[Federal Register Volume 83, Number 89 (Tuesday, May 8, 2018)]
[Notices]
[Pages 20875-20882]
[FR Doc No: 2018-09696]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83156; File No. SR-ISE-2018-39]

Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change To Amend ISE Rules
412, Position Limits, and 414, Exercise Limits

May 2, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 20, 2018, Nasdaq ISE, LLC (``ISE'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by the Exchange. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to amend ISE Rules 412, Position Limits, and
414, Exercise Limits, to increase the position and exercise limits for
options on the following exchange traded funds (``ETFs''): iShares
China Large-Cap ETF (``FXI''), iShares MSCI EAFE ETF (``EFA''), iShares
MSCI Emerging Markets ETF (``EEM''), iShares Russell 2000 ETF
(``IWM''), iShares MSCI Brazil Capped ETF (``EWZ''), iShares 20+ Year
Treasury Bond Fund ETF (``TLT''), PowerShares QQQ Trust (``QQQQ''), and
iShares MSCI Japan Index (``EWJ'').
    The text of the proposed rule change is available on the Exchange's
website at http://ise.cchwallstreet.com/, at the principal office of
the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
Position Limit Increase
    Position limits for options on ETFs such as those subject to this
proposal are determined pursuant to Exchange Rule 412, and, with
certain exceptions, vary by tier according to the number of outstanding
shares and the trading volume of the underlying security. Options in
the highest tier--i.e., options that overlie securities with the
largest numbers of outstanding shares and trading volumes--have a
standard option position limit of 250,000 contracts (with adjustments
for splits, re-capitalizations, etc.) on the same side of the market.
In addition, Rule 412 currently sets forth separate position limits for
options on certain ETFs, including 500,000 contracts for options on EEM
and IWM, and 900,000 contracts for options on QQQQ.
    The Exchange proposes to revise Rule 412 to increase the position
limits for options on certain ETFs, as described more fully below.\3\
The Exchange believes that increasing the position limits for these
options will lead to a more liquid and competitive market environment
for these options that will benefit customers interested in these
products.
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    \3\ ISE Rule 414 establishes exercise limits for the
corresponding options at the same levels as the corresponding
security's position limits. Rule 414 would be amended such that the
exercise limits for each of these options would be increased to the
level of the new position limits.
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    First, the Exchange proposes to increase the position limits for
options on FXI, EFA, EWZ, TLT, and EWJ, each of which fall into the
highest standard tier set forth in Exchange Rule 412(d)(5). Rule 412,
Supplementary Material .01, would be amended to increase the current
position limit of 250,000 contracts for options on these securities to
500,000 contracts.
    Second, the Exchange proposes to increase the position limits for
options on EEM and IWM from 500,000 contracts to 1,000,000
contracts.\4\
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    \4\ The Exchange is also amending Rules 412 and 414 to update
and correct the names of IWM and EEM, which are currently referred
to in that rule as the iShares[supreg] Russell 2000[supreg] Index
Fund and iShares MSCI Emerging Markets Index Fund, respectively.
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    Finally, the Exchange proposes to increase the position limits on
options on QQQQ from 900,000 contracts to 1,800,000 contracts.
    In support of this proposal, the Exchange represents that the above
listed ETFs qualify for either: (i) The initial listing criteria set
forth in Exchange Rule 502(h) for ETFs holding non-U.S. component
securities; or (ii) for ETFs listed pursuant to generic listing
standards for series of portfolio depository receipts and index fund
shares based on international or global indexes under which a
comprehensive surveillance agreement (``CSA'') is not required.\5\ FXI
tracks the performance of the FTSE China 50 Index, which is composed of
the 50 largest Chinese stocks.\6\ EEM tracks the performance of the
MSCI Emerging Markets Index, which is composed of approximately 800
component securities.\7\ The MSCI Emerging Markets Index consists of
the following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.\8\ IWM tracks the performance of
the Russell 2000 Index, which is composed of 2,000 small-cap domestic
stocks.\9\ EFA tracks the performance of MSCI EAFE Index, which has
over 900 component securities.\10\ The MSCI EAFE Index is designed to
represent the performance of large and mid-cap securities across 21
developed markets, including countries in Europe, Australasia and the
Far East, excluding the U.S. and Canada.\11\ EWZ tracks the performance
of the MSCI Brazil 25/50 Index, which is composed of shares of large
and mid-size companies in Brazil.\12\ TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index, which is composed of long-term U.S.
Treasury bonds.\13\ QQQQ tracks the performance of the Nasdaq-100
Index, which is composed of 100 of the largest domestic and
international nonfinancial companies listed on the Nasdaq Stock Market
LLC (``Nasdaq'').\14\ EWJ tracks the MSCI Japan Index, which tracks the
performance of large and mid-sized companies in Japan.\15\
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    \5\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Exchange Rule 503(h).
    \6\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
    \7\ See http://us.ishares.com/product_info/fund/overview/EEM.htm.
    \8\ See http://www.msci.com/products/indices/tools/index.html#EM.
    \9\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
    \10\ See https://www.ishares.com/us/products/239623/.
    \11\ See https://www.msci.com/eafe.
    \12\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
    \13\ See https://www.ishares.com/us/products/239454/.
    \14\ See https://www.invesco.com/portal/site/us/financial-professional/etfs/productdetail?productId=QQQ&ticker=QQQ&title=powershares-qqq.
    \15\ See https://www.ishares.com/us/products/239665/EWJ.
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    The Exchange represents that more than 50% of the weight of the
securities held by the options subject to this proposal are also
subject to a CSA.\16\ Additionally, the component securities of the
MSCI Emerging Markets Index on which EEM is based for which the primary
market is in any one country that is not subject to a CSA do not
represent 20% or more of the weight of the MSCI Emerging Markets
Index.\17\ Finally, the component securities of the MSCI Emerging
Markets Index on which EEM is based, for which the primary market is in
any two countries that are not subject to CSAs do not represent 33% or
more of the weight of the MSCI Emerging Markets Index.\18\
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    \16\ See Exchange Rule 502(h)(b)(2).
    \17\ See Exchange Rule 502(h)(b)(3).
    \18\ See Exchange Rule 502(h)(b)(4).
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    Market participants have increased their demand for options on FXI,
EFA, EWZ, TLT, and EWJ for hedging and trading purposes and the
Exchange believes the current position limits are too low and may be a
deterrent to successful trading of options on these securities.
The CBOE Analysis
    The Commission has recently approved a proposed rule change of the
Chicago Board Options Exchange (``CBOE'') to increase position limits
for these same options.\19\ The discussion that follows is based upon
the CBOE's analysis presented in that proposal.
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    \19\ See Securities Exchange Act Release No. 82770 (February 23,
2018) (approving SR-CBOE-2017-057).
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    In its proposal, CBOE stated that it had collected the following
trading statistics on the ETFs that are subject to this proposal:

----------------------------------------------------------------------------------------------------------------
                                                                     2017 ADV         Shares
                       ETF                           2017 ADV         (option       outstanding    Fund  market
                                                   (Mil. shares)    contracts)        (Mil.)       cap  ($Mil.)
----------------------------------------------------------------------------------------------------------------
FXI.............................................           15.08          71,944            78.6         3,343.6
EEM.............................................           52.12         287,357           797.4        34,926.1
IWM.............................................           27.46         490,070           253.1        35,809.1
EFA.............................................           19.42          98,844          1178.4        78,870.3
EWZ.............................................           17.08          95,152           159.4         6,023.4
TLT.............................................            8.53          80,476            60.0           7,442
QQQQ............................................           26.25         579,404           351.6        50,359.7
EWJ.............................................            6.06           4,715           303.6        16,625.1
SPY.............................................           64.63       2,575,153          976.23       240,540.0
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    In support of its proposal to increase the position limits for QQQQ
to 1,800,000 contracts, CBOE compared the trading characteristics of
QQQQ to that of the SPDR S&P 500 ETF (``SPY''), which has no position
limits. As shown in the above table, the average daily trading volume
through August 14, 2017 for QQQQ was 26.25 million shares compared to
64.63 million shares for SPY. The total shares outstanding for QQQQ are
351.6 million compared to 976.23 million for SPY. The fund market cap
for QQQQ is $50,359.7 million compared to $240,540 million for SPY. SPY
is one of the most actively trading ETFs and is, therefore, subject to
no position limits. QQQQ is also very actively traded, and while not to
the level of SPY, should be subject to the proposed higher position
limits based on its trading characteristics when compared to SPY. The
proposed position limit coupled with QQQQ's trading behavior would
continue to address potential manipulative schemes and adverse market
impact surrounding the use of options and trading in its underlying the
options.
    In support of its proposal to increase the position limits for EEM
and IWM from 500,000 contracts to 1,000,000 contracts, CBOE also
compared the trading characteristics of EEM and IWM to that of QQQQ,
which currently has a position limit of 900,000 contracts. As shown in
the above table, the average daily trading volume through July 31, 2017
for EEM was 52.12 million shares and IWM was 27.46 million shares
compared to 26.25 million shares for QQQQ. The total shares outstanding
for EEM are 797.4 million and for IWM are 253.1 million compared to
351.6 million for QQQQ. The fund market cap for EEM is $34,926.1
million and IWM is $35,809 million compared to $50,359.7 million for
QQQQ. EEM, IWM and QQQQ have similar trading characteristics and
subjecting EEM and IWM to the proposed higher position limit would
continue be designed to address potential manipulate schemes that may
arise from trading in the options and their underlying securities.
These above trading characteristics for QQQQ when compared to EEM and
IWM also justify increasing the position limit for QQQQ. QQQQ has a
higher options ADV than EEM and IWM, a higher numbers of shares
outstanding than IWM and a much higher market cap than EEM and IWM
which justify doubling the position limit for QQQQ. CBOE concluded
that, based on these statistics, and as stated above, the proposed
position limit coupled with QQQQ's trading behavior would continue to
address potential manipulative schemes and adverse market impact
surrounding the use of options and trading in the securities underlying
the options.
    In support of its proposal to increase the position limits for FXI,
EFA, EWZ, TLT, and EWJ from 250,000 contracts to 500,000 contracts,
CBOE compared the trading characteristics of FXI, EFA, EWZ, TLT, and
EWJ to that of EEM and IWM, both of which currently have a position
limit of 500,000 contracts. As shown in the above table, the average
daily trading volume through July 31, 2017 for FXI is 15.08 million
shares, EFA is 19.42 million shares, EWZ is 17.08 million shares, TLT
is 8.53 million shares, and EWJ is 6.06 million shares compared to
52.12 million shares for EEM and 27.46 million shares for IWM. The
total shares outstanding for FXI is 78.6 million, EFA is 1178.4
million, EWZ is 159.4 million, TLT is 60 million, and EWJ is 303.6
million compared to 797.4 million for EEM and 253.1 million for IWM.
The fund market cap for FXI is $3,343.6 million, EFA is $78,870.3
million, EWZ is $6,023.4 million, TLT is $7,442.4 million, and EWJ is
$16,625.1 million compared to $34,926.1 million for EEM and $35,809.1
million for IWM.
    In Partial Amendment No. 1 to its proposed rule change, CBOE
provided additional analysis and support for its proposed rule
change.\20\ According to CBOE, market participants' trading activity
has been adversely impacted by the current position limits as such
limits have caused options trading in the symbols subject to the
proposed rule change to move from exchanges to the over-the-counter
market. CBOE stated it had submitted the proposed rule change at the
request of market participants whose on-exchange activity has been
hindered by the existing position limits causing them to be unable to
provide additional liquidity not just on CBOE, but also on other
options exchanges on which they participate.
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    \20\ See SR-CBOE-2017-057, Partial Amendment No. 1 (November 22,
2017).
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    CBOE stated it understood that certain market participants wishing
to make trades involving a large number of options contracts in the
symbols subject to the proposed rule change are opting to execute those
trades in the over-the-counter market, that the over-the counter
transactions occur via bilateral agreements the terms of which are not
publicly disclosed to other market participants, and that therefore,
these large trades do not contribute to the price discovery process
performed on a lit market. It stated that position limits are designed
to address potential manipulative schemes and adverse market impact
surrounding the use of options, such as disrupting the market in the
security underlying the options, and that the potential manipulative
schemes and adverse market impact are balanced against the potential of
setting the limits so low as to discourage participation in the options
market. It stated that the level of those position limits must be
balanced between curtailing potential manipulation and the cost of
preventing potential hedging activity that could be used for legitimate
economic purposes.
    CBOE observed that the ETFs that underlie options subject to the
proposed rule change are highly liquid, and are based on a broad set of
highly liquid securities and other reference assets,

and noted that the Commission has generally looked through to the
liquidity of securities comprising an index in establishing position
limits for cash-settled index options. It further noted that options on
certain broad-based security indexes have no position limits. CBOE
observed that the Commission has recognized the liquidity of the
securities comprising the underlying interest of the SPDR S&P 500 ETF
(``SPY'') in permitting no position limits on SPY options since
2012,\21\ and expanded position limits for options on EEM, IWM and
QQQQ.
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    \21\ See Securities Exchange Act Release No. 67937 (September
27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-091).
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    CBOE stated that the creation and redemption process for these ETFs
also lessen the potential for manipulative activity, explaining that
when an ETF company wants to create more ETF shares, it looks to an
Authorized Participant, which is a market maker or other large
financial institution, to acquire the securities the ETF is to hold.
For instance, IWM is designed to track the performance of the Russell
2000 Index, the Authorized Participant will purchase all the Russell
2000 constituent securities in the exact same weight as the index, then
deliver those shares to the ETF provider. In exchange, the ETF provider
gives the Authorized Participant a block of equally valued ETF shares,
on a one-for-one fair value basis. The price is based on the net asset
value, not the market value at which the ETF is trading. The creation
of new ETF units can be conducted all trading day and is not subject to
position limits. This process can also work in reverse where the ETF
company seeks to decrease the number of shares that are available to
trade. The creation and redemption process, therefore, creates a direct
link to the underlying components of the ETF, and serves to mitigate
potential price impact of the ETF shares that might otherwise result
from increased position limits. The ETF creation and redemption seeks
to keep ETF share prices trading in line with the ETF's underlying net
asset value. Because an ETF trades like a stock, its price will
fluctuate during the trading day, due to simple supply and demand. If
demand to buy an ETF is high, for instance, the ETF's share price might
rise above the value of its underlying securities. When this happens,
the Authorized Participant believes the ETF may now be overpriced, and
can buy the underlying shares that compose the ETF and then sell ETF
shares on the open market. This should help drive the ETF's share price
back toward fair value. Likewise, if the ETF starts trading at a
discount to the securities it holds, the Authorized Participant can buy
shares of the ETF and redeem them for the underlying securities. Buying
undervalued ETF shares should drive the price of the ETF back toward
fair value. This arbitrage process helps to keep an ETF's price in line
with the value of its underlying portfolio.
    CBOE stated that in proposing the increased position limits, the
Exchange considered the availability of economically equivalent
products and their respective position limits. For instance, some of
the ETFs underlying options subject to the proposed rule change are
based on broad-based indices that underlie cash settled options that
are economically equivalent to the ETF options that are the subject of
the proposed rule change and have no position limits. Other ETFs are
based on broad-based indexes that underlie cash-settled options with
position limits reflecting notional values that are larger than the
current position limits for ETF analogues (EEM, EFA). Where there was
no approved index analogue, CBOE stated its belief, based on the
liquidity, breadth and depth of the underlying market, that the index
referenced by the ETF would be considered a broad-based index.\22\ CBOE
argued that if certain position limits are appropriate for the options
overlying the same index or is an analogue to the basket of securities
that the ETF tracks, then those same economically equivalent position
limits should be appropriate for the option overlying the ETF. In
addition, CBOE observed, the market capitalization of the underlying
index or reference asset is large enough to absorb any price movements
that may be caused by an oversized trade. Also, the Authorized
Participant or issuer may look to the stocks comprising the analogous
underlying index or reference asset when seeking to create additional
ETF shares are part of the creation/redemption process to address
supply and demand or to mitigate the price movement the price of the
ETF. CBOE offered the following specific examples to illustrate:
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    \22\ CBOE Rule 24.4 and Exchange Rule 2004 set forth the CBOE
and the ISE position limits for broad-based index options.
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QQQQ
    For example, the PowerShares QQQ Trust or QQQQ is an ETF that
tracks the Nasdaq 100 Index or NDX, which is an index composed of 100
of the largest non-financial securities listed on Nasdaq. Options on
NDX are currently subject to no position limits but share similar
trading characteristics as QQQQ. Based on QQQQ's share price of $154.54
\23\ and NDX's index level of 6,339.14, approximately 40 contracts of
QQQQ equals one contract of NDX. Assume that NDX was subject to the
standard position limit of 25,000 contracts for broad-based index
options. Based on the above comparison of notional values, this would
result in a positon limit equivalent to 1,000,000 contracts for QQQQ as
NDX's analogue. However, NDX is not subject to position limits and has
an average daily trading volume of 15,300 contracts. QQQQ is currently
subject to a position limit of 900,000 contracts but has a much higher
average daily trading volume of 579,404 contracts. Furthermore, NDX
currently has a market capitalization of $17.2 trillion and QQQQ has a
market capitalization of $50,359.7 million, and the component
securities of NDX, in aggregate, have traded an average of 440 million
shares per day in 2017, both large enough to absorb any price movement
cause by a large trade in the QQQQ. The Commission has also approved no
position limit for NDX, although it has a much lower average daily
trading volume than its analogue, the QQQQ. Therefore, CBOE concluded
and the Exchange agrees it was reasonable to increase the positon limit
for options on the QQQQ from 900,000 to 1,800,000 contracts.
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    \23\ CBOE stated that all share prices used in its analysis were
based on the closing price of the security on November 16, 2017 and
cited Yahoo Finance as the source.
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IWM
    The iShares Russell 2000 ETF or IWM, is an ETF that also tracks the
Russell 2000 Index or RUT, which is an index that is composed of 2,000
small-cap domestic companies in the Russell 3000 index. Options on RUT
are currently subject to no position limits but share similar trading
characteristics as IWM. Based on IWM's share price of $144.77 and RUT's
index level of 1,486.88, approximately 10 contracts of IWM equals one
contract of RUT. Assume that RUT was subject to the standard position
limit of 25,000 contracts for broad-based index options under Exchange
Rule 24.4(a). Based on the above comparison of notional values, this
would result in a positon limit equivalent to 250,000 contracts for IWM
as RUT's analogue. However, RUT is not subject to position limits and
has an average daily trading volume of 66,200 contracts. IWM is
currently subject to a position limit of 500,000 contracts but has a
much higher average daily trading volume of 490,070

contracts. The Commission has approved no position limit for RUT,
although it has a much lower average daily trading volume than its
analogue, the IWM. Furthermore, RUT currently has a market
capitalization of $2.4 trillion and IWM has a market capitalization of
$35,809.1 million, and the component securities of RUT, in aggregate,
have traded an average of 270 million shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
IWM. Therefore, CBOE concluded and the Exchange agrees it is reasonable
to increase the positon limit for options on the IWM from 500,000 to
1,000,000 contracts.
EEM
    EEM tracks the performance of the MSCI Emerging Markets Index or
MXEF, which is composed of approximately 800 component securities
following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey. Based on EEM's share price of
$47.06 and MXEF's index level of 1,136.45, approximately 24 contracts
of EEM equals one contract of MXEF. MXEF is currently subject to the
standard position limit of 25,000 contracts for broad-based index
options. Based on the above comparison of notional values, this would
result in a position limit economically equivalent to 604,000 contracts
for EEM as MXEF's analogue. However, MXEF has an average daily trading
volume of 180 contracts. EEM is currently subject to a position limit
of 500,000 contracts but has a much higher average daily trading volume
of 287,357 contracts. Furthermore, MXEF currently has a market
capitalization of $5.18 trillion and EEM has a market capitalization of
$34,926.1 million, and the component securities of MXEF, in aggregate,
have traded an average of 33.6 billion shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in the
EEM. Therefore, based on the comparison of average daily trading
volume, CBOE believed and the Exchange agrees that it is reasonable to
increase the positon limit for options on the IWM from 500,000 to
1,000,000 contracts.
EFA
    EFA tracks the performance of MSCI EAFE Index or MXEA, which has
over 900 component securities designed to represent the performance of
large and mid-cap securities across 21 developed markets, including
countries in Europe, Australasia and the Far East, excluding the U.S.
and Canada. Based on EFA's share price of $69.16 and MXEA's index level
of 1,986.15, approximately 29 contracts of EFA equals one contract of
MXEA. MXEA is currently subject to the standard position limit of
25,000 contracts for broad-based index options. Based on the above
comparison of notional values, this would result in a positon limit
economically equivalent to 721,000 contracts for EFA as MXEA's
analogue. Furthermore, MXEA currently has a market capitalization of
$18.7 trillion and EFA has a market capitalization of $78,870.3
million, and the component securities of MXEA, in aggregate, have
traded an average of 4.6 billion shares per day in 2017, both large
enough to absorb any price movement cause by a large trade in the EEM.
However, MXEA has an average daily trading volume of 270 contracts. EFA
is currently subject to a position limit of 250,000 contracts but has a
much higher average daily trading volume of 98,844 contracts. Based on
the above comparisons, CBOE believed and the Exchange agrees that it is
reasonable to increase the positon limit for options on the EFA from
250,000 to 500,000 contracts.
FXI
    FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks. There is currently no index
analogue for FXI approved for options trading. However, the FTSE China
50 Index currently has a market capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18 million, both large enough to
absorb any price movement cause by a large trade in FXI. The components
of the FTSE China 50 Index, in aggregate, have an average daily trading
volume of 2.3 billion shares. FXI is currently subject to a position
limit of 250,000 contracts but has a much higher average daily trading
volume of 15.08 million shares. Based on the above comparisons, CBOE
believed, and that Exchange agrees, that it is reasonable to increase
the positon limit for options on the FXI from 250,000 to 500,000
contracts.
EWZ
    EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil. There is
currently no index analogue for EWZ approved for options trading.
However, the MSCI Brazil 25/50 Index currently has a market
capitalization of $700 billion and EWZ has a market capitalization of
$6,023.4 million, both large enough to absorb any price movement cause
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index,
in aggregate, have an average daily trading volume of 285 million
shares. EWZ is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 17.08
million shares. Based on the above comparisons, CBOE believed and the
Exchange agrees that it is reasonable to increase the positon limit for
options on the EWZ from 250,000 to 500,000 contracts.
TLT
    TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond
Index, which is composed of long-term U.S. Treasury bonds. There is
currently no index analogue for TLT approved for options trading.
However, the U.S. Treasury market is one of the largest and most liquid
markets in the world, with over $14 trillion outstanding and turnover
of approximately $500 billion per day. TLT currently has a market
capitalization of $7,442.4 million, both large enough to absorb any
price movement cause by a large trade in TLT. Therefore, the potential
for manipulation will not increase solely due the increase in position
limits as set forth in the proposed rule change. Based on the above
comparisons, CBOE believed and the Exchange agrees it is reasonable to
increase the positon limit for options on the TLT from 250,000 to
500,000 contracts.
EWJ
    EWJ tracks the MSCI Japan Index, which tracks the performance of
large and mid-sized companies in Japan. There is currently no index
analogue for EWJ approved for options trading. However, the MSCI Japan
Index has a market capitalization of $3.5 trillion and EWJ has a market
capitalization of $16,625.1 million, and the component securities of
the MSCI Japan Index, in aggregate, have traded an average of 1.1
billion shares per day in 2017, both large enough to absorb any price
movement cause by a large trade in EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and has an average daily trading
volume of 6.6 million shares. Based on the above comparisons, CBOE
believed and the Exchange agrees that it is reasonable to increase the
positon limit for options on EWJ from 250,000 to 500,000 contracts.
ISE Analysis and Conclusions
    ISE has reviewed the CBOE analysis set forth above. On the basis of
that analysis ISE believes that market

participants' trading activity could be adversely impacted by the
current position limits for FXI, EFA, EWZ, TLT and EWJ and such limits
may cause options trading in these symbols to move from exchanges to
the over-the-counter market. The above trading characteristics of FXI,
EFA, EWZ, TLT and EWJ are either similar to those of EEM and IWM or
sufficiently active so that the proposed limit would continue to
address potential manipulation that may arise. Specifically, EFA has
far more shares outstanding and a larger fund market cap than EEM, IWM,
and QQQQ. EWJ has more shares outstanding than IWM and only slightly
fewer shares outstanding than QQQQ.
    On the other hand, while FXI, EWZ and TLT do not exceed EEM, IWM or
QQQQ in any of the specified areas, they are all actively trading so
that market participants' trading activity has been impacted by them
being restricted by the current position limits. The Exchange believes
that the trading activity and these securities being based on a broad
basket of underlying securities alleviates concerns as to any potential
manipulative activity that may arise. In addition, as discussed in more
detail below, the Exchange's existing surveillance procedures and
reporting requirements at the Exchange, at other options exchanges, and
at the several clearing firms are capable of properly identifying
unusual and/or illegal trading activity.
    On the basis of CBOE's analysis ISE also believes that market
participants' trading activity could be adversely impacted by the
current position limits for EEM, IWM and QQQQ. As discussed above, EEM,
IWM and QQQQ have similar trading characteristics. Subjecting EEM and
IWM to the proposed higher position limit would continue be designed to
address potential manipulate schemes that may arise from trading in the
options and their underlying securities. The trading characteristics
for QQQQ described above, when compared to EEM and IWM, also justify
increasing the position limit for QQQQ. QQQQ has a higher options ADV
than EEM and IWM, a higher numbers of shares outstanding than IWM and a
much higher market cap than EEM and IWM which justify doubling the
positon limit for QQQQ. Based on these statistics, the proposed
position limit coupled with QQQQ's trading behavior would continue to
address potential manipulative schemes and adverse market impact
surrounding the use of options and trading in its underlying the
options.
    The Exchange believes that increasing the position limits for the
options subject to this proposal would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in this product. Under the proposal, the reporting
requirement for the above options would be unchanged. Thus, the
Exchange would still require that each Member file with the Exchange
the name, address and social security or tax identification number of
any customer, as well as any Member, any general or special partner of
the Member, any officer or director of the Member or any participant,
as such, in any joint, group or syndicate account with the Member or
with any partner, officer or director thereof, who, on the previous
business day held aggregate long or short positions of 200 or more
options contracts of any single class of options traded on the
Exchange. The report is also required to indicate for each such class
of options contracts the number of options contracts comprising each
such position and, in case of short positions, whether covered or
uncovered. Additionally, Electronic Access Members that maintain an end
of day position in excess of 10,000 non-FLEX equity options contracts
on the same side of the market on behalf of its own account or for the
account of a customer, are required to report whether such position is
hedged and provide documentation as to how such position is hedged.
This report is required at the time the subject account exceeds the
10,000 contract threshold and thereafter, for customer accounts, when
the position increases by 2,500 contracts and for proprietary accounts
when the position increases by 5,000 contracts. Finally, Members are
also required to report promptly to the Exchange any instance in which
the Member has reason to believe that a person included in Rule 415(a),
acting alone or in concert with others, has exceeded or is attempting
to exceed the position limits established pursuant to Rule 412.\24\
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    \24\ See Exchange Rule 415 for reporting requirements.
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    The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange, other options exchanges, and at
the several clearing firms are capable of properly identifying unusual
and/or illegal trading activity. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize daily monitoring of market movements via automated
surveillance techniques to identify unusual activity in both options
and underlying stocks.\25\
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    \25\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed.
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    Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\26\ The positions for
options subject to this proposal are part of any reportable positions
and, thus, cannot be legally hidden. Moreover, the Exchange's
requirement that Members file reports with the Exchange for any
customer who held aggregate large long or short positions of any single
class for the previous day will continue to serve as an important part
of the Exchange's surveillance efforts.
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    \26\ 17 CFR 240.13d-1.
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    The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a member organization or its customer may try to maintain
an inordinately large un-hedged position in the options subject to this
proposal. Current margin and risk-based haircut methodologies serve to
limit the size of positions maintained by any one account by increasing
the margin and/or capital that a member organization must maintain for
a large position held by itself or by its customer.\27\ In addition,
Rule 15c3-1 \28\ imposes a capital charge on member organizations to
the extent of any margin deficiency resulting from the higher margin
requirement.
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    \27\ See Exchange Rule 1202(a), which provides that a Member
must elect to be bound by the initial and maintenance margin
requirements of either the CBOE or the New York Stock Exchange as
the same may be in effect from time to time.
    \28\ 17 CFR 240.15c3-1.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\29\ in general, and furthers the objectives of Section
6(b)(5) of the Act,\30\ in particular, in that it is designed 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. As noted above, the Commission has recently approved
increasing position limits to the levels proposed herein on the same
ETF options on the CBOE. The Exchange believes that the proposed
position limits would continue to address potential manipulative
activity while allowing for potential hedging

activity for appropriate economic purposes.
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    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
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    The current position limits for the options subject to this
proposal have inhibited the ability of market makers to make markets on
the Exchange. Specifically, the proposal is designed to encourage
market makers to shift liquidity from over the counter markets onto the
Exchange, which will enhance the process of price discovery conducted
on the Exchange through increased order flow. The proposal will also
benefit institutional investors as well as retail traders, and public
customers, by providing them with a more effective trading and hedging
vehicle. In addition, the Exchange believes that the structure of the
ETFs subject to this proposal and the considerable liquidity of the
market for options on those ETFs diminishes the opportunity to
manipulate this product and disrupt the underlying market that a lower
position limit may protect against.
    Increased position limits for select actively traded options, such
as that proposed herein, is not novel and has been previously approved
by the Commission. For example, the Commission has previously approved,
on a pilot basis, eliminating position limits for certain options.\31\
Additionally, the Commission has approved similar proposed rule changes
to increase position limits for options on highly liquid, actively-
traded ETFs,\32\ including a proposal to permanently eliminate the
position and exercise limits for options overlaying the S&P 500 Index,
S&P 100 Index, Dow Jones Industrial Average, Nasdaq 100 Index, and the
Russell 2000(R) Index (``RUT'').\33\ In approving the permanent
elimination of position and exercise limits for these index options,
the Commission relied heavily upon the Exchange's surveillance
capabilities, and the Commission expressed trust in the enhanced
surveillance and reporting safeguards that the Exchange took in order
to detect and deter possible manipulative behavior which might arise
from eliminating position and exercise limits.\34\ Furthermore, as
described more fully above, options on other ETFs have the position
limits proposed herein and those ETFs have trading characteristics and
trading volumes that are similar to those of the ETFs subject to this
proposed rule change.
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    \31\ See Securities Exchange Act Release Nos. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091).
    \32\ See Securities Exchange Act Release Nos. 68086 (October 23,
2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066); 64928
(July 20, 2011), 76 FR 44633 (July 26,2011) (SR-CBOE-2011-065);
64695 (June 17, 2011), 76 FR 36942 (June 23, 2011) (SR-PHLX-2011-
58); and 55176 (January 25, 2007), 72 FR 4741 (February 1, 2017)
(SR-CBOE-2007-008.).
    \33\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22) (elimination
of position and exercise limits on SPX, OEX, and DJX options)
(``SPX, OEX, and DJX Position Limit Elimination Approval Order'');
52650 (October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-
2005-41) (elimination of position and exercise limits on NDX
options) (``NDX Position Limit Elimination Approval Order''); 56651
(October 12, 2007), 72 FR 59130 (October 18, 2007) (SR-Phlx-2007-71)
(``RUT Position Limit Elimination Approval Order'').
    \34\ Id.
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    Last, the Commission has expressed the belief that removing
position and exercise limits may bring additional depth and liquidity
without increasing concerns regarding intermarket manipulation or
disruption of the options or the underlying securities.\35\ The
Exchange's enhanced surveillance and reporting safeguards continue to
be designed to deter and detect possible manipulative behavior which
might arise from eliminating position and exercise limits.
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    \35\ Id.
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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 not necessary or appropriate in
furtherance of the purposes of the Act. On the contrary, the Exchange
believes that the proposed rule change will result in additional
opportunities to achieve the investment and trading objectives of
market participants seeking efficient trading and hedging vehicles, to
the benefit of investors, market participants, and the marketplace in
general.

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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A)(iii) of the Act \36\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\37\
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    \36\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \37\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \38\ normally
does not become operative prior to 30 days after the date of the
filing. However, Rule 19b-4(f)(6)(iii) \39\ permits the Commission to
designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposed
rule change may become effective and operative immediately upon filing.
The Exchange states that waiver of the operative delay would permit the
Exchange to immediately implement the proposed rule change to increase
the position limits as proposed herein and thereby seamlessly continue
to offer traders and the investing public the ability to use these
products as effective hedging and trading vehicles. The Exchange
further states that waiver would allow the Exchange to remain
competitive with other exchanges. The Commission believes that waiver
of the 30-day operative delay is consistent with the protection of
investors and the public interest. Therefore, the Commission hereby
waives the 30-day operative delay and designates the proposed rule
change as operative upon filing.\40\
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    \38\ 17 CFR 240.19b-4(f)(6).
    \39\ 17 CFR 240.19b-4(f)(6)(iii).
    \40\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or 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-ISE-2018-39 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-ISE-2018-39. 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-ISE-2018-39 and should be submitted on
or before May 29, 2018.
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    \41\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09696 Filed 5-7-18; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register: March 4, 2008 (Volume 73, Number 43)]
[Notices]
[Page 11685-11687]
[DOCID:fr04mr08-109]

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28175; 812-13473]

Advisors Series Trust, et al.; Notice of Application

February 27, 2008.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the
Investment Company Act of 1940 (``Act'') for an exemption from section
15(a) of the Act and rule 18f-2 under the Act, as well as from certain
disclosure requirements.

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Summary of the Application:  Applicants request an order that would
permit them to enter into and materially amend subadvisory agreements
without shareholder approval and would grant relief from certain
disclosure requirements.
    Applicants: Advisors Series Trust (the ``Trust'') and FundQuest
Incorporated (the ``Adviser'').

Filing Dates:  The application was filed on December 31, 2007, and
amended on January 28, 2008.

Hearing or Notification of Hearing:  An order granting the application
will be issued unless the Commission orders a hearing. Interested
persons may request a hearing by writing to the Commission's Secretary
and serving applicants with a copy of the request, personally or by
mail. Hearing requests should be received by the Commission by 5:30
p.m. on March 24, 2008 and should be accompanied by proof of service on
applicants, in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writer's
interest, the reason for the request, and the issues contested. Persons
who wish to be notified of a hearing may request by writing to the
Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. Applicants, c/o Julie Allecta,
Esq., Paul Hastings, Janofsky and Walker, 55 Second Street, 24th Floor,
San Francisco, CA 94105.

FOR FURTHER INFORMATION CONTACT: Lewis B. Reich, Senior Counsel, at
(202) 551-6919, or Nadya B. Roytblat, Assistant Director, at (202) 551-
6821 (Office of Investment Company Regulation, Division of Investment
Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Branch, 100 F Street, NE., Washington, DC
20549-1520 (telephone<PHONE_NUMBER>).

Applicants' Representations

    1. The Trust, a Delaware statutory trust organized as a series
investment company, is registered under the Act as an open-end
management investment company and currently offers thirty-three series,
ten of which are advised by the Adviser (``Funds'').\1\ The Adviser, a
Delaware corporation and a wholly-owned subsidiary of Paribas North
America, is registered as an investment adviser under the Investment
Advisers Act of 1940 (``Advisers Act''), and will serve as investment
adviser to the Funds under an investment advisory agreement with the
Trust (``Advisory Agreement'') that will have been approved by each
respective Fund's shareholders and the Trust's Board of Trustees
(``Board''), including a majority of the trustees who are not
``interested persons,'' as defined in section 2(a)(19) of the Act, of
either the Trust or the Adviser (``Independent Trustees'').
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    \1\ Applicants request relief with respect to any existing and
any future series of the Trust that: (a) Is advised by the Adviser
or a person controlling, controlled by, or under common control with
the Adviser; (b) uses the management structure described in the
application; and (c) complies with the terms and conditions of the
requested order (included in the term ``Funds''). The only existing
registered open-end management investment company that currently
intends to rely on the requested order is named as an applicant. If
the name of any Fund contains the name of a Subadviser (as defined
below), the name of the Adviser will precede the name of the
Subadviser.
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    2. Under the terms of the Advisory Agreement, the Adviser will
provide each Fund with overall management services and continuously
review, supervise and administer each Fund's investment program,
subject to the supervision of, and policies established by, the Board.
For the investment management services it will provide to each Fund,
the Adviser will receive the fee specified in the Advisory Agreement
from such Fund. The Advisory Agreement will also permit the Adviser,
subject to the approval of the Board and Fund shareholders, to enter
into investment subadvisory agreements (``Subadvisory Agreements'')
with one or more subadvisers (``Subadvisers''). The Adviser has entered
into Subadvisory Agreements with various Subadvisers to provide
investment advisory services to the Funds. Each Subadviser is, and
every future Subadviser will be, registered as an investment adviser
under the Advisers Act. The Adviser will monitor and evaluate the
Subadvisers and recommend to the Board their hiring, retention or
termination. Subadvisers recommended to the Board by the Adviser will
be selected and approved by the Board, including a majority of the
Independent Trustees. Each Subadviser will have discretionary authority
to invest the assets or a portion of the assets of a particular Fund.
The Adviser will compensate each Subadviser out of the fees paid to the
Adviser under the Advisory Agreement.
    3. Applicants request an order to permit the Adviser, subject to
Board approval, to enter into and materially amend Subadvisory
Agreements without obtaining shareholder approval. The requested relief
will not extend to any Subadviser that is an affiliated person, as
defined in section 2(a)(3) of the Act, of the Trust or of the Adviser,
other than by reason of serving as a subadviser to one or more of the
Funds (``Affiliated Subadviser'').
    4. Applicants also request an exemption from the various disclosure
provisions described below that may require a Fund to disclose fees
paid by the Adviser to each Subadviser. An exemption is requested to
permit the Trust to disclose for each Fund (as both a dollar amount and
as a percentage of each Fund's net assets): (a) The aggregate fees paid
to the Adviser and any Affiliated Subadvisers; and (b) the aggregate
fees paid to Subadvisers other than Affiliated Subadvisers (``Aggregate
Fee Disclosure''). Any Fund that employs an Affiliated Subadviser will
provide separate disclosure of any fees paid to the Affiliated
Subadviser.

Applicants' Legal Analysis

    1. Section 15(a) of the Act provides, in relevant part, that is
unlawful for any person to act as an investment adviser to a registered
investment company except pursuant to a written contract that has been
approved by a vote of a majority of the company's outstanding voting
securities. Rule 18f-2 under the Act provides that each series or class
of stock in a series investment company affected by a matter must
approve that matter if the Act requires shareholder approval.
    2. Form N-1A is the registration statement used by open-end
investment companies. Item 14(a)(3) of Form N-1A requires disclosure of
the method and amount of the investment adviser's compensation.
    3. Rule 20a-1 under the Act requires proxies solicited with respect
to an investment company to comply with Schedule 14A under the
Securities Exchange Act of 1934 (``1934 Act''). Items 22(c)(1)(ii),
22(c)(1)(iii), 22(c)(8) and 22(c)(9) of Schedule 14A, taken together,
require a proxy statement for a shareholder meeting at which the
advisory contract will be voted upon to include the ``rate of
compensation of the investment adviser,'' the ``aggregate amount of the
investment adviser's fees,'' a description of the ``terms of the
contract to be acted upon,'' and, if a change in the advisory fee is
proposed, the existing and proposed fees and the difference between the
two fees.
    4. Form N-SAR is the semi-annual report filed with the Commission
by registered investment companies. Item 48 of Form N-SAR requires
investment companies to disclose the rate schedule

for fees paid to their investment advisers, including the Subadvisers.
    5. Regulation S-X sets forth the requirements for financial
statements required to be included as part of investment company
registration statements and shareholder reports filed with the
Commission. Sections 6-07(2)(a), (b), and (c) of Regulation S-X require
that investment companies include in their financial statements
information about investment advisory fees.
    6. Section 6(c) of the Act provides that the Commission may exempt
any person, security, or transaction or any class or classes of
persons, securities, or transactions from any provisions of the Act, or
from any rule thereunder, if such exemption is necessary or appropriate
in the public interest and consistent with the protection of investors
and the purposes fairly intended by the policy and provisions of the
Act. Applicants state that their requested relief meets this standard
for the reasons discussed below.
    7. Applicants assert that the shareholders rely on the Adviser's
experience to select one or more Subadvisers best suited to achieve a
Fund's investment objectives. Applicants assert that, from the
perspective of the investor, the role of the Subadvisers is comparable
to that of the individual portfolio managers employed by traditional
investment company advisory firms. Applicants state that requiring
shareholder approval of each Subadvisory Agreement would impose costs
and unnecessary delays on the Funds, and may preclude the Adviser from
acting promptly in a manner considered advisable by the Board.
Applicants note that the Advisory Agreement and any Subadvisory
Agreement with an Affiliated Subadviser will remain subject to section
15(a) of the Act and rule 18f-2 under the Act.
    8. Applicants assert that some Subadvisers use a ``posted'' rate
schedule to set their fees. Applicants state that while Subadvisers are
willing to negotiate fees that are lower than those posted on the
schedule, they are reluctant to do so where the fees are disclosed to
other prospective and existing customers. Applicants submit that the
requested relief will encourage potential Subadvisers to negotiate
lower subadvisory fees with the Adviser.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will
be subject to the following conditions:
    1. Before a Fund may rely on the order requested in the
application, the operation of the Fund in the manner described in the
application will be approved by a majority of the Fund's outstanding
voting securities, as defined in the Act, or, in the case of a Fund
whose public shareholders purchase shares on the basis of a prospectus
containing the disclosure contemplated by condition 2 below, by the
sole initial shareholder before offering the Fund's shares to the
public.
    2. The prospectus for each Fund will disclose the existence,
substance, and effect of any order granted pursuant to the application.
Each Fund will hold itself out to the public as employing the
management structure described in the application. The prospectus will
prominently disclose that the Adviser has ultimate responsibility
(subject to oversight by the Board) to oversee the Subadvisers and
recommend their hiring, termination, and replacement.
    3. Within 90 days of the hiring of any new Subadviser, the affected
Fund shareholders will be furnished all information about the new
Subadviser that would be included in a proxy statement, except as
modified to permit Aggregate Fee Disclosure. This information will
include Aggregate Fee Disclosure and any change in that disclosure
caused by the addition of the new Subadviser. To meet this obligation,
the Fund will provide shareholders within 90 days of the hiring of a
new Subadviser with an information statement meeting the requirements
of Regulation 14C, Schedule 14C, and Item 22 of Schedule 14A under the
1934 Act, except as modified by the order to permit Aggregate Fee
Disclosure.
    4. The Adviser will not enter into a Subadvisory Agreement with any
Affiliated Subadviser without that agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Fund.
    5. At all times, at least a majority of the Board will be
Independent Trustees, and the nomination of new or additional
Independent Trustees will be placed within the discretion of the then-
existing Independent Trustees.
    6. When a Subadviser change is proposed for a Fund with an
Affiliated Subadviser, the Board, including a majority of the
Independent Trustees, will make a separate finding, reflected in the
applicable Board minutes, that such change is in the best interests of
the Fund and its shareholders and does not involve a conflict of
interest from which the Adviser or the Affiliated Subadviser would
derive an inappropriate advantage.
    7. Independent legal counsel, as defined in rule 0-1(a)(6) under
the Act, will be engaged to represent the Independent Trustees. The
selection of such counsel will be within the discretion of the then
existing Independent Trustees.
    8. The Adviser will provide the Board, no less frequently than
quarterly, with information about the profitability of the Adviser on a
per-Fund basis. The information will reflect the impact on
profitability of the hiring or termination of any Subadviser during the
applicable quarter.
    9. Whenever a Subadviser is hired or terminated, the Adviser will
provide the Board with information showing the expected impact on the
profitability of the Adviser.
    10. The Adviser will provide general management services to each
Fund, including overall supervisory responsibility for the general
management and investment of the Fund's assets and, subject to review
and approval of the Board, will (i) set each Fund's overall investment
strategies; (ii) evaluate, select and recommend Subadvisers to manage
all or part of a Fund's assets; (iii) when appropriate, allocate and
reallocate a Fund's assets among multiple Subadvisers; (iv) monitor and
evaluate the performance of Subadvisers; and (v) implement procedures
reasonably designed to ensure that the Subadvisers comply with each
Fund's investment objective, policies and restrictions.
    11. No director or officer of the Trust, or director or officer of
the Adviser, will own directly or indirectly (other than through a
pooled investment vehicle that is not controlled by such person) any
interest in a Subadviser, except for (a) ownership of interests in the
Adviser or any entity that controls, is controlled by, or is under
common control with the Adviser; or (b) ownership of less than 1% of
the outstanding securities of any class of equity or debt of a publicly
traded company that is either a Subadviser or an entity that controls,
is controlled by, or is under common control with a Subadviser.
    12. Each Fund will disclose in its registration statement the
Aggregate Fee Disclosure.
    13. The requested order will expire on the effective date of Rule
15a-5 under the Act, if adopted.

    For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-4081 Filed 3-3-08; 8:45 am]

BILLING CODE 8011-01-P


[Federal Register Volume 87, Number 122 (Monday, June 27, 2022)]
[Proposed Rules]
[Pages 38046-38048]
[FR Doc No: 2022-13660]

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ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 52

[EPA-R03-OAR-2021-0855; FRL-8941-01-R3]

Air Plan Approval; Virginia; Negative Declaration Certification
for the 2015 Ozone National Ambient Air Quality Standard for the 2016
Oil and Natural Gas Control Techniques Guidelines

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

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SUMMARY: The Environmental Protection Agency (EPA) is proposing to
approve a state implementation plan (SIP) revision submitted by the
Commonwealth of Virginia. This revision provides Virginia's
determination for the 2015 Ozone national ambient air quality standards
(NAAQS), via a negative declaration, that there are no sources within
the Northern Virginia volatile organic compound (VOC) Emissions Control
Area subject to EPA's 2016 Oil and Natural Gas control techniques
guidelines (2016 Oil and Gas CTG). The negative declaration covers only
the 2016 Oil and Gas CTG and asserts that there are no sources subject
to this CTG located in the Northern Virginia VOC Emissions Control
Area. This action is being taken under the Clean Air Act (CAA).

DATES: Written comments must be received on or before July 27, 2022.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-R03-
OAR-2021-0855 at https://www.regulations.gov, or via email to
[email protected]. For comments submitted at Regulations.gov, follow
the online instructions for submitting comments. Once submitted,
comments cannot be edited or removed from Regulations.gov. For either
manner of submission, EPA may publish any comment received to its
public docket. Do not submit electronically any information you
consider to be confidential business information (CBI) or other
information whose disclosure is restricted by statute. Multimedia
submissions (audio, video, etc.) must be accompanied by a written
comment. The written comment is considered the official comment and
should include discussion of all points you wish to make. EPA will
generally not consider comments or comment contents located outside of
the primary submission (i.e., on the web, cloud, or other file sharing
system). For additional submission methods, please contact the person
identified in the FOR FURTHER INFORMATION CONTACT section. For the full
EPA public comment policy, information about CBI or multimedia
submissions, and general guidance on making effective comments, please
visit https://www.epa.gov/dockets/commenting-epa-dockets.

FOR FURTHER INFORMATION CONTACT: Om P. Devkota, Planning &
Implementation Branch (3AD30), Air & Radiation Division, U.S.
Environmental Protection Agency, Region III, Four Penn Center, 1600
John F. Kennedy Boulevard, Philadelphia, Pennsylvania 19103. The
telephone number is<PHONE_NUMBER>. Mr. Devkota can also be reached via
electronic mail at [email protected].

SUPPLEMENTARY INFORMATION: On August 9, 2021, the Virginia Department
of Environmental Quality (VADEQ) submitted the negative declaration for
the 2016 Oil and Gas CTG for the 2015 ozone NAAQS as a revision to the
Virginia SIP.

I. Background

    The CAA regulates emissions of nitrogen oxides (NOX) and
VOCs to prevent photochemical reactions that result in ozone formation.
Reasonably available control technology (RACT) is a strategy for
reducing NOX and VOC emissions from stationary sources
within areas not meeting the NAAQS for ozone. EPA has consistently
defined ``RACT'' as the lowest emission limit that a particular source
is capable of meeting by the application of the control technology that
is reasonably available considering technological and economic
feasibility.
    Section 172(c)(1) of the CAA provides that SIPs for nonattainment
areas must include RACT, including RACT for existing sources of
emissions. Section 182(b)(2)(A) of the CAA requires that for areas
designated nonattainment for an ozone NAAQS and classified as moderate,
states must revise their SIP to include provisions to implement RACT
for each category of VOC sources covered by a CTG document issued
between November 15, 1990, and the date of attainment. Section
182(b)(2)(B) requires the same for CTGs issued before November 15,
1990. CAA section 182(c) through (e) applies this requirement to states
with areas designated nonattainment for an ozone NAAQS classified as
serious, severe, and extreme.
    The CAA also imposes the same requirement on states in Ozone
Transport Regions (OTR). Specifically, CAA section 184(b) provides that
states in an OTR must revise their SIP to implement RACT with respect
to all sources of VOC in the OTR covered by a CTG document issued
before or after November 15, 1990, even for areas designated attainment
within the OTR. CAA section 184(a) establishes a single OTR comprised
of 11 eastern states and the Consolidated Metropolitan Statistical Area
(CMSA) that includes the District of Columbia. Portions of Northern
Virginia are in the CMSA and therefore the OTR. The rest of Virginia is
not in the OTR. The Virginia portion of the OTR includes the following
areas: Arlington County, Fairfax County, Loudoun County, Prince William
County, Stafford County, Alexandria City, Fairfax City, Falls Church
City, Manassas City, and Manassas Park City. Collectively, these areas
will be referred to as the ``Northern Virginia VOC Emissions Control
Area'' or the ``Northern Virginia area.'' Finally, Section 182(f)
requires that plan provisions required under subpart 4 of part D of
title I of the CAA, which includes sections 182 through 184, for major
sources of VOC shall also apply to major stationary sources of oxides
of nitrogen in ozone nonattainment areas.
    CTGs and alternative control techniques (ACTs) form important
components of the guidance that EPA provides to states for making RACT
determinations.\1\ CTGs are used to presumptively define VOC RACT for
applicable source categories. States subject to RACT requirements are
required to adopt controls that are at least as stringent as those
found in the CTG either by adopting regulations or issuing single-
source orders or permits that outline what the source is required to do
to meet RACT. On October 27, 2016 (81 FR 74798), EPA published in the
Federal Register the ``Release of Final Control Techniques Guidelines
for the Oil and Natural Gas Industry.'' This 2016 Oil and Gas CTG
provided information to state, local, and tribal air agencies to assist
in determining RACT

for VOC emissions from select oil and natural gas industry emission
sources. The 2016 Oil and Gas CTG replaces an earlier 1983 CTG entitled
``Control of Volatile Organic Compound Equipment Leaks from Natural
Gas/Gasoline Processing Plants. December 1983.'' EPA-450/3-83-007 (1983
CTG) 49 FR 4432 (February 6, 1984). 2016 Oil and Gas CTG, p. 8-1.
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    \1\ A complete list of EPA-issued CTGs and ACTs with links to
each CTG or ACT can be found at https://www.epa.gov/ground-level-ozone-pollution/control-techniques-guidelines-and-alternative-control-techniques.
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    On March 6, 2015 (80 FR 12263), EPA issued a final rule entitled
``Implementation of the 2008 national ambient air quality standards for
Ozone: State Implementation Plan Requirements'' (2008 Ozone
Implementation Rule).\2\ In the preamble to the final rule, EPA makes
clear that if there are no sources covered by a specific CTG source
category located in an ozone nonattainment area or an area in the OTR,
the state must submit a negative declaration for that CTG. See 80 FR
12263, 12278. On December 6, 2018 (83 FR 62998), EPA issued a final
rule entitled ``Implementation of the 2015 National Ambient Air Quality
Standards for Ozone: Nonattainment Area State Implementation Plan
Requirements'' (2015 Ozone Implementation Rule).\3\ In the 2015 Ozone
Implementation Rule, EPA retained without significant revision the
majority of existing implementing regulations associated with the 2008
ozone NAAQS for the purposes of implementing the 2015 ozone NAAQS. See
83 FR 62998. If no source for a specified CTG exists in a state, the
state must submit, as a SIP revision, a negative declaration
documenting this fact. On August 9, 2021, VADEQ submitted for approval
into the Virginia SIP a negative declaration for the 2016 CTG for the
Oil and Natural Gas Industry for the 2015 ozone standards.
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    \2\ See Provisions for Implementation of the 2008 Ozone National
Ambient Air Quality Standards at 40 CFR 51.1100 through 51.1119.
    \3\ See Provisions for Implementation of the 2015 Ozone National
Ambient Air Quality Standards at 40 CFR 51.1300 through 51.1319.
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II. Summary of SIP Revision and EPA Analysis

    The 2016 Oil and Gas CTG divides the industry into four segments:
production, processing, transmission and storage, and distribution. The
transmission and storage sector includes compressor stations, pipelines
and storage facilities. The distribution sector is the final step in
delivering natural gas to customers and includes gas mains and service
pipelines. See CTG p.3-1; see also CTG pp.3-1 through 3-3 for a brief
explanation of each segment. However, not all four segments of the
industry are subject to the requirements of the CTG. The CTG covers
select sources of VOC emissions in the onshore production and
processing segments of the oil and natural gas industry (i.e.,
pneumatic controllers, pneumatic pumps, compressors, equipment leaks,
fugitive emissions) and storage vessel VOC emissions in all segments
(except distribution) of the oil and natural gas industry. These
sources were selected for RACT recommendations because current
information indicates that they are significant sources of VOC
emissions. CTG p.3-5. A summary of the oil and natural gas emission
sources and recommended RACT for those sources is provided in Table 1
of the CTG document, on pages 3-6 through 3-8.
    According to Virginia's August 9, 2021 submittal, VADEQ conducted a
review of potential sources subject to the 2016 Oil and Gas CTG and
found that there are no sources located in the Northern Virginia area
subject to the terms of this CTG for purposes of the 2015 ozone NAAQS.
VADEQ used several methods to determine whether there were any sources
subject to this CTG in the Northern Virginia area. VADEQ consulted the
Department of Mines, Minerals, and Energy (DMME) Division of Gas and
Oil (DGO) database, which showed that there are no active wells in the
Northern Virginia area. No drilling permits have been issued in the
area since 1991. VADEQ also consulted the Comprehensive Environmental
Data System (CEDS), which is the air regulatory registration database
for the jurisdictions comprising the Northern Virginia VOC Emissions
Control Area (i.e., the Northern Virginia area). As explained in the
SIP submission, facilities must register in this database all units
subject to any applicable regulation in the Regulations for the Control
and Abatement of Air Pollution, any facilities with the potential to
emit (PTE) at least 25 tons per year (tpy) of VOC or 40 tpy of
NOX, and any facility making a change with a PTE of at least
10 tpy VOC or NOX. The CEDS also has registration and
reporting requirements for facilities emitting much lower levels of
VOC. After consulting CEDS, VADEQ found that no natural gas processing
or storage facilities are located in the Northern Virginia area. The
details concerning VADEQ's analysis are on page 2 of Virginia's
submittal.
    Notwithstanding VADEQ's finding that there are no VOC sources in
the Northern Virginia area subjected to RACT by the 2016 Oil and Gas
CTG, VADEQ identified facilities in Northern Virginia defined by the
2016 Oil and Gas CTG as part of the oil and natural gas industry.
Specifically, VADEQ identified certain natural gas compressor stations
in the Northern Virginia area, but determined that these are
``downstream'' of the point of custody transfer to the natural gas
transmission and storage segment. That is, these compressor stations
are in neither the production nor processing segment of the industry.
Compressor stations located in the transmission and storage segment of
the oil and gas industry are not subject to any RACT requirements
specified by the 2016 Oil and Gas CTG. See CTG, p. 3-7. However, if
these compressor stations meet the VOC or NOX emission
thresholds to be considered major sources of VOC or NOX for
a moderate ozone nonattainment area, these sources will be subject to a
major source RACT determination under Section 182(b)(2)(C) of the CAA.

III. Proposed Action

    EPA's review of this material indicates that the August 9, 2021
submittal meets CAA requirements and that VADEQ's analysis adequately
demonstrates that there are no affected sources located in the Northern
Virginia area subject to the 2016 Oil and Gas CTG source categories.
Therefore, EPA is proposing to approve Virginia's August 9, 2021
negative declaration SIP submittal as a revision to the Virginia SIP.
EPA is soliciting public comments on Virginia's negative declaration,
including the adequacy of VADEQ's search and analysis of the CTG
applicability criteria. Comments concerning the adequacy of the 2016
Oil and Gas CTG itself are not germane to this action and will not be
considered. Relevant comments will be considered before taking final
action.

IV. General Information Pertaining to SIP Submittals From the
Commonwealth of Virginia

    In 1995, Virginia adopted legislation that provides, subject to
certain conditions, for an environmental assessment (audit)
``privilege'' for voluntary compliance evaluations performed by a
regulated entity. The legislation further addresses the relative burden
of proof for parties either asserting the privilege or seeking
disclosure of documents for which the privilege is claimed. Virginia's
legislation also provides, subject to certain conditions, for a penalty
waiver for violations of environmental laws when a regulated entity
discovers such violations pursuant to a voluntary compliance evaluation
and voluntarily discloses such violations to the Commonwealth and takes
prompt and appropriate measures to remedy the

violations. Virginia's Voluntary Environmental Assessment Privilege
Law, Va. Code Sec. 10.11198, provides a privilege that protects from
disclosure documents and information about the content of those
documents that are the product of a voluntary environmental assessment.
The Privilege Law does not extend to documents or information that: (1)
are generated or developed before the commencement of a voluntary
environmental assessment; (2) are prepared independently of the
assessment process; (3) demonstrate a clear, imminent and substantial
danger to the public health or environment; or (4) are required by law.
    On January 12, 1998, the Commonwealth of Virginia Office of the
Attorney General provided a legal opinion that states that the
Privilege law, Va. Code Sec. 10.11198, precludes granting a privilege
to documents and information ``required by law,'' including documents
and information ``required by Federal law to maintain program
delegation, authorization or approval,'' since Virginia must ``enforce
Federally authorized environmental programs in a manner that is no less
stringent than their Federal counterparts. . . .'' The opinion
concludes that ``[r]egarding Sec.  10.1-1198, therefore, documents or
other information needed for civil or criminal enforcement under one of
these programs could not be privileged because such documents and
information are essential to pursuing enforcement in a manner required
by Federal law to maintain program delegation, authorization or
approval.''
    Virginia's Immunity law, Va. Code Sec. 10.11199, provides that
``[t]o the extent consistent with requirements imposed by Federal
law,'' any person making a voluntary disclosure of information to a
state agency regarding a violation of an environmental statute,
regulation, permit, or administrative order is granted immunity from
administrative or civil penalty. The Attorney General's January 12,
1998 opinion states that the quoted language renders this statute
inapplicable to enforcement of any Federally authorized programs, since
``no immunity could be afforded from administrative, civil, or criminal
penalties because granting such immunity would not be consistent with
Federal law, which is one of the criteria for immunity.''
    Therefore, EPA has determined that Virginia's Privilege and
Immunity statutes will not preclude the Commonwealth from enforcing its
program consistent with the Federal requirements. In any event, because
EPA has also determined that a state audit privilege and immunity law
can affect only state enforcement and cannot have any impact on Federal
enforcement authorities, EPA may at any time invoke its authority under
the CAA, including, for example, sections 113, 167, 205, 211 or 213, to
enforce the requirements or prohibitions of the state plan,
independently of any state enforcement effort. In addition, citizen
enforcement under section 304 of the CAA is likewise unaffected by
this, or any, state audit privilege or immunity law.

V. Statutory and Executive Order Reviews

    Under the CAA, the Administrator is required to approve a SIP
submission that complies with the provisions of the CAA and applicable
Federal regulations. 42 U.S.C. 7410(k); 40 CFR 52.02(a). Thus, in
reviewing SIP submissions, EPA's role is to approve state choices,
provided that they meet the criteria of the CAA. Accordingly, this
action merely approves state law as meeting Federal requirements and
does not impose additional requirements beyond those imposed by state
law. For that reason, this proposed action:
     Is not a ``significant regulatory action'' subject to
review by the Office of Management and Budget under Executive Orders
12866 (58 FR 51735, October 4, 1993) and 13563 (76 FR 3821, January 21,
2011);
     Does not impose an information collection burden under the
provisions of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.);
     Is certified as not having a significant economic impact
on a substantial number of small entities under the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.);
     Does not contain any unfunded mandate or significantly or
uniquely affect small governments, as described in the Unfunded
Mandates Reform Act of 1995 (Pub. L. 104-4);
     Does not have Federalism implications as specified in
Executive Order 13132 (64 FR 43255, August 10, 1999);
     Is not an economically significant regulatory action based
on health or safety risks subject to Executive Order 13045 (62 FR
19885, April 23, 1997);
     Is not a significant regulatory action subject to
Executive Order 13211 (66 FR 28355, May 22, 2001);
     Is not subject to requirements of section 12(d) of the
National Technology Transfer and Advancement Act of 1995 (15 U.S.C. 272
note) because application of those requirements would be inconsistent
with the CAA; and
     Does not provide EPA with the discretionary authority to
address, as appropriate, disproportionate human health or environmental
effects, using practicable and legally permissible methods, under
Executive Order 12898 (59 FR 7629, February 16, 1994).
    The SIP is not approved to apply on any Indian reservation land as
defined in 18 U.S.C. 1151 or in any other area where EPA or an Indian
tribe has demonstrated that a tribe has jurisdiction. As such, EPA's
proposed approval of Virginia's SIP revision certifying the negative
declaration for the 2016 Oil and Gas CTG does not have tribal
implications and will not impose substantial direct costs on tribal
governments or preempt tribal law as specified by Executive Order 13175
(65 FR 67249, November 9, 2000).

List of Subjects in 40 CFR Part 52

    Environmental protection, Air pollution control, Incorporation by
reference, Nitrogen dioxide, Ozone, Volatile organic compounds.

Adam Ortiz,
Regional Administrator, Region III.
[FR Doc. 2022-13660 Filed 6-24-22; 8:45 am]
BILLING CODE 6560-50-P