[Federal Register Volume 84, Number 214 (Tuesday, November 5, 2019)]
[Notices]
[Pages 59669-59672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24088]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87421; File No. SR-CboeBZX-2019-068]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade
Shares of the iShares California Short Maturity Muni Bond ETF of the
iShares U.S. ETF Trust Under Rule 14.11(i), Managed Fund Shares
October 30, 2019.
I. Introduction
On July 19, 2019, 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
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend Cboe BZX Rule 14.11(c) to list and trade shares (``Shares'') of
the iShares California Short Maturity Muni Bond ETF (``Fund'') of the
iShares U.S. ETF Trust under BZX Rule 14.11(i). The proposed rule
change was published for comment in the Federal Register on August 7,
2019.\3\ On September 19, 2019, pursuant to Section 19(b)(2) of the
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 approve or disapprove
the proposed rule change.\5\ On October 1, 2019, the Exchange filed
Amendment No. 1 to the proposed rule change, which replaced in its
entirety the proposed rule change as originally submitted.\6\ The
Commission has received no comments on the proposal. The Commission is
publishing this order to institute proceedings pursuant to Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1.
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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. 86546 (Aug. 1,
2019), 84 FR 38689.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 87018, 84 FR 50501
(Sep. 25, 2019). The Commission designated November 5, 2019 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to approve or disapprove,
the proposed rule change.
\6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-cboebzx-2019-068/srcboebzx2019068-6362715-196411.pdf.
\7\ 15 U.S.C. 78s(b)(2)(B).
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[[Page 59670]]
II. Summary of the Proposed Rule Change, as Modified by Amendment No. 1
8
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\8\ For a full description of the proposal, see Amendment No. 1,
supra note 6.
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BZX Rule 14.11(i) permits the Exchange to generically list Managed
Fund Shares \9\ issued by a fund whose portfolio components satisfy
certain criteria. The Exchange must file separate proposals under
Section 19(b) of the Act to list and trade shares of a series of
Managed Fund Shares with portfolio components that do not satisfy the
applicable generic listing criteria (including portfolio components not
specified in the generic listing standards).\10\
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\9\ ``Managed Fund Shares'' is defined in BZX Rule
14.11(i)(3)(A).
\10\ See BZX Rule 14.11(i)(4)(C).
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According to the Exchange, the Fund will satisfy all of the
applicable generic listing requirements except for BZX Rule
14.11(i)(4)(C)(ii)(a),\11\ which requires that fixed income securities
in a fund's portfolio that in the aggregate account for at least 75% of
the fixed income weight of the portfolio each have a minimum principal
amount outstanding of $100 million or more. Accordingly, the Exchange
filed the pending proposal to seek Commission approval to list and
trade the Shares.
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\11\ See Amendment No. 1, supra note 6, 84 FR at 14.
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BlackRock Fund Advisors (``Adviser'') is the investment adviser to
the Fund.\12\ The Fund will seek to maximize tax-free current income
from a portfolio composed of short maturity, investment-grade municipal
bonds issued in the State of California. To achieve its objective, the
Fund will invest, under Normal Market Conditions,\13\ at least 80% of
its net assets in U.S.-dollar denominated investment-grade short-term
fixed- and floating-rate Municipal Securities, as defined below, with
remaining maturities of five years or less, issued in the State of
California by or on behalf of California state or local governments or
agencies, whose interest payments are exempt from U.S. federal,
including the federal alternative minimum tax, and California state
income taxes. Under Normal Market Conditions, the Fund will seek to
maintain a weighted average maturity that is less than three years.\14\
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\12\ BFA is an indirect wholly owned subsidiary of BlackRock,
Inc.
\13\ 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 system failures; or force majeure
type events such as natural or man-made disaster, act of God, armed
conflict, act of terrorism, riot or labor disruption, or any similar
intervening circumstance. In the absence of Normal Market
Conditions, the Fund may temporarily depart from its normal
investment process, provided that such departure is, in the opinion
of the Adviser, consistent with the Fund's investment objective and
in the best interest of the Fund. For example, the Fund may hold a
higher than normal proportion of its assets in cash in response to
adverse market, economic or political conditions. See id. at 7, n.8.
\14\ Weighted average maturity is a U.S. dollar-weighted average
of the remaining term to maturity of the underlying securities in
the Fund's portfolio. For the purposes of determining the Fund's
weighted average maturity, a security's final maturity date will be
used for calculation purposes.
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Municipal Securities include only the following instruments:
General obligation bonds; limited obligation bonds (or revenue bonds);
municipal notes; municipal commercial paper; tender option bonds;
variable rate demand notes and demand obligations; municipal lease
obligations, stripped securities; structured securities; \15\ zero
coupon securities; and shares of exchange-traded and non-exchange-
traded investment companies that principally invest in such Municipal
Securities.
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\15\ Structured securities, when combined with those instruments
held as part of the other portfolio holdings described below, will
not exceed 20% of the Fund's net assets. See id. at 9, n.20
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Other Portfolio Holdings. The Fund may also, to a limited extent
(under Normal Market Conditions, less than 20% of the Fund's net
assets), invest in certain futures, options and swap contracts; \16\
cash and cash equivalents; as well as in Municipal Securities of
issuers located outside of California whose interest payments are
exempt from regular federal income taxes.\17\ The Fund may also enter
into repurchase and reverse repurchase agreements for Municipal
Securities (collectively, ``Repurchase Agreements''). The Fund may also
invest in short-term instruments (``Short-Term Instruments''),\18\
which includes exchange traded and non-exchange traded investment
companies that invest in money market instruments.
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\16\ Such futures, options and swap contracts will include only
the following: Interest rate futures, interest rate options, and
interest rate swaps. The derivatives will be centrally cleared and
they will be collateralized. At least 90% of the Fund's net assets
that are invested in listed derivatives will be invested in
instruments that trade in markets that are members or affiliates of
members of the Intermarket Surveillance Group or are parties to a
comprehensive surveillance sharing with the Exchange. See id. at 10,
n.24.
\17\ Issuers located outside of California may be states,
territories and possessions of the U.S., including the District of
Columbia, and their political subdivisions, agencies and
instrumentalities.
\18\ The Fund may invest in Short-Term Instruments, including
money market instruments, on an ongoing basis to provide liquidity
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of
money market funds; (ii) obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities (including
government-sponsored enterprises); (iii) negotiable certificates of
deposit, bankers' acceptances, fixed-time deposits and other
obligations of U.S. and non-U.S. banks (including non-U.S. branches)
and similar institutions; (iv) commercial paper, including asset-
backed commercial paper; (v) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at
the date of purchase of not more than 397 days and that satisfy the
rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of non-U.S.
banks (including U.S. branches) that, in the opinion of BFA, are of
comparable quality to obligations of U.S. banks which may be
purchased by the Fund. All money market securities acquired by the
Fund will be rated investment grade. The Fund does not intend to
invest in any unrated money market securities. However, it may do
so, to a limited extent, such as where a rated money market security
becomes unrated, if such money market security is determined by the
Adviser to be of comparable quality. BFA may determine that unrated
securities are of comparable quality based on such credit quality
factors that it deems appropriate, which may include, among other
things, performing an analysis similar, to the extent possible, to
that performed by a nationally recognized statistical rating
organization rating similar securities and issuers.
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Investment Restrictions. The Fund may hold up to an aggregate
amount of 15% of its net assets in illiquid assets (calculated at the
time of investment), as deemed illiquid by the Adviser under the 1940
Act. The 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 held in illiquid assets.\19\
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\19\ Illiquid assets are defined by Rule 22e-4. In reaching
liquidity decisions, the Adviser may consider factors including: 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; the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of
transfer); any legal or contractual restrictions on the ability to
transfer the security or asset; significant developments involving
the issuer or counterparty specifically (e.g., default, bankruptcy,
etc.) or the securities markets generally; and settlement practices,
registration procedures, limitations on currency conversion or
repatriation, and transfer limitations (for foreign securities or
other assets). See id. at 12-13.
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Additionally, the Exchange states that the Fund will launch with at
least 300,000 Shares outstanding. The Exchange also states: (1) The
portfolio will hold a minimum of 15 different Municipal Securities from
at least 15 unique issuers when at least six creation units are
outstanding, but will never hold fewer than 10 different Municipal
[[Page 59671]]
Securities from at least 10 unique issuers; (2) no single obligor will
account for more than 10% of the weight of the Fund's portfolio and no
10 obligors will account for more than 75% of the weight of the Fund's
portfolio.\20\ Additionally, no more than 50% of the Fund's assets will
be invested in issuers that are more than 5% of the value of the Fund's
assets, and the Fund will not invest more than 25% of its assets in any
single issuer.\21\
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\20\ See id. at 13.
\21\ See id. at 13-14.
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III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2019-068 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule
change, as modified by Amendment No. 1, 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 proposal.
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 proposal.
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\22\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposal's consistency with Section 6(b)(5) of the 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,'' and ``to protect investors and the public
interest.'' \24\ Specifically, the Commission seeks comment regarding
the following:
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\23\ Id.
\24\ 15 U.S.C. 78f(b)(5).
1. Would the proposed requirement that the portfolio hold a
minimum of ten different Municipal Securities from at least ten
unique issuers or, when at least six creation units are outstanding,
fifteen different Municipal Securities from at least fifteen unique
issuers be sufficient to ensure that the Fund's portfolio isn't
susceptible to manipulation?
2. Would the proposed concentration limit, i.e., that no single
obligor will account for more than 10% of the weight of the Fund's
portfolio and no ten obligors will account for more than 75% of the
weight of the Fund's portfolio, be sufficient to ensure that the
Fund's portfolio isn't susceptible to manipulation?
3. Taken collectively, would the proposed listing requirements
adequately ensure that the Fund's portfolio would not be susceptible
to manipulation?
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 proposed rule
change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) or any other provision of the 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 Act,\25\ any request for an
opportunity to make an oral presentation.\26\
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\25\ 17 CFR 240.19b-4.
\26\ Section 19(b)(2) of the 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 proposed rule change, as modified by
Amendment No. 1, should be approved or disapproved by November 26,
2019. Any person who wishes to file a rebuttal to any other person's
submission must file that rebuttal by December 10, 2019. The Commission
asks that commenters address the sufficiency of the Exchange's
statements in support of the proposal, which are set forth in Amendment
No. 1,\27\ in addition to any other comments they may wish to submit
about the proposal.
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\27\ See supra note 6.
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In this regard, the Commission seeks comment on the Exchange's
proposed generic listing standards for Shares based on an index or
portfolio of Municipal Securities. The Commission specifically seeks
comment on whether the proposed requirement that an underlying index or
portfolio must include a minimum of 500 component Municipal Securities
is consistent with the requirement 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,'' and ``to protect investors and the public
interest.'' \28\
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\28\ 15 U.S.C. 78f(b)(5).
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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-2019-068 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-2019-068. 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-2019-068 and should be submitted
by November 26, 2019. Rebuttal comments should be submitted by December
10, 2019.
[[Page 59672]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(57).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-24088 Filed 11-4-19; 8:45 am]
BILLING CODE 8011-01-P