[Federal Register Volume 77, Number 241 (Friday, December 14, 2012)]
[Notices]
[Pages 74540-74543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-30165]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68390; File No. SR-BATS-2012-042]
Self-Regulatory Organizations; BATS Exchange, Inc.; Order
Granting Approval of Proposed Rule Change To List and Trade Shares of
the iShares Sovereign Screened Global Bond Fund
December 10, 2012.
I. Introduction
On October 12, 2012, BATS Exchange, Inc. (``Exchange'' or ``BATS'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
iShares Sovereign Screened Global Bond Fund (``Fund'') under BATS Rule
14.11(i). The proposed rule change was published for comment in the
Federal Register on October 30, 2012.\3\ The Commission received no
comments on the proposed rule change. This order grants approval of 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. 68094 (October 24,
2012), 77 FR 65740 (``Notice'').
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II. Description of the Proposed Rule Change
The Exchange proposes to list and trade Shares of the Fund pursuant
to BATS Rule 14.11(i), which governs the listing and trading of Managed
Fund Shares on the Exchange. The Shares will be offered by iShares
Sovereign Screened Global Bond Fund, Inc. (``Company''),\4\ a Maryland
corporation that is registered with the Commission as an open-end
investment company. BlackRock Fund Advisors is the investment adviser
(``BFA'' or ``Adviser'') to the Fund. BlackRock International Limited
serves as sub-adviser for the Fund (``Sub-Adviser'').\5\
[[Page 74541]]
State Street Bank and Trust Company is the administrator, custodian,
and transfer agent for the Company, and BlackRock Investments, LLC is
the distributor for the Company. The Exchange states that the Adviser
and the Sub-Adviser are both affiliated with multiple broker-dealers
and have both implemented fire walls with respect to such broker-dealer
affiliates regarding access to information concerning the composition
and/or changes to the Fund's portfolio.\6\
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\4\ See Registration Statement on Form N-1A for the Company,
dated March 5, 2012 (File Nos. 333-179905 and 811-22674)
(``Registration Statement''). The Commission has issued an order
granting certain exemptive relief (``Exemptive Order'') to the
Company under the Investment Company Act of 1940. See Investment
Company Act Release No. 29571 (January 24, 2011) (File No. 812-
13601).
\5\ The Adviser manages the Fund's investments and its business
operations subject to the oversight of the Board of Directors of the
Company (``Board''). While BFA is ultimately responsible for the
management of the Fund, it is able to draw upon the trading,
research, and expertise of its asset management affiliates for
portfolio decisions and management with respect to portfolio
securities. Portfolio managers employed by the Adviser are generally
responsible for day-to-day management of the Fund and, as such,
typically make all decisions with respect to portfolio holdings. The
Adviser also has ongoing oversight responsibility. The Sub-Adviser,
subject to the supervision and oversight of the Board and BFA, will
be primarily responsible for execution of securities transactions
outside the United States and Canada and may, from time to time,
participate in the management of specified assets in the Fund's
portfolio. The Sub-Adviser may be responsible for the day-to-day
management of the Fund.
\6\ See BATS Rule 11.14(i)(7). In the event (a) the Adviser or
Sub-Adviser becomes newly affiliated with a broker-dealer, or (b)
any new adviser or sub-adviser becomes affiliated with a broker-
dealer, they will implement a fire wall with respect to such broker-
dealer regarding access to information concerning the composition
and/or changes to the portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material, non-
public information regarding such portfolio.
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iShares Sovereign Screened Global Bond Fund
The Fund will seek to generate current income while striving to
mitigate downside risk by investing principally in global sovereign
debt obligations. To achieve its objective, the Fund will invest, under
normal circumstances,\7\ at least 80% of its net assets in sovereign
government bonds from both developed and emerging market countries. In
the absence of normal circumstances, the Fund may temporarily depart
from its normal investment process, provided that such departure is, in
the opinion of the portfolio management team of the Fund, 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.
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\7\ The term ``under normal circumstances'' includes, but is not
limited to, the absence of adverse market, economic, political, or
other conditions, including extreme volatility or trading halts in
the fixed income markets or the financial markets generally;
operational issues causing dissemination of inaccurate market
information; or force majeure type events such as systems failure,
natural or man-made disaster, act of God, armed conflict, act of
terrorism, riot or labor disruption, or any similar intervening
circumstance.
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The Fund will hold sovereign debt obligations of at least 13 non-
affiliated issuers. The Fund will not purchase the securities of
issuers conducting their principal business activity in the same
industry if, immediately after the purchase and as a result thereof,
the value of the Fund's investments in that industry would equal or
exceed 25% of the current value of the Fund's total assets, provided
that this restriction does not limit the Fund's: (i) Investments in
securities of other investment companies; (ii) investments in
securities issued or guaranteed by the U.S. government, its agencies,
or instrumentalities; or (iii) investments in repurchase agreements
collateralized by U.S. government securities. The Fund will not invest
in equity securities.
The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as
amended.\8\
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\8\ 26 U.S.C. 851.
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Sovereign Debt
The Fund intends to achieve its investment objective by investing,
under normal circumstances, at least 80% of its net assets in bonds
denominated in local currencies and the U.S. dollar, issued by
governments in both developed and emerging market countries.
The Fund intends to maintain specific exposure to global government
bonds with targeted investment characteristics. The Adviser will
utilize a model-based proprietary investment process to assemble the
investment portfolio from a defined group of developed and emerging
market countries across all credit rating categories, including below
investment grade. The investment process primarily will utilize the
universe of sovereign debt issuers included in the BlackRock Sovereign
Risk Index, a proprietary model that scores countries using a
comprehensive list of relevant fiscal, financial, and institutional
metrics to assess sovereign credit risk. These country scores, along
with other model-driven factors, will be used to construct the Fund's
investment portfolio by screening out lower scoring countries and
weighting the remaining sovereigns based on their scores. According to
the Exchange, as of July 31, 2012, there were 48 countries in the
universe of eligible countries, any of which may or may not be held by
the Fund.\9\ This proprietary investment process is intended to provide
an increased exposure to sovereign debt securities issued by countries
with higher credit quality, as defined by the model, than would a fund
that seeks to replicate the performance of a broad global government
bond index that is weighted more heavily towards countries based on
their amount of debt outstanding. According to the Exchange, as of July
31, 2012, the following countries were included in the universe of
eligible countries: Argentina, Australia, Austria, Belgium, Brazil,
Canada, Chile, China, Colombia, Croatia, the Czech Republic, Denmark,
Egypt, Finland, France, Germany, Greece, Hungary, India, Indonesia,
Ireland, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, New
Zealand, Norway, Peru, the Philippines, Poland, Portugal, Russia,
Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain,
Sweden, Switzerland, Taiwan, Thailand, Turkey, the United Kingdom, the
United States, and Venezuela.\10\ Countries may be added to, eliminated
from, or replaced in the universe of eligible countries at any time,
and the model may score countries differently over time, which means
that countries may be added to, deleted from, or re-weighted within the
model.
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\9\ Countries must have at least $5 billion of outstanding debt
principal amounts at the beginning of the calendar year in order to
be included in the eligible universe.
\10\ According to the Exchange, each country's approximate value
of outstanding debt principal amounts as of July 31, 2012, is as
follows (in billions): Argentina $160; Australia $246; Austria $248;
Belgium $421; Brazil $498; Canada $865; Chile $58; China $1,216;
Colombia $76; Croatia $22; the Czech Republic $79; Denmark $133;
Egypt $116; Finland $106; France $1,696; Germany $1,347; Greece
$169; Hungary $86; India $593; Indonesia $112; Ireland $109; Israel
$151; Italy $2,007; Japan $11,554; Malaysia $142; Mexico $379; the
Netherlands $384; New Zealand $58; Norway $64; Peru $27; the
Philippines $98; Poland $221; Portugal $143; Russia $140; Singapore
$136; Slovakia $40; Slovenia $18; South Africa $138; South Korea
$380; Spain $844; Sweden $143; Switzerland $98; Taiwan $162;
Thailand $104; Turkey $265; the United Kingdom $1,878; the United
States $10,743; and Venezuela $72.
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The universe of sovereign debt currently includes securities that
are rated ``investment grade'' as well as ``below investment grade.''
\11\ The Fund will not invest in distressed debt. The Fund expects
that, under normal circumstances, the securities included in the Fund
will be primarily investment grade. According to the Exchange, as of
July 31, 2012, 97% of the securities in the BlackRock Sovereign Risk
Index were rated investment grade.
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\11\ When constructing the model, the distribution of ratings
across issues in each country will be considered in order to ensure
that no single issue is over weighted and that the model is
diversified. The ratings-based caps will be imposed on a per country
basis, and will be generally as follows: AAA/AA=5%; A=4%; BBB=3%;
Junk=2% (ratings are averaged across Moody's and S&P).
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The Fund's investments will be consistent with the Fund's
investment objective and will not be used to enhance leverage. Under
normal circumstances, the effective duration of
[[Page 74542]]
the Fund's portfolio is expected to be 5-7 years, as calculated by the
Adviser.
Other Portfolio Holdings
While the Fund will invest at least 80% of its net assets in bonds
denominated in local currencies and the U.S. dollar issued by
governments in both developed and emerging market countries, the
Adviser expects that, under normal market circumstances, the Fund
intends to invest its remaining assets in money market securities (as
described below) in a manner consistent with its investment objective
in order to help manage cash flows in and out of the Fund, such as in
connection with payment of dividends or expenses, and to satisfy margin
requirements, to provide collateral, or to otherwise back investments
in derivative instruments. For these purposes, money market securities
include: Short-term, high-quality obligations issued or guaranteed by
the U.S. Treasury or the agencies or instrumentalities of the U.S.
government; short-term, high-quality securities issued or guaranteed by
non-U.S. governments, agencies, and instrumentalities; repurchase
agreements backed by U.S. government securities; money market mutual
funds; and deposits and other obligations of U.S. and non-U.S. banks
and financial institutions. 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 or
the Sub-Adviser to be of comparable quality.
Additionally, the Fund may hold up to an aggregate amount of 15% of
its net assets in illiquid securities (calculated at the time of
investment), including Rule 144A securities. 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 securities. Illiquid securities 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.
Pursuant to the Exemptive Order, the Fund will not invest in swap
agreements, futures contracts, or option contracts. The Fund may invest
in currency forwards for hedging against foreign currency exchange rate
risk and/or trade settlement purposes.
Additional information regarding the Shares and the Fund, including
investment strategies, risks, creation and redemption procedures, fees
and expenses, portfolio holdings disclosure policies, distributions,
taxes, and reports to be distributed to beneficial owners of the Shares
can be found in the Notice,\12\ the Registration Statement,\13\ or on
the Web site for the Fund (www.iShares.com), as applicable.
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\12\ See supra note 3.
\13\ See supra note 4.
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III. Discussion and Commission's Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of Section 6 of the Act \14\
and the rules and regulations thereunder applicable to a national
securities exchange.\15\ In particular, the Commission finds that the
proposed rule change is consistent with Section 6(b)(5) of the Act,\16\
which requires, among other things, that the Exchange's rules 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 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 Commission notes that
the Fund and the Shares must comply with the requirements of BATS Rule
14.11(i) to be listed and traded on the Exchange.
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\14\ 15 U.S.C. 78f.
\15\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\16\ 15 U.S.C. 78f(b)(5).
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The Commission finds that the proposal to list and trade the Shares
on the Exchange is consistent with Section 11A(a)(1)(C)(iii) of the
Act,\17\ which sets forth Congress's finding that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for, and transactions in, securities. Quotation and last-
sale information for the Shares will be available on the facilities of
the Consolidated Tape Association (``CTA''). In addition, the Intraday
Indicative Value, as defined in BATS Rule 14.11(i)(3)(C), will be
updated and widely disseminated by one or more major market data
vendors at least every 15 seconds during the Exchange's Regular Trading
Hours.\18\ On each business day, before commencement of trading in
Shares during Regular Trading Hours on the Exchange, the Fund will
disclose on its Web site the Disclosed Portfolio, as defined in BATS
Rule 14.11(i)(3)(B), held by the Fund that will form the basis for the
Fund's calculation of NAV at the end of the business day.\19\ The NAV
of the Fund's Shares generally will be calculated once daily Monday
through Friday as of the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern Time). Information regarding
market price and trading volume of the Shares will be continually
available on a real-time basis throughout the day on brokers' computer
screens and other electronic services. Information regarding the
previous day's closing price and trading volume information for the
Shares will be published daily in the financial section of newspapers.
Intraday, executable price quotations on sovereign bonds and other
assets are available from major broker-dealer firms. Such intraday
information is also available through subscription services, such as
Bloomberg, Thomson Reuters, and International Data Corporation. The
Fund's Web site will include a form of the prospectus for the Fund and
additional data relating to NAV and other applicable quantitative
information.
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\17\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
\18\ According to the Exchange, several major market data
vendors display and/or make widely available Intraday Indicative
Values published via the CTA or other data feeds. The Exchange notes
that the quotations of certain of the Fund's holdings may not be
updated during U.S. trading hours if such holdings do not trade in
the United States or if updated prices cannot be ascertained.
Further, there may be periods of time during Regular Trading Hours
during which the Intraday Indicative Value would be static to the
extent securities that comprise the Fund's holdings are not actively
trading.
\19\ The Disclosed Portfolio will include, as applicable, the
names, quantity, percentage weighting, and market value of fixed
income securities and other assets held by the Fund and the
characteristics of such assets. The Web site and information will be
publicly available at no charge.
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The Commission further believes that the proposal to list and trade
the Shares is reasonably designed to promote fair disclosure of
information that may be necessary to price the Shares appropriately and
to prevent trading when a reasonable degree of transparency cannot be
assured. The Commission notes that the Exchange will obtain a
representation from the issuer of the Shares that the NAV per Share
will be calculated daily and that
[[Page 74543]]
the NAV and the Disclosed Portfolio will be made available to all
market participants at the same time.\20\ In addition, trading in the
Shares will be subject to BATS Rule 14.11(i)(4)(B)(iv), which sets
forth circumstances under which Shares of the Fund may be halted. The
Exchange may halt trading in the Shares if trading is not occurring in
the securities and/or the financial instruments comprising the
Disclosed Portfolio of the Fund, or if other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present.\21\ Further, the Commission notes that the
Reporting Authority that provides the Disclosed Portfolio must
implement and maintain, or be subject to, procedures designed to
prevent the use and dissemination of material, non-public information
regarding the actual components of the portfolio.\22\ The Exchange may
obtain information via the Intermarket Surveillance Group (``ISG'')
from other exchanges that are members or affiliates of ISG or with
which the Exchange has entered into a comprehensive surveillance
sharing agreement. The Exchange prohibits the distribution of material,
non-public information by its employees. The Exchange also states that
the Adviser and the Sub-Adviser are both affiliated with multiple
broker-dealers and have both implemented fire walls with respect to
such broker-dealer affiliates regarding access to information
concerning the composition and/or changes to the Fund's portfolio.\23\
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\20\ See BATS Rule 14.11(i)(4)(A)(ii).
\21\ See BATS Rule 14.11(i)(4)(B)(iii) (providing additional
considerations for the suspension of trading in or removal from
listing of Managed Fund Shares on the Exchange). With respect to
trading halts, the Exchange may consider other relevant factors in
exercising its discretion to halt or suspend trading in the Shares
of the Fund. Trading in Shares of the Fund will be halted if the
circuit breaker parameters in BATS Rule 11.18 have been reached.
Trading also may be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in the
Shares inadvisable.
\22\ See BATS Rule 14.11(i)(4)(B)(ii)(b).
\23\ See supra note 6. The Commission notes that an investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (``Advisers Act''). As a result, the
Adviser and the Sub-Adviser and their related personnel are subject
to the provisions of Rule 204A-1 under the Advisers Act relating to
codes of ethics. This Rule requires investment advisers to adopt a
code of ethics that reflects the fiduciary nature of the
relationship to clients as well as compliance with other applicable
securities laws. Accordingly, procedures designed to prevent the
communication and misuse of non-public information by an investment
adviser must be consistent with Rule 204A-1 under the Advisers Act.
In addition, Rule 206(4)-7 under the Advisers Act makes it unlawful
for an investment adviser to provide investment advice to clients
unless such investment adviser has (i) adopted and implemented
written policies and procedures reasonably designed to prevent
violation, by the investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted thereunder; (ii)
implemented, at a minimum, an annual review regarding the adequacy
of the policies and procedures established pursuant to subparagraph
(i) above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
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The Exchange represents that the Shares are deemed to be equity
securities, thus rendering trading in the Shares subject to the
Exchange's existing rules governing the trading of equity securities.
In support of this proposal, the Exchange has made representations,
including:
(1) The Shares will be subject to BATS Rule 14.11(i), which sets
forth the initial and continued listing criteria applicable to Managed
Fund Shares.
(2) The Exchange has appropriate rules to facilitate transactions
in the Shares during all trading sessions.
(3) The Exchange's surveillance procedures applicable to derivative
products, which include Managed Fund Shares, 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.
(4) Prior to the commencement of trading, the Exchange will inform
its members in an Information Circular of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Circular will discuss the following: (a) The procedures for
purchases and redemptions of Shares in Creation Units (and that Shares
are not individually redeemable); (b) BATS Rule 3.7, which imposes
suitability obligations on Exchange members with respect to
recommending transactions in the Shares to customers; (c) how
information regarding the Intraday Indicative Value is disseminated;
(d) the risks involved in trading the Shares during the Pre-Opening and
After Hours Trading Sessions when an updated Intraday Indicative Value
will not be calculated or publicly disseminated; (e) a reminder that
there may be periods of time during Regular Trading Hours during which
the Intraday Indicative Value would be static to the extent securities
that comprise the Fund's holdings are not actively trading; (f) the
requirement that members deliver a prospectus to investors purchasing
newly issued Shares prior to or concurrently with the confirmation of a
transaction; and (g) trading information.
(5) For initial and/or continued listing, the Fund must be in
compliance with Rule 10A-3 under the Exchange Act.\24\
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\24\ 17 CFR 240.10A-3.
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(6) Consistent with the Exemptive Order, the Fund will not invest
in options, swaps, or futures. The Fund's investments will be
consistent with its investment objective and will not be used to
enhance leverage. The Fund will not invest in equity securities.
(7) Countries must have at least $5 billion of outstanding debt
principal amounts at the beginning of the calendar year in order to be
included as an eligible investment.
(8) The Fund expects that, under normal circumstances, the
securities included in the Fund will be primarily investment grade. In
addition, the Fund will not invest in distressed debt.
(9) The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid securities (calculated at the time of investment),
including Rule 144A securities.
(10) A minimum of 100,000 Shares of the Fund will be outstanding at
the commencement of trading on the Exchange.
This approval order is based on all of the Exchange's representations
and description of the Fund, including those set forth above and in the
Notice.
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with Section 6(b)(5) of the Act \25\ and the
rules and regulations thereunder applicable to a national securities
exchange.
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\25\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\26\ that the proposed rule change (SR-BATS-2012-042) be, and it
hereby is, approved.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-30165 Filed 12-13-12; 8:45 am]
BILLING CODE 8011-01-P