary, Commission, from:
(1) Todd J. Broms, Chief Executive Officer, Broms & Company LLC,
dated March 13, 2018 (``Broms Letter''); (2) Simon P. Goulet, Co-
Founder, Blue Tractor Group, LLC, dated March 19, 2018 (``Blue
Tractor Letter I''); (3) Terence W. Norman, Founder, Blue Tractor
Group, LLC, dated March 20, 2018 (``Blue Tractor Letter II''); and
(4) Terence W. Norman, Founder, Blue Tractor Group, LLC, dated May
8, 2018 (``Blue Tractor Letter III''). The comment letters are
available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Exchange's Description of the Proposed Rule Change 8
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\8\ For a complete description of the Exchange's proposal,
including a description of the Precidian ETF Trust II (``Trust''),
see Notice, supra note 3.
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The Exchange proposes to adopt BZX Rule 14.11(k), which would
govern the listing and trading of Managed Portfolio Shares.\9\ The
Exchange also proposes to list and trade Shares of the ClearBridge
Appreciation ETF, ClearBridge Large Cap ETF, ClearBridge Mid Cap Growth
ETF, ClearBridge Select ETF, and ClearBridge All Cap Value ETF under
proposed BZX Rule 14.11(k) (each a ``Fund,'' and collectively the
``Funds'').
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\9\ Proposed BZX Rule 14.11(k)(3)(A) defines the term ``Managed
Portfolio Share'' as a security that (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 consistent with the Investment
Company's investment objectives and policies; (b) is issued in a
specified aggregate minimum number of shares equal to a Creation
Unit (as defined in proposed BZX Rule 14.11(k)(3)(C)), or multiples
thereof, in return for a designated portfolio of securities (and/or
an amount of cash) with a value equal to the next determined net
asset value (``NAV''); and (c) when aggregated in the same specified
aggregate number of shares equal to a Redemption Unit (as defined in
proposed BZX Rule 14.11(k)(3)(D)), or multiples thereof, may be
redeemed at the request of an authorized participant, which
authorized participant will be paid through a confidential account
established for its benefit (``Confidential Account'') a portfolio
of securities and/or cash with a value equal to the next determined
NAV.
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A. Description of the Funds

The portfolio for each Fund will consist primarily of long and/or
short positions in U.S. exchange-listed securities and shares issued by
other U.S. exchange-listed exchange-traded funds (``ETFs'').\10\ All
exchange-listed equity securities in which the Funds will invest will
be listed and traded on U.S. national securities exchanges.
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\10\ The Exchange represents that, for purposes of describing
the holdings of the Funds, ETFs include Portfolio Depository
Receipts (as described in BZX Rule 14.11(b)); Index Fund Shares (as
described in BZX Rule 14.11(c)); and Managed Fund Shares (as
described in BZX Rule 14.11(i)). The ETFs in which a Fund will
invest all will be listed and traded on national securities
exchanges. While the Funds may invest in inverse ETFs, the Funds
will not invest in leveraged (e.g., 2X, -2X, 3X, or -3X) ETFs.
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1. ClearBridge Appreciation ETF
The ClearBridge Appreciation ETF will seek to provide long-term
appreciation of shareholders' capital.

[[Page 24368]]

The Fund will seek to achieve its investment objective by investing
primarily in U.S. exchange-listed equity securities. The Fund will
typically invest in medium and large capitalization companies, but may
also invest in small capitalization companies.
2. ClearBridge Large Cap ETF
The ClearBridge Large Cap ETF will seek long-term capital
appreciation. The Fund will seek to achieve its investment objective by
taking long and possibly short positions in equity securities or groups
of equities that the portfolio managers believe will provide long term
capital appreciation. The Fund will normally invest at least 80% of its
net assets (plus borrowings for investment purposes) in stocks included
in the Russell 1000 Index and ETFs that primarily invest in stocks in
the Russell 1000 Index. The Fund will purchase securities that
ClearBridge Investments, LLC (``Sub-Adviser'') believes are
undervalued, and sell short securities that it believes are overvalued.
3. ClearBridge Mid Cap Growth ETF
The ClearBridge Mid Cap Growth ETF will seek long-term growth of
capital. The Fund will seek to achieve its investment objective by
investing primarily in U.S. exchange-listed, publicly traded equity and
equity-related securities of U.S. companies or other instruments with
similar economic characteristics. The Fund may invest in securities of
issuers of any market capitalization.
4. ClearBridge Select ETF
The ClearBridge Select ETF will seek to provide long-term growth of
capital. The Fund will seek to achieve its investment objective by
investing primarily in U.S. exchange-listed, publicly traded equity and
equity-related securities of U.S. companies or other instruments with
similar economic characteristics. The Fund may invest in securities of
issuers of any market capitalization.
5. ClearBridge All Cap Value ETF
The ClearBridge All Cap Value ETF will seek long-term capital
growth with current income as a secondary consideration. The Fund will
seek to achieve its investment objective by investing primarily in
common stocks and common stock equivalents, such as preferred stocks
and securities convertible into common stocks, of companies the Sub-
Adviser believes are undervalued in the marketplace. The Fund may
invest up to 25% of its net assets in equity securities of foreign
issuers through U.S. exchange-listed depositary receipts.
6. Other Investments
While each Fund, under normal market conditions,\11\ will invest
primarily in U.S. exchange-listed securities, as described above, each
Fund may invest its remaining assets in other securities and financial
instruments, as described below.
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\11\ Proposed BZX Rule 14.11(k)(3)(F) defines the term ``normal
market conditions'' as including, but not limited to, the absence of
trading halts in the applicable financial markets generally;
operational issues (e.g., systems failure) causing dissemination of
inaccurate market information; or force majeure type events such as
natural or manmade disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
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Each Fund may enter into repurchase agreements. It will be the
policy of the Trust to enter into repurchase agreements only with
recognized securities dealers, banks, and the Fixed Income Clearing
Corporation, a securities clearing agency registered with the
Commission.
Each Fund may invest up to 5% of its total assets in warrants,
rights, and options.
Each Fund may invest a portion of its assets in cash or cash
equivalents.\12\
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\12\ For purposes of this filing, cash equivalents include
short-term instruments (instruments with maturities of less than 3
months) of the following types: (i) U.S. Government securities,
including bills, notes, and bonds differing as to maturity and rates
of interest, which are either issued or guaranteed by the U.S.
Treasury or by U.S. Government agencies or instrumentalities; (ii)
certificates of deposit issued against funds deposited in a bank or
savings and loan association; (iii) bankers' acceptances, which are
short-term credit instruments used to finance commercial
transactions; (iv) repurchase agreements and reverse repurchase
agreements; (v) bank time deposits, which are monies kept on deposit
with banks or savings and loan associations for a stated period of
time at a fixed rate of interest; (vi) commercial paper, which are
short-term unsecured promissory notes; and (vii) money market funds.
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Each Fund may invest in the securities of other investment
companies (including money market funds) to the extent allowed by law.
7. Investment Restrictions
Each Fund may invest up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment),\13\
consistent with Commission guidance. Each Fund will monitor its
portfolio liquidity on an ongoing basis to determine whether, in light
of current circumstances, an adequate level of liquidity is being
maintained, and will consider taking appropriate steps in order to
maintain adequate liquidity if, through a change in values, net assets,
or other circumstances, more than 15% of the Fund's net assets are
invested in illiquid assets. Illiquid assets include securities subject
to contractual or other restrictions on resale and other instruments
that lack readily available markets as determined in accordance with
Commission staff guidance.
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\13\ In reaching liquidity decisions, the Adviser may consider
the following factors: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace in which it trades (e.g.,
the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
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Each Fund will seek to qualify for treatment as a Regulated
Investment Company under the Internal Revenue Code.\14\
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\14\ 26 U.S.C. 851.
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The Funds will not invest in securities listed on non-U.S.
exchanges. The Funds also will not invest in futures, forwards, or
swaps.
Each Fund's investments will be consistent with its investment
objective and will not be used to enhance leverage. While a Fund may
invest in inverse ETFs, a Fund will not invest in leveraged (e.g., 2X,
-2X, 3X, or -3X) ETFs.

B. Key Features of Managed Portfolio Shares

According to the Exchange, while funds issuing Managed Portfolio
Shares would be actively-managed, and in that respect would be similar
to Managed Fund Shares,\15\ Managed Portfolio Shares would differ from
Managed Fund Shares in the following respects:
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\15\ Managed Fund Shares are shares of actively-managed funds
listed and traded under BZX Rule 14.11(i).
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First, issues of Managed Fund Shares are required to
disseminate their ``Disclosed Portfolio'' at least once daily.\16\ By
contrast, the portfolio for an issue of Managed Portfolio Shares would
be disclosed only quarterly.
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\16\ BZX Rule 14.11(i)(3)(B) defines the term ``Disclosed
Portfolio'' as the identities and quantities of the securities and
other assets held by the Investment Company that will form the basis
for the Investment Company's calculation of NAV at the end of the
business day. BZX Rule 14.11(i)(4)(B)(ii)(a) requires that, for
Managed Fund Shares, the Disclosed Portfolio be disseminated at
least once daily and be made available to all market participants at
the same time.
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Second, in connection with the creation of shares in
Creation Unit size or the redemption of shares in Redemption Unit size,
the delivery or receipt of any portfolio securities in kind would be
effected through an agent (``AP Representative'') in a Confidential
Account established for the benefit of the creating or redeeming
authorized participant without disclosing the

[[Page 24369]]

identity of the securities to the authorized participant.
Third, for each series of Managed Portfolio Shares, a
Verified Intraday Indicative Value (``VIIV'') would be widely
disseminated by the Reporting Authority (as defined in proposed BZX
Rule 14.11(k)(3)(E)) and/or by one or more major market data vendors
every second during the Exchange's Regular Trading Hours (between 9:30
a.m. and 4:00 p.m. Eastern Time).\17\ The Exchange states that the
dissemination of the VIIV will allow investors to determine the
estimated intraday value of the underlying portfolio of a series of
Managed Portfolio Shares and will provide a close estimate of that
value throughout the trading day.\18\
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\17\ Proposed BZX Rule 14.11(k)(3)(B) defines the VIIV as the
estimated indicative value of a Managed Portfolio Share based on all
of the holdings of a series of Managed Portfolio Shares as of the
close of business on the prior business day, and, for corporate
actions, based on the applicable holdings as of the opening of
business on the current business day, priced and disseminated in one
second intervals during Regular Trading Hours.
\18\ According to the Exchange, the VIIV should not be viewed as
a ``real-time'' update of the NAV, because the VIIV may not be
calculated in the same manner as the NAV, which will be computed
once a day.
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C. Arbitrage of Managed Portfolio Shares

The Exchange asserts that market makers will be able to make
efficient and liquid markets in the Shares priced near the VIIV as long
as the VIIV is disseminated every second and market makers employ
market making techniques such as ``statistical arbitrage,'' including
correlation hedging, beta hedging, and dispersion trading, which the
Exchange represents is currently used throughout the financial services
industry, to make efficient markets in exchange-traded products.\19\
According to the Exchange, if an authorized participant believes that
the Shares are trading at a price that is higher than the value of the
underlying portfolio--for example, if the market price for the Shares
is higher than the VIIV--then the authorized participant may sell the
Shares short and purchase securities that the authorized participant
believes will track the movements of the Shares. When the spread
narrows, the authorized participant would execute offsetting orders or
enter an order with its AP Representative to create Shares. According
to the Exchange, the AP Representative's execution of a Creation Unit
in a Confidential Account, combined with the sale of the Shares, may
create downward pressure on the price of the Shares and/or upward
pressure on the price of the portfolio securities, bringing the market
price of the Shares and the value of a Fund's portfolio securities
closer together.
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\19\ According to the Exchange, statistical arbitrage enables a
trader to construct an accurate proxy for another instrument,
allowing it to hedge the other instrument or buy or sell the
instrument when it is cheap or expensive in relation to the proxy.
The Exchange states that statistical analysis permits traders to
discover correlations, based purely on trading data without regard
to other fundamental drivers. The Exchange also states that these
correlations are a function of differentials, over time, between one
instrument or group of instruments and one or more other
instruments, and that once the nature of these price deviations have
been quantified, a universe of securities is searched in an effort
to, in the case of a hedging strategy, minimize the differential. In
addition, the Exchange states that, once a suitable hedging proxy
has been identified, a trader can minimize portfolio risk by
executing the hedging basket. According to the Exchange, the trader
then can monitor the performance of this hedge throughout the trade
period, making correction where warranted. The Exchange states that,
in the case of correlation hedging, the analysis seeks to find a
proxy that matches the pricing behavior of a Fund, and that in the
case of beta hedging, the analysis seeks to determine the
relationship between the price movement over time of a Fund and that
of another stock.
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Similarly, according to the Exchange, an authorized participant
could buy the Shares and instruct the AP Representative to redeem them
and then sell the underlying portfolio securities from its Confidential
Account when the Shares trade at a discount to the portfolio
securities. According to the Exchange, the authorized participant's
purchase of the Shares in the secondary market, combined with the sale
of the portfolio securities from its Confidential Account, may create
upward pressure on the price of the Shares and/or downward pressure on
the price of portfolio securities, driving the market price of the
Shares and the value of a Fund's portfolio securities closer together.
The Exchange states that, according to Precidian Funds LLC, the
investment adviser to the Trust (``Adviser''), this process is
identical to how many authorized participants currently arbitrage
existing traditional ETFs, except for the use of the Confidential
Account.

D. The Creation and Redemption Procedures

The Exchange states that, generally, the Shares will be purchased
and redeemed on an in-kind basis, so that, except where the purchase or
redemption would include cash under the circumstances described in the
applicable Fund's registration statement, purchasers will be required
to purchase Creation Units by making an in-kind deposit of specified
instruments (``Deposit Instruments''), and shareholders redeeming their
Shares will receive an in-kind transfer of specified instruments
(``Redemption Instruments'') in their Confidential Account through an
AP Representative. On any given business day, the names and quantities
of the instruments that constitute the Deposit Instruments and the
names and quantities of the instruments that constitute the Redemption
Instruments will be identical, and these instruments may be referred
to, in the case of either a purchase or redemption, as the ``Creation
Basket.''
In the case of a redemption, the authorized participant will enter
into an irrevocable redemption order and then immediately instruct the
AP Representative to sell the underlying basket of securities that it
will receive in the redemption. After receipt of a redemption order, a
Fund's custodian (``Custodian'') will typically deliver securities to
the Confidential Account on a pro rata basis with a value approximately
equal to the value of the Shares tendered for redemption at the order
cut-off time established by the Fund. The Custodian will make delivery
of the securities by appropriate entries on its books and records,
transferring ownership of the securities to the authorized
participant's Confidential Account, subject to delivery of the Shares
redeemed. The AP Representative will in turn liquidate the securities
based on instructions from the authorized participant.\20\ The AP
Representative will pay the liquidation proceeds net of expenses, plus
or minus any cash balancing amount, to the authorized participant
through the Depository Trust Company.\21\ The redemption securities
that the Confidential Account receives are expected to mirror the
portfolio holdings of a Fund pro rata.
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\20\ The Exchange represents that an authorized participant will
issue execution instructions to the AP Representative and be
responsible for all associated profit or losses. Like a traditional
ETF, the authorized participant has the ability to sell the basket
securities at any point during normal trading hours.
\21\ According to the Exchange, under applicable provisions of
the Internal Revenue Code, the authorized participant is expected to
be deemed a ``substantial owner'' of the Confidential Account
because it receives distributions from the Confidential Account. As
a result, the Exchange states, all income, gain, or loss realized by
the Confidential Account will be directly attributed to the
authorized participant. The Exchange also states that, in a
redemption, the authorized participant will have a basis in the
distributed securities equal to the fair market value at the time of
the distribution, and any gain or loss realized on the sale of those
Shares will be taxable income to the authorized participant.
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In the case of a creation, the authorized participant will enter
into an

[[Page 24370]]

irrevocable creation order with the Fund and then direct the AP
Representative to purchase the necessary basket of portfolio
securities. The AP Representative will then purchase the necessary
securities in the Confidential Account. Once the necessary basket of
securities has been acquired, the purchased securities held in the
Confidential Account will be contributed in-kind to the Fund.
The Exchange states that, in purchasing the necessary securities
for creation purposes, and, conversely, in selling the portfolio
securities for redemption purposes, the AP Representative will be
required, by the terms of the Confidential Account agreement, to
obfuscate the trades by use of tactics such as breaking the trades into
multiple purchases or sales and transacting in multiple marketplaces.

E. Availability of Information

Each Fund will be required to file with the Commission its complete
portfolio schedules for the second and fourth fiscal quarters on Form
N-CSR under the Investment Company Act of 1940 (``1940 Act''), and to
file its complete portfolio schedules for the first and third fiscal
quarters on Form N-Q under the 1940 Act, within 60 days of the end of
the quarter. Form N-Q requires funds to file the same schedules of
investments that are required in annual and semi-annual reports to
shareholders. The Trust's SAI and each Fund's shareholder reports will
be available free upon request from the Trust. These documents and
forms may be viewed on-screen or downloaded from the Commission's
website at www.sec.gov.
In addition, the VIIV will be widely disseminated by the Reporting
Authority and/or one or more major market data vendors every second
during the Exchange's Regular Trading Hours. According to the Exchange,
the VIIV will include all accrued income and expenses of a Fund, and
any extraordinary expenses booked during the day that would be taken
into account in calculating the Fund's NAV will also be taken into
account in calculating the VIIV.
For purposes of the VIIV, securities held by a Fund will be valued
throughout the day based on the mid-point between the disseminated
current national best bid and offer.\22\ According to the Exchange, by
utilizing mid-point pricing for purposes of VIIV calculation, stale
prices are eliminated and a more accurate representation of the real-
time value of the underlying securities is provided to the market.
Specifically, according to the Exchange, quotations based on the mid-
point of bid/ask spreads more accurately reflect current market
sentiment by providing real time information on where market
participants are willing to buy or sell securities at that point in
time. The Exchange also believes that the use of quotations will dampen
the impact of any momentary spikes in the price of a portfolio
security.
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\22\ If the Adviser determines that the mid-point of the bid/ask
spread is inaccurate, a Fund will use fair value pricing.
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According to the Exchange, each Fund will utilize two separate
pricing feeds to provide two separate sources of pricing information.
Each Fund will also utilize a ``Pricing Verification Agent'' and
establish a computer-based protocol that will permit the Pricing
Verification Agent to continuously compare the multiple intraday
indicative values on a real time basis.\23\ A single VIIV will be
disseminated publicly for each Fund; however, the Pricing Verification
Agent will continuously compare the public VIIV against a non-public
alternative intraday indicative value to which the Pricing Verification
Agent has access. Upon notification to the Exchange by the issuer of a
series of Managed Portfolio Shares, or its agent, that the public VIIV
and non-public alternative intraday indicative value differ by more
than 25 basis points for 60 seconds, the Exchange will halt trading as
soon as practicable in the Shares until the discrepancy is
resolved.\24\ Each Fund's board of directors will review the procedures
used to calculate the VIIV and maintain its accuracy as appropriate,
but not less than annually. The specific methodology for calculating
the VIIV will be disclosed on each Fund's website.
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\23\ The Exchange states that a Fund's Custodian will provide,
on a daily basis, the identities and quantities of portfolio
securities that will form the basis for a Fund's calculation of NAV
at the end of the business day, plus any cash in the portfolio, to
the Pricing Verification Agent for purposes of pricing. According to
the Exchange, the Pricing Verification Agent will utilize at least
two separate calculation engines to calculate intraday indicative
values, based on the mid-point between the disseminated current
national best bid and offer, to provide the real-time value on a per
Share basis of each Fund's holdings every second during Regular
Trading Hours.
\24\ According to the Exchange, a continuous deviation for 60
seconds could indicate an error in the feed or in a calculation
engine used to calculate the intraday indicative values. The
Exchange states that the Trust reserves the right to change these
thresholds to the extent deemed appropriate and approved by a Fund's
board of directors.
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F. Surveillance

The Exchange represents that trading in the Shares will be subject
to the Exchange's surveillance procedures for derivative products. The
Exchange represents that these procedures are adequate to properly
monitor Exchange trading of the Shares in all trading sessions and to
deter and detect violations of Exchange rules and applicable federal
securities laws.\25\
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\25\ The Exchange represents that the Exchange or the Financial
Industry Regulatory Authority (``FINRA''), on behalf of the
Exchange, or both, will communicate as needed regarding trading in
the Shares, underlying stocks, ETFs, and exchange-listed options
with other markets and other entities that are members of the
Intermarket Surveillance Group (``ISG''), and the Exchange or FINRA,
on behalf of the Exchange, or both, may obtain trading information
regarding such securities from such markets and other entities. In
addition, the Exchange may obtain information regarding trading in
the Shares, underlying stocks, ETFs, and exchange-listed options
from markets and other entities that are members of ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement.
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The Exchange represents that the Adviser will make available daily
to FINRA and the Exchange the portfolio holdings of each Fund in order
to facilitate the performance of the surveillances. In addition, the
Exchange states that it has a general policy prohibiting the
distribution of material, non-public information by its employees.

II. Summary of Comment Letters

The Commission has received four comment letters on the proposed
rule change, each of which expresses opposition to the proposed rule
change.\26\ As of the date of this order instituting proceedings, the
Exchange has not submitted a response to the comments.
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\26\ See supra note 6.
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A. Broms Letter.\27\ The commenter opposes the proposed rule change
and raises the following concerns: \28\
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\27\ The Broms Letter is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3254113-162031.pdf.
\28\ The commenter also generally references concerns that it
raised in its comment letter related to a similar, previous proposal
filed by the Exchange to list and trade Managed Portfolio Shares,
which the Exchange withdrew. See Securities Exchange Act Release No.
80911 (June 13, 2017), 82 FR 27925 (June 19, 2017) (SR-BatsBZX-2017-
30) (``Prior Proposal''); and letter to Brent J. Fields, Secretary,
Commission, from Todd J. Broms, Chief Executive Officer, Broms &
Company LLC, dated July 10, 2017, available at https://www.sec.gov/comments/sr-batsbzx-2017-30/batsbzx201730-1842158-155104.pdf.
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Selective disclosure of confidential portfolio information
to AP Representatives for trading on behalf of authorized participants
violates federal securities law and facilitates illegal insider
trading;
The portfolio holdings can be reverse engineered,
resulting in harm to the Funds' shareholders;

[[Page 24371]]

The Funds would serve no useful public purpose without
clear protections against reverse engineering and every other plausible
means by which confidential portfolio holdings information could be
used by other market participants to harm the Funds' shareholders; and
Authorized participants and other market makers cannot
engage in bona fide arbitrage, and the Shares will not trade
efficiently without an effective arbitrage mechanism, with particularly
poor trading performance to be expected during periods of market stress
and volatility.
B. Blue Tractor Letter I.\29\ The commenter opposes the proposed
rule change and expresses concern that the Funds can be reverse
engineered to determine their composition and trading strategies, and
that ``predatory traders'' can use such information in order to front
run the Funds.
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\29\ The Blue Tractor Letter I is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3287448-162066.pdf.
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C. Blue Tractor Letter II.\30\ The commenter opposes the proposed
rule change and raises the following concerns: \31\
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\30\ The Blue Tractor Letter II is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3294085-162071.pdf.
\31\ Although the commenter purports to comment on the Notice,
the comments are more directly related to the Trust's December 4,
2017, exemptive application. See Fifth Amended and Restated
Application for an Order under Section 6(c) of the 1940 Act for
exemptions from various provisions of the 1940 Act and rules
thereunder (File No. 812-14405), dated December 4, 2017. The
commenter also references concerns that it raised in its comment
letters related to the Prior Proposal. See letters to Brent J.
Fields, Secretary, Commission, from Terence W. Norman, Founder, Blue
Tractor Group, LLC, dated August 1, 2017, available at https://www.sec.gov/comments/sr-batsbzx-2017-30/batsbzx201730-2161995-157800.pdf and Terence W. Norman, Founder, Blue Tractor Group, LLC,
dated December 5, 2017, available at https://www.sec.gov/comments/sr-batsbzx-2017-30/batsbzx201730-2755179-161594.pdf.
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Under the proposal, market participants will not be able
to engage in bona fide arbitrage or efficient statistical arbitrage to
keep the price of Shares close to a Fund's NAV; \32\
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\32\ The commenter also notes that market makers will not be
able to construct optimized tracking portfolios using the proposed
fund structure and cites to comment letters that it submitted in
response to a proposal filed by NYSE Arca, Inc. to list and trade
Managed Portfolio Shares, which was withdrawn. See Securities
Exchange Act Release No. 80553 (April 28, 2017), 82 FR 20932 (May 4,
2017) (SR-NYSEArca-2017-36); and letters to Brent J. Fields,
Secretary, Commission, from Simon P. Goulet, Co-Founder, Blue
Tractor Group, LLC, dated November 22, 2017, available at https://www.sec.gov/comments/sr-nyseArca-2017-36/nysearca201736-2735961-161533.pdf and Terence W. Norman, Founder, Blue Tractor Group, LLC,
dated October 31, 2017, available at https://www.sec.gov/comments/sr-nyseArca-2017-36/nysearca201736-2659706-161420.pdf.
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Funds can be reverse engineered to determine the
composition of the portfolio securities, which will make the Funds
susceptible to front-running;
The proposed fund structure will result in asymmetric
disclosure of confidential portfolio information to selected parties;
Details regarding the VIIV generation process, as well as
calculation engine verification procedures, are inadequate for market
participants and market makers;
One second dissemination of VIIVs in a high frequency
trading environment is inadequate for authorized participants and
market makers and not of value to retail investors; and
Requiring AP Representatives to obfuscate trades for
creation and redemption purposes in an effort to keep portfolio
composition confidential will delay execution and increase costs for
authorized participants.
D. Blue Tractor Letter III.\33\ The commenter reiterates that the
Funds will be susceptible to reverse engineering resulting in predatory
front-running, and will not have efficient primary and secondary market
trading. The commenter again requests that the Commission include in
its deliberation the comment letters it submitted on the Prior
Proposal.
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\33\ The Blue Tractor Letter III is available at https://www.sec.gov/comments/sr-cboebzx-2018-010/cboebzx2018010-3604029-162352.pdf.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2018-010 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Exchange Act \34\ to determine whether the proposed
rule change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
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\34\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Exchange Act,\35\ the
Commission is providing notice of the grounds for disapproval under
consideration. The Commission is instituting proceedings to allow for
additional analysis of the proposed rule change's consistency with
Section 6(b)(5) of the Exchange Act, which requires, among other
things, that the rules of a national securities exchange be ``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\
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\35\ Id.
\36\ 15 U.S.C. 78f(b)(5).
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IV. Procedure: Request for Written Comments

The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Exchange
Act, or the rules and regulations thereunder. Although there do not
appear to be any issues relevant to approval or disapproval that would
be facilitated by an oral presentation of views, data, and arguments,
the Commission will consider, pursuant to Rule 19b-4 under the Exchange
Act,\37\ any request for an opportunity to make an oral
presentation.\38\
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\37\ 17 CFR 240.19b-4.
\38\ Section 19(b)(2) of the Exchange Act, as amended by the
Securities Acts Amendments of 1975, Public Law 94-29 (June 4, 1975),
grants the Commission flexibility to determine what type of
proceeding--either oral or notice and opportunity for written
comments--is appropriate for consideration of a particular proposal
by a self-regulatory organization. See Securities Acts Amendments of
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by June 15, 2018. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 29,
2018.
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice,\39\ the issues raised by the commenters, and any other
issues raised by the proposed rule change under the Exchange Act. In
particular, the Commission seeks commenters' views regarding the
concerns raised with respect to selective disclosure of confidential
portfolio information,

[[Page 24372]]

namely, whether such disclosure is consistent with the requirement of
Section 6(b)(5) that the rules of the exchange be designed to prevent
fraudulent and manipulative acts and practices. The Commission also
seeks commenters' views regarding the various concerns raised about how
the Shares may trade in the secondary market, including the calculation
engine verification and trading halt procedures and the potential for
poor trading performance during times of market stress and volatility.
In this regard, the Commission specifically seeks commenters' views on
whether the proposal is consistent with the maintenance of a fair and
orderly market.
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\39\ See supra note 3.
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Comments may be submitted by any of the following methods:

Electronic Comments

Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2018-010 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBZX-2018-010. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2018-010 and should be submitted
by June 15, 2018. Rebuttal comments should be submitted by June 29,
2018.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11223 Filed 5-24-18; 8:45 am]
BILLING CODE 8011-01-P

Document Created: 2018-05-25 02:13:22
Document Modified: 2018-05-25 02:13:22

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		83 FR 24367