[Federal Register Volume 85, Number 39 (Thursday, February 27, 2020)]
[Notices]
[Pages 11419-11421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03920]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88259; File No. SR-CboeBZX-2020-007]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Eliminate the Requirement That the
Intraday Indicative Value Be Disseminated as Set Forth Under Rule
14.11(c) for Certain Series of Index Fund Shares and Under Rule
14.11(i) for All Series of Managed Fund Shares
February 21, 2020.
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 February 14, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'')
filed with the Securities and Exchange Commission (the ``Commission'')
the proposed rule change as described in Items I, II and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to eliminate the requirement that the Intraday Indicative
Value be disseminated as set forth under Rule 14.11(c) (``Index Fund
Shares'') for certain series of Index Fund Shares and under Rule
14.11(i) (``Managed Fund Shares'') for all series of Managed Fund
Shares. The text of the proposed rule change is provided in Exhibit 5.
The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Exchange Rules 14.11(c) and 14.11(i) relate to the listing and
trading of Index Fund Shares and Managed Fund Shares on the Exchange.
Among a number of other requirements, numerous sub-paragraphs of each
of these rules require that an intraday estimate of the value of a
share of each series (the ``Intraday Indicative Value'' or ``IIV'') of
Index Fund Shares and Managed Fund Shares be disseminated and updated
at least every 15 seconds.\3\ The Exchange is proposing to eliminate
the requirement to disseminate an IIV for all series of Managed Fund
Shares \4\ listed on the Exchange and for those series of Index Fund
Shares that also publish their Portfolio Holdings (as defined below) on
a daily basis.
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\3\ See subparagraphs (c)(3)(C), (c)(6)(A), and (c)(9)(B)(i)(e)
of Exchange Rule 14.11. See also subparagraphs (i)(3)(C), (i)(3)(D),
(i)(4)(B)(i), (i)(4)(B)(iii)(b), and (i)(4)(B)(iv) of Exchange Rule
14.11.
\4\ The Exchange notes that Rule 14.11(i)(4)(B)(ii)(a) requires
that the Disclosed Portfolio for a series of Managed Fund Shares be
disseminated at least once daily and be made available to all market
participants at the same time. Further, Rule 14.11(i)(4)(B)(iii)(b)
requires that the Exchange consider suspension of trading in and
commence delisting proceedings for a series of Managed Fund Shares
where the Disclosed Portfolio is not made available to all market
participants at the same time. As such, the Exchange is proposing to
eliminate the IIV dissemination requirements entirely from Rule
14.11(i).
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As part of this proposal, the Exchange is also proposing to adopt
proposed Rule 14.11(c)(1)(F) to define the term ``Portfolio Holdings''
which would mean the holdings of a particular series of Index Fund
Shares that will form the basis for the calculation of its net asset
value (``NAV'') at the end of the business day.\5\ Existing Exchange
Rules require issuers of Managed Fund Shares to provide IIV and daily
disclosure of the Disclosed Portfolio.\6\ Similarly, existing Exchange
Rules require issuers of Index Fund Shares to disseminate an IIV for
each fund, but do not universally require daily disclosure of a fund's
underlying holdings.\7\
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\5\ For purposes of Rule 14.11(c), Portfolio Holdings would
include various information, to the extent applicable, as listed in
proposed subparagraphs (c)(1)(F)(i) through (c)(1)(F)(xi). The
proposed definition of Portfolio Holdings is substantively identical
to the definition of ``Disclosed Portfolio'' as set forth in Rule
14.11(i)(3)(B).
\6\ See subparagraphs (i)(3)(B), (i)(4)(A)(ii), and
(i)(4)(B)(ii) of Exchange Rule 14.11. The term ``Disclosed
Portfolio'' means 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 net asset value at
the end of the business day. See also Exchange Rule 14.11(i)(3)(B).
\7\ The Exchange notes that Rule 14.11(c)(1)(B)(iv) would
require the daily disclosure of certain information related to a
fund's portfolio holdings where a fund ``seeks to provide investment
results that either exceed the performance of a specified . . .
index . . . by a specified multiple or that correspond to the
inverse (opposite) of the performance of a specified . . . index . .
. by a specified multiple,'' however, the Exchange does not
currently list any such funds.
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The dissemination of an IIV, together with disclosure of the fund's
underlying
[[Page 11420]]
holdings, was designed to allow investors to determine the value of the
underlying portfolio of such funds on a daily basis and provide a close
estimate of that value throughout the trading day. However, as
consistently highlighted in the adopting release of Rule 17 CFR 270.6c-
11 (``Rule 6c-11'') \8\ under the Investment Company Act of 1940 \9\
(the ``1940 Act''), the Commission has expressed concerns regarding the
accuracy of IIV estimates for certain Exchange-Traded Funds
(``ETFs'').\10\ Specifically, the Commission noted that an IIV may not
accurately reflect the value of an ETF that holds securities that trade
less frequently as such IIV can be stale or inaccurate.\11\ Similarly,
the Commission also expressed concerns with the IIV of ETFs with
frequently traded component securities because ``in today's fast moving
markets, given the dissemination lags, an IIV may not accurately
reflect the value of an ETF that holds frequently traded component
securities.'' \12\ Additionally, the Commission indicated that even in
circumstances when an IIV may be reliable, retail investors do not have
easy access to free, publicly available IIV information.\13\ Further,
in instances when IIV may be free and publicly available, it can be
delayed by up to 45 minutes.\14\
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\8\ See Investment Company Act Release No. 10695 (September 25,
2019), 84 FR 57162 (October 24, 2019) (the ``Adopting Release'').
\9\ 15 U.S.C. 80a-1.
\10\ An Exchange-Traded Fund means a registered open-end
investment company: (i) That issues (and redeems) creation units to
(and from) authorized participants in exchange for a basket and a
cash balancing amount if any; and (ii) Whose shares are listed on a
national securities exchange and traded at market-determined prices.
See Id.
\11\ See supra note 8, at 62.
\12\ See id.
\13\ See Id., at 66.
\14\ See Id.
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Aside from the fact that the disseminated IIV may provide investors
with stale or misleading data, the Commission also stated that market
makers and authorized participants typically calculate their own
intraday value of an ETF's portfolio with proprietary algorithms that
use an ETF's daily portfolio disclosure and available pricing
information.\15\ Such information allows those market participants to
support the arbitrage mechanism for ETFs. The arbitrage mechanism is
designed to help keep the market price of ETF shares at or close to the
NAV per share of an ETF, and is important because it helps to ensure
ETF investors are treated equitably when buying and selling fund
shares.\16\ Therefore, as market participants who engage in arbitrage
typically calculate their own intraday value of an ETF's portfolio
based on the ETF's daily portfolio disclosure and pricing information
and use an IIV only as a secondary check to their own calculation,\17\
the Commission noted that IIV was not necessary to support the
arbitrage mechanism.\18\ Given this, combined with shortcomings of the
IIV noted above, the Commission concluded that ETFs will not be
required to disseminate an IIV under Rule 6c-11.\19\ As such, exchange
listing rules are the only reason that a series of Managed Fund Shares
is required to disseminate an IIV. Similarly, exchange listings rules
are the only reason that a series of Index Fund Shares that also
publishes its Portfolio Holdings on a daily basis is required to
disseminate an IIV.
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\15\ See Id., at 63.
\16\ See Id., at 12.
\17\ See Id., at 63.
\18\ See Id., at 65.
\19\ See Id., at 61.
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The Exchange believes that the limitations and shortcomings of IIV
as it pertains to ETFs relying on Rule 6c-11 and highlighted in the
Adopting Release are equally applicable to all Managed Fund Shares
listed on the Exchange and Index Fund Shares for which the Portfolio
Holdings are disclosed on a daily basis. The Exchange further agrees
with the conclusion of the Adopting Release that the ``IIV is not
necessary to support the arbitrage mechanism for ETFs that provide
daily portfolio holdings disclosure.'' The transparency that comes from
daily portfolio holdings disclosure provides market participants with
sufficient information to facilitate the intraday valuation of the
shares of an ETF, including Managed Fund Shares and Index Fund Shares
for which Portfolio Holdings are disclosed daily, which, ignoring the
many criticisms of IIV in the Adopting Order, renders IIV at the very
least duplicative and unnecessary.
As such, the Exchange is proposing to eliminate the requirement for
the dissemination of the IIV for all series of Managed Fund Shares and
for Index Fund Shares for which Portfolio Holdings are disclosed on a
daily basis. Additionally, the Exchange is proposing to make conforming
numbering changes to Rules 14.11(c) and 14.11(i).
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\20\ Specifically, the Exchange believes the proposed rule change
is consistent with the Section 6(b)(5) \21\ requirements that the rules
of an exchange be designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
The proposed amendment seeks to eliminate the requirement that Managed
Fund Shares and Index Fund Shares for which the Portfolio Holdings are
disclosed daily, disseminate an IIV for the same reasons articulated in
the Adopting Order for Rule 6c-11, which does not require the
dissemination of IIV. The Exchange believes that the proposed amendment
will eliminate the dissemination of potentially stale and misleading
IIV information to market participants, as was also noted in the
Adopting Order. Further, as the proposed rule text would only eliminate
the requirement for series of Index Fund Shares \22\ and Managed Fund
Shares \23\ that provide full daily portfolio transparency, such full
daily portfolio transparency would provide market participants with a
tool to easily calculate the IIV of a series of Managed Fund Shares or
Index Fund Shares, which the Exchange believes generally mitigates the
need for the dissemination of an IIV for certain series of Index Fund
Shares or Managed Fund Shares. Nonetheless, nothing in this proposal
limits the ability of such Index Fund Shares or Managed Fund Shares
from disseminating the IIV should they choose to do so. Further, the
Exchange notes that its rules still include certain circumstances in
which an issuer would be required to disseminate an IIV.\24\
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\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ As provided in proposed Rules 14.11(c)(3)(C) and
14.11(c)(6)(A), a series of Index Fund Shares would only be exempt
from IIV dissemination requirements where there is daily public
website disclosure of Portfolio Holdings.
\23\ See supra note 4.
\24\ For example, a series of Index Fund Shares that does not
provide daily portfolio transparency would still be required to
disseminate an IIV. Additionally, the requirement of IIV
dissemination will continue to be required for certain products that
are not subject to the Investment Company Act of 1940.
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As a result of the proposed rule change, the Exchange believes
issuers may benefit from cost savings because of the eliminated
requirement to disseminate an IIV. The reduced cost
[[Page 11421]]
could also result in lower barriers to entry for new issuers and new
series of Managed Fund Shares and Index Fund Shares for which the
Portfolio Holdings are disclosed daily, which will result in enhanced
competition among products and issuers of such funds, which can lead to
lower fees for investors, encourage financial innovation, and increase
investor choice in the ETF market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. To the contrary, the
Exchange believes that issuers may benefit from cost savings and lower
barriers to entry because of the eliminated requirement to disseminate
an IIV. In turn, the proposed rule change will enable increased product
competition among issuers of such funds, which can lead to lower fees
for investors, encourage financial innovation, and increase investor
choice in the ETF market.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. By order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2020-007 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-2020-007. 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-2020-007 and should be submitted
on or before March 19, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
Jill M. Peterson,
Assistant Secretary.
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\25\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2020-03920 Filed 2-26-20; 8:45 am]
BILLING CODE 8011-01-P