[Federal Register Volume 81, Number 17 (Wednesday, January 27, 2016)]
[Notices]
[Pages 4695-4708]
[FR Doc No: 2016-01535]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76954; File No. SR-BATS-2016-02]

Self-Regulatory Organizations; BATS Exchange, Inc.; Notice of
Filing of a Proposed Rule Change to Rule 14.11(i), Managed Fund Shares,
to List and Trade Shares of the iShares iBonds Dec 2023 AMT-Free Muni
Bond ETF, iShares iBonds Dec 2024 AMT-Free Muni Bond ETF, iShares
iBonds Dec 2025 AMT-Free Muni Bond ETF, and iShares iBonds Dec 2026
AMT-Free Muni Bond ETF of the iShares U.S. ETF Trust

January 21, 2016.
    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 January 12, 2016, BATS Exchange, Inc. (``Exchange'' or ``BATS'')
filed with the Securities and Exchange Commission (``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 is proposing to a rule change to list and trade shares
of the iShares iBonds Dec 2023 AMT-Free Muni Bond ETF, iShares iBonds
Dec 2024 AMT-Free Muni Bond ETF, iShares iBonds Dec 2025 AMT-Free Muni
Bond ETF, and iShares iBonds Dec 2026 AMT-Free Muni Bond ETF (each a
``Fund'' or, collectively, the ``Funds'') of the iShares U.S. ETF Trust
(the ``Trust'') under BATS Rule 14.11(i) (``Managed Fund Shares''). The
shares of the Funds are referred to herein as the ``Shares.''
    The text of the proposed rule change is available at the Exchange's
Web site at www.batstrading.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 parts of such
statements.

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

1. Purpose
    The Exchange proposes to list and trade the Shares under BATS Rule
14.11(i), which governs the listing and trading of Managed Fund Shares
on the Exchange.\3\ The Funds will be actively managed funds. The
Shares will be offered by the Trust, which was established as a
Delaware statutory trust on June 21, 2011. The Trust is registered with
the Commission as an open-end investment company and has filed a
registration statement on behalf of the Funds on Form N-1A
(``Registration Statement'') with the Commission.\4\
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    \3\ The Commission approved BATS Rule 14.11(i) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
    \4\ See Registration Statement on Form N-1A for the Trust, dated
November 2, 2015 (File Nos. 333-179904 and 811-22649). The
descriptions of the Funds and the Shares contained herein are based,
in part, on information in the Registration Statement. The
Commission has issued an order granting certain exemptive relief to
the Trust under the Investment Company Act of 1940 (15 U.S.C. 80a-1)
(``1940 Act'') (the ``Exemptive Order''). See Investment Company Act
Release No. 29571 (January 24, 2011) (File No. 812-13601).
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Description of the Shares and the Funds
    BlackRock Fund Advisors is the investment adviser (``BFA'' or
``Adviser'') to the Funds.\5\ State Street Bank and Trust Company is
the administrator, custodian, and transfer agent (``Administrator,''
``Custodian,'' and ``Transfer Agent,'' respectively) for the Trust.
BlackRock Investments, LLC serves as the distributor (``Distributor'')
for the Trust.
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    \5\ BFA is an indirect wholly owned subsidiary of BlackRock,
Inc.
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    BATS Rule 14.11(i)(7) provides that, if the investment adviser to
the investment company issuing Managed Fund Shares is affiliated with a
broker-dealer, such investment adviser shall erect a ``fire wall''
between the investment adviser and the broker-dealer with respect to
access to information concerning the composition and/or changes to such
investment company portfolio.\6\ In addition, Rule

14.11(i)(7) further requires that personnel who make decisions on the
investment company's portfolio composition must be subject to
procedures designed to prevent the use and dissemination of material
nonpublic information regarding the applicable investment company
portfolio. Rule 14.11(i)(7) is similar to BATS Rule 14.11(b)(5)(A)(i),
however, Rule 14.11(i)(7) in connection with the establishment of a
``fire wall'' between the investment adviser and the broker-dealer
reflects the applicable open-end fund's portfolio, not an underlying
benchmark index, as is the case with index-based funds. The Adviser is
not a registered broker-dealer, but is affiliated with multiple broker-
dealers and has implemented ``fire walls'' with respect to such broker-
dealers regarding access to information concerning the composition and/
or changes to a Fund's portfolio. In addition, Adviser personnel who
make decisions regarding a Fund's portfolio are subject to procedures
designed to prevent the use and dissemination of material nonpublic
information regarding the Fund's portfolio. In the event that (a) the
Adviser becomes registered as a broker-dealer or newly affiliated with
another broker-dealer, or (b) any new adviser or sub-adviser is a
registered broker-dealer or becomes affiliated with a broker-dealer, it
will implement a fire wall with respect to its relevant personnel or
such broker-dealer affiliate, as applicable, 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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    \6\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser and its 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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iShares iBonds Dec 2023 AMT-Free Muni Bond ETF
    According to the Registration Statement, the Fund will seek to
maximize tax-free current income and terminate on or around December
2023. To achieve its objective, the Fund will invest, under normal
circumstances,\7\ at least 80% of its net assets in Municipal
Securities, as defined below, such that the interest on each security
is exempt from U.S. federal income taxes and the federal alternative
minimum tax (the ``AMT''). The Fund is not a money market fund and does
not seek to maintain a stable net asset value of $1.00 per share. The
Fund will be classified as a ``non-diversified'' investment company
under the 1940 Act.\8\
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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 financial markets; 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.
    \8\ The diversification standard is set forth in Section 5(b)(1)
of the 1940 Act.
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    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended. The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
Principal Holdings--Municipal Securities
    To achieve its objective, the Fund will invest, under normal
circumstances, in U.S.-dollar denominated investment-grade fixed-rate
Municipal Securities, as defined below. The Fund will invest in both
callable and non-callable municipal bonds. Investment-grade securities
are rated a minimum of BBB- or higher by Standard & Poor's Ratings
Services and/or Fitch, or Baa3 or higher by Moody's, or if unrated,
determined by the Adviser to be of equivalent quality.\9\ Under normal
circumstances, the Fund's effective duration will vary within one year
(plus or minus) of the effective duration of the securities comprising
the S&P AMT-Free Municipal Series Dec 2023 Index, which, as of December
15, 2015, was 6.51 years.\10\
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    \9\ According to the Adviser, BFA may determine that unrated
securities are of ``equivalent quality'' based on such credit
quality factors that it deems appropriate, which may include among
other things, performing an analysis similar, to the extent
possible, to that performed by a nationally recognized statistical
ratings organization when rating similar securities and issuers. In
making such a determination, BFA may consider internal analyses and
risk ratings, third party research and analysis, and other sources
of information, as deemed appropriate by the Adviser.
    \10\ Effective duration is a measure of the Fund's price
sensitivity to changes in yields or interest rates.
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    Municipal securities (``Municipal Securities'') are fixed and
variable rate securities issued in the U.S. by U.S. states and
territories, municipalities and other political subdivisions, agencies,
authorities, and instrumentalities of states and multi-state agencies
and authorities and will include only the following instruments:
General obligation bonds,\11\ limited obligation bonds (or revenue
bonds),\12\ municipal notes,\13\ municipal commercial paper,\14\ tender
option bonds,\15\ variable rate demand obligations (``VRDOs''),\16\
municipal lease obligations,\17\ stripped securities,\18\ structured
securities,\19\ when issued securities,\20\ zero coupon securities,\21\
and exchange traded and

non-exchange traded investment companies (including investment
companies advised by BFA or its affiliates) that invest in such
Municipal Securities.\22\
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    \11\ General obligation bonds are obligations involving the
credit of an issuer possessing taxing power and are payable from
such issuer's general revenues and not from any particular source.
    \12\ Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific
revenue source, and also include industrial development bonds issued
pursuant to former U.S. federal tax law. Industrial development
bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of industrial
development bonds are usually related to the credit of the corporate
user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
    \13\ Municipal notes are shorter-term municipal debt obligations
that may provide interim financing in anticipation of tax
collection, receipt of grants, bond sales, or revenue receipts.
    \14\ Municipal commercial paper is generally unsecured debt that
is issued to meet short-term financing needs.
    \15\ Tender option bonds are synthetic floating-rate or
variable-rate securities issued when long-term bonds are purchased
in the primary or secondary market and then deposited into a trust.
Custodial receipts are then issued to investors, such as the Fund,
evidencing ownership interests in the trust.
    \16\ VRDOs are tax-exempt obligations that contain a floating or
variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period
not to exceed seven days.
    \17\ Municipal lease obligations include certificates of
participation issued by government authorities or entities to
finance the acquisition or construction of equipment, land, and/or
facilities.
    \18\ Stripped securities are created when an issuer separates
the interest and principal components of an instrument and sells
them as separate securities. In general, one security is entitled to
receive the interest payments on the underlying assets and the other
to receive the principal payments.
    \19\ Structured securities are privately negotiated debt
obligations where the principal and/or interest is determined by
reference to the performance of an underlying investment, index, or
reference obligation, and may be issued by governmental agencies.
While structured securities are part of the principal holdings of
the Fund, the Issuer represents that such securities, when combined
with those instruments held as part of the other portfolio holdings
described below, will not exceed 20% of the Fund's net assets.
    \20\ The Fund may purchase or sell securities that it is
entitled to receive on a when issued or delayed delivery basis as
well as through a forward commitment.
    \21\ Zero coupon securities are securities that are sold at a
discount to par value and do not pay interest during the life of the
security. The discount approximates the total amount of interest the
security will accrue and compound over the period until maturity at
a rate of interest reflecting the market rate of the security at the
time of issuance. Upon maturity, the holder of a zero coupon
security is entitled to receive the par value of the security.
    \22\ The Fund currently anticipates investing in only registered
open-end investment companies, including mutual funds and the open-
end investment company funds described in BATS Rule 14.11. The Fund
may invest in the securities of other investment companies to the
extent permitted by law.
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    In the last year of operation, as the bonds held by the Fund
mature, the proceeds will not be reinvested in bonds but instead will
be held in cash and cash equivalents, including, without limitation,
shares of affiliated money market funds, AMT-free tax-exempt municipal
notes, VRDOs, tender option bonds and municipal commercial paper. In or
around December 2023, the Fund will wind up and terminate, and its net
assets will be distributed to then current shareholders.
    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 Adviser, consistent with the Fund's
investment objective and in the best interest of the Fund. For example,
the Fund may hold a higher than normal proportion of its assets in cash
in response to adverse market, economic or political conditions.
    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended.\23\ The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
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    \23\ 26 U.S.C. 851.
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Other Portfolio Holdings
    The Fund may also, to a limited extent (under normal circumstances,
less than 20% of the Fund's net assets), engage in transactions in
futures contracts, options, or swaps in order to facilitate trading or
to reduce transaction costs.\24\ The Fund's investments will be
consistent with its investment objective and will not be used to
achieve leveraged returns (i.e. two times or three times the Fund's
benchmark, as described in the Registration Statement).
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    \24\ Derivatives might be included in the Fund's investments to
serve the investment objectives of the Fund. Such derivatives
include only the following: Interest rate futures, interest rate
options, interest rate swaps, and swaps on Municipal Securities
indexes. The derivatives will be centrally cleared and they will be
collateralized. Derivatives are not a principal investment strategy
of the Fund.
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    The Fund may also enter into repurchase and reverse repurchase
agreements for Municipal Securities (collectively, ``Repurchase
Agreements''). Repurchase Agreements involve the sale of securities
with an agreement to repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics of borrowing as
part of the Fund's principal holdings.\25\
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    \25\ The Fund's exposure to reverse repurchase agreements will
be covered by liquid assets having a value equal to or greater than
such commitments. The use of reverse repurchase agreements is a form
of leverage because the proceeds derived from reverse repurchase
agreements may be invested in additional securities. As further
stated below, the Fund's investments will be consistent with its
investment objective and will not be used to achieve leveraged
returns.
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    The Fund may also invest in short-term instruments (``Short-Term
Instruments''),\26\ which includes exchange traded and non-exchange
traded investment companies (including investment companies advised by
BFA or its affiliates) that invest in money market instruments.
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    \26\ The Fund may invest in Short-Term Instruments, including
money market instruments, on an ongoing basis to provide liquidity
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of
money market funds (including those advised by BFA or otherwise
affiliated with BFA); (ii) obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities (including
government-sponsored enterprises); (iii) negotiable certificates of
deposit (``CDs''), bankers' acceptances, fixed-time deposits and
other obligations of U.S. and non-U.S. banks (including non-U.S.
branches) and similar institutions; (iv) commercial paper, including
asset-backed commercial paper; (v) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at
the date of purchase of not more than 397 days and that satisfy the
rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of non-U.S.
banks (including U.S. branches) that, in the opinion of BFA, are of
comparable quality to obligations of U.S. banks which may be
purchased by the Fund. All money market securities acquired by the
Fund will be rated investment grade. The Fund does not intend to
invest in any unrated money market securities. However, it may do
so, to a limited extent, such as where a rated money market security
becomes unrated, if such money market security is determined by the
Adviser to be of comparable quality. BFA may determine that unrated
securities are of comparable quality based on such credit quality
factors that it deems appropriate, which may include, among other
things, performing an analysis similar, to the extent possible, to
that performed by a nationally recognized statistical rating
organization rating similar securities and issuers.
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Investment Restrictions
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment), as
deemed illiquid by the Adviser \27\ under the 1940 Act.\28\ The Fund
will monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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    \27\ In reaching liquidity decisions, the Adviser may consider
factors including: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer); any legal or contractual
restrictions on the ability to transfer the security or asset;
significant developments involving the issuer or counterparty
specifically (e.g., default, bankruptcy, etc.) or the securities
markets generally; and settlement practices, registration
procedures, limitations on currency conversion or repatriation, and
transfer limitations (for foreign securities or other assets).
    \28\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
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    The Fund may also invest up to 20% of its net assets in Municipal
Securities that pay interest that is subject to the AMT.
    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, (iii) investments in securities of state, territory,
possession or municipal governments and their authorities, agencies,
instrumentalities or political subdivisions or (iv) investments in
repurchase agreements collateralized by any such obligations.\29\
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    \29\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests in more than 25%
of the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
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iShares iBonds Dec 2024 AMT-Free Muni Bond ETF
    According to the Registration Statement, the Fund will seek to
maximize tax-free current income and terminate on or around December
2024. To achieve its objective, the Fund will invest, under normal
circumstances,\30\ at least 80% of its net assets in Municipal
Securities, as defined below, such that the interest on each security
is exempt from U.S. federal income taxes and the federal alternative
minimum tax (the ``AMT''). The Fund is not a money market fund and does
not seek to maintain a stable net asset value of $1.00 per share. The
Fund will be classified as a ``non-diversified'' investment company
under the 1940 Act.\31\
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    \30\ 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 financial markets; 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.
    \31\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
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    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended. The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
Principal Holdings--Municipal Securities
    To achieve its objective, the Fund will invest, under normal
circumstances, in U.S.-dollar denominated investment-grade fixed-rate
Municipal Securities, as defined below. The Fund will invest in both
callable and non-callable municipal bonds. Investment-grade securities
are rated a minimum of BBB- or higher by Standard & Poor's Ratings
Services and/or Fitch, or Baa3 or higher by Moody's, or if unrated,
determined by the Adviser to be of equivalent quality.\32\ Under normal
circumstances, the Fund's effective duration will vary within one year
(plus or minus) of the effective duration of the securities comprising
the S&P AMT-Free Municipal Series Dec 2024 Index, which, as of December
15, 2015, was 7.24 years.\33\
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    \32\ According to the Adviser, BFA may determine that unrated
securities are of ``equivalent quality'' based on such credit
quality factors that it deems appropriate, which may include among
other things, performing an analysis similar, to the extent
possible, to that performed by a nationally recognized statistical
ratings organization when rating similar securities and issuers. In
making such a determination, BFA may consider internal analyses and
risk ratings, third party research and analysis, and other sources
of information, as deemed appropriate by the Adviser.
    \33\ Effective duration is a measure of the Fund's price
sensitivity to changes in yields or interest rates.
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    Municipal securities (``Municipal Securities'') are fixed and
variable rate securities issued in the U.S. by U.S. states and
territories, municipalities and other political subdivisions, agencies,
authorities, and instrumentalities of states and multi-state agencies
and authorities and will include only the following instruments:
General obligation bonds,\34\ limited obligation bonds (or revenue
bonds),\35\, municipal notes,\36\ municipal commercial paper,\37\
tender option bonds,\38\ variable rate demand obligations
(``VRDOs''),\39\ municipal lease obligations,\40\ stripped
securities,\41\ structured securities,\42\ when issued securities,\43\
zero coupon securities,\44\ and exchange traded and non-exchange traded
investment companies (including investment companies advised by BFA or
its affiliates) that invest in such Municipal Securities.\45\
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    \34\ General obligation bonds are obligations involving the
credit of an issuer possessing taxing power and are payable from
such issuer's general revenues and not from any particular source.
    \35\ Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific
revenue source, and also include industrial development bonds issued
pursuant to former U.S. federal tax law. Industrial development
bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of industrial
development bonds are usually related to the credit of the corporate
user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
    \36\ Municipal notes are shorter-term municipal debt obligations
that may provide interim financing in anticipation of tax
collection, receipt of grants, bond sales, or revenue receipts.
    \37\ Municipal commercial paper is generally unsecured debt that
is issued to meet short-term financing needs.
    \38\ Tender option bonds are synthetic floating-rate or
variable-rate securities issued when long-term bonds are purchased
in the primary or secondary market and then deposited into a trust.
Custodial receipts are then issued to investors, such as the Fund,
evidencing ownership interests in the trust.
    \39\ VRDOs are tax-exempt obligations that contain a floating or
variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period
not to exceed seven days.
    \40\ Municipal lease obligations include certificates of
participation issued by government authorities or entities to
finance the acquisition or construction of equipment, land, and/or
facilities.
    \41\ Stripped securities are created when an issuer separates
the interest and principal components of an instrument and sells
them as separate securities. In general, one security is entitled to
receive the interest payments on the underlying assets and the other
to receive the principal payments.
    \42\ Structured securities are privately negotiated debt
obligations where the principal and/or interest is determined by
reference to the performance of an underlying investment, index, or
reference obligation, and may be issued by governmental agencies.
While structured securities are part of the principal holdings of
the Fund, the Issuer represents that such securities, when combined
with those instruments held as part of the other portfolio holdings
described below, will not exceed 20% of the Fund's net assets.
    \43\ The Fund may purchase or sell securities that it is
entitled to receive on a when issued or delayed delivery basis as
well as through a forward commitment.
    \44\ Zero coupon securities are securities that are sold at a
discount to par value and do not pay interest during the life of the
security. The discount approximates the total amount of interest the
security will accrue and compound over the period until maturity at
a rate of interest reflecting the market rate of the security at the
time of issuance. Upon maturity, the holder of a zero coupon
security is entitled to receive the par value of the security.
    \45\ The Fund currently anticipates investing in only registered
open-end investment companies, including mutual funds and the open-
end investment company funds described in BATS Rule 14.11. The Fund
may invest in the securities of other investment companies to the
extent permitted by law.
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    In the last year of operation, as the bonds held by the Fund
mature, the proceeds will not be reinvested in bonds but instead will
be held in cash and cash equivalents, including, without limitation,
shares of affiliated money market funds, AMT-free tax-exempt municipal
notes, VRDOs, tender option bonds and municipal commercial paper. In or
around December 2024, the Fund will wind up and terminate, and its net
assets will be distributed to then current shareholders.
    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 Adviser, consistent with the Fund's
investment objective and in the best interest of the Fund. For example,
the Fund may hold a higher than normal proportion of its assets in cash
in response to adverse market, economic or political conditions.

    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended.\46\ The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
---------------------------------------------------------------------------

    \46\ 26 U.S.C. 851.
---------------------------------------------------------------------------

Other Portfolio Holdings
    The Fund may also, to a limited extent (under normal circumstances,
less than 20% of the Fund's net assets), engage in transactions in
futures contracts, options, or swaps in order to facilitate trading or
to reduce transaction costs.\47\ The Fund's investments will be
consistent with its investment objective and will not be used to
achieve leveraged returns (i.e. two times or three times the Fund's
benchmark, as described in the Registration Statement).
---------------------------------------------------------------------------

    \47\ Derivatives might be included in the Fund's investments to
serve the investment objectives of the Fund. Such derivatives
include only the following: Interest rate futures, interest rate
options, interest rate swaps, and swaps on Municipal Securities
indexes. The derivatives will be centrally cleared and they will be
collateralized. Derivatives are not a principal investment strategy
of the Fund.
---------------------------------------------------------------------------

    The Fund may also enter into repurchase and reverse repurchase
agreements for Municipal Securities (collectively, ``Repurchase
Agreements''). Repurchase Agreements involve the sale of securities
with an agreement to repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics of borrowing as
part of the Fund's principal holdings.\48\
---------------------------------------------------------------------------

    \48\ The Fund's exposure to reverse repurchase agreements will
be covered by liquid assets having a value equal to or greater than
such commitments. The use of reverse repurchase agreements is a form
of leverage because the proceeds derived from reverse repurchase
agreements may be invested in additional securities. As further
stated below, the Fund's investments will be consistent with its
investment objective and will not be used to achieve leveraged
returns.
---------------------------------------------------------------------------

    The Fund may also invest in short-term instruments (``Short-Term
Instruments''),\49\ which includes exchange traded and non-exchange
traded investment companies (including investment companies advised by
BFA or its affiliates) that invest in money market instruments.
---------------------------------------------------------------------------

    \49\ The Fund may invest in Short-Term Instruments, including
money market instruments, on an ongoing basis to provide liquidity
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of
money market funds (including those advised by BFA or otherwise
affiliated with BFA); (ii) obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities (including
government-sponsored enterprises); (iii) negotiable certificates of
deposit (``CDs''), bankers' acceptances, fixed-time deposits and
other obligations of U.S. and non-U.S. banks (including non-U.S.
branches) and similar institutions; (iv) commercial paper, including
asset-backed commercial paper; (v) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at
the date of purchase of not more than 397 days and that satisfy the
rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of non-U.S.
banks (including U.S. branches) that, in the opinion of BFA, are of
comparable quality to obligations of U.S. banks which may be
purchased by the Fund. All money market securities acquired by the
Fund will be rated investment grade. The Fund does not intend to
invest in any unrated money market securities. However, it may do
so, to a limited extent, such as where a rated money market security
becomes unrated, if such money market security is determined by the
Adviser to be of comparable quality. BFA may determine that unrated
securities are of comparable quality based on such credit quality
factors that it deems appropriate, which may include, among other
things, performing an analysis similar, to the extent possible, to
that performed by a nationally recognized statistical rating
organization rating similar securities and issuers.
---------------------------------------------------------------------------

Investment Restrictions
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment), as
deemed illiquid by the Adviser \50\ under the 1940 Act.\51\ The Fund
will monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
---------------------------------------------------------------------------

    \50\ In reaching liquidity decisions, the Adviser may consider
factors including: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer); any legal or contractual
restrictions on the ability to transfer the security or asset;
significant developments involving the issuer or counterparty
specifically (e.g., default, bankruptcy, etc.) or the securities
markets generally; and settlement practices, registration
procedures, limitations on currency conversion or repatriation, and
transfer limitations (for foreign securities or other assets).
    \51\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    The Fund may also invest up to 20% of its net assets in Municipal
Securities that pay interest that is subject to the AMT.
    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, (iii) investments
in securities of state, territory, possession or municipal governments
and their authorities, agencies, instrumentalities or political
subdivisions or (iv) investments in repurchase agreements
collateralized by any such obligations.\52\
---------------------------------------------------------------------------

    \52\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests in more than 25%
of the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
---------------------------------------------------------------------------

iShares iBonds Dec 2025 AMT-Free Muni Bond ETF
    According to the Registration Statement, the Fund will seek to
maximize tax-free current income and terminate on or around December
2025. To achieve its objective, the Fund will invest, under normal
circumstances,\53\ at least 80% of its net assets in Municipal
Securities, as defined below, such that the interest on each security
is exempt from U.S. federal income taxes and the federal alternative
minimum tax (the ``AMT''). The Fund is not a money market fund and does
not

seek to maintain a stable net asset value of $1.00 per share. The Fund
will be classified as a ``non-diversified'' investment company under
the 1940 Act.\54\
---------------------------------------------------------------------------

    \53\ 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 financial markets; 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.
    \54\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended. The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
Principal Holdings--Municipal Securities
    To achieve its objective, the Fund will invest, under normal
circumstances, in U.S.-dollar denominated investment-grade fixed-rate
Municipal Securities, as defined below. The Fund will invest in both
callable and non-callable municipal bonds. Investment-grade securities
are rated a minimum of BBB- or higher by Standard & Poor's Ratings
Services and/or Fitch, or Baa3 or higher by Moody's, or if unrated,
determined by the Adviser to be of equivalent quality.\55\ Under normal
circumstances, the Fund's effective duration will vary within one year
(plus or minus) of the effective duration of the securities comprising
the S&P AMT-Free Municipal Series Dec 2025 Index, which, as of December
15, 2015, was 8.26 years.\56\
---------------------------------------------------------------------------

    \55\ According to the Adviser, BFA may determine that unrated
securities are of ``equivalent quality'' based on such credit
quality factors that it deems appropriate, which may include among
other things, performing an analysis similar, to the extent
possible, to that performed by a nationally recognized statistical
ratings organization when rating similar securities and issuers. In
making such a determination, BFA may consider internal analyses and
risk ratings, third party research and analysis, and other sources
of information, as deemed appropriate by the Adviser.
    \56\ Effective duration is a measure of the Fund's price
sensitivity to changes in yields or interest rates.
---------------------------------------------------------------------------

    Municipal securities (``Municipal Securities'') are fixed and
variable rate securities issued in the U.S. by U.S. states and
territories, municipalities and other political subdivisions, agencies,
authorities, and instrumentalities of states and multi-state agencies
and authorities and will include only the following instruments:
General obligation bonds,\57\ limited obligation bonds (or revenue
bonds),\58\ municipal notes,\59\ municipal commercial paper,\60\ tender
option bonds,\61\ variable rate demand obligations (``VRDOs''),\62\
municipal lease obligations,\63\ stripped securities,\64\ structured
securities,\65\ when issued securities,\66\ zero coupon securities,\67\
and exchange traded and non-exchange traded investment companies
(including investment companies advised by BFA or its affiliates) that
invest in such Municipal Securities.\68\
---------------------------------------------------------------------------

    \57\ General obligation bonds are obligations involving the
credit of an issuer possessing taxing power and are payable from
such issuer's general revenues and not from any particular source.
    \58\ Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific
revenue source, and also include industrial development bonds issued
pursuant to former U.S. federal tax law. Industrial development
bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of industrial
development bonds are usually related to the credit of the corporate
user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
    \59\ Municipal notes are shorter-term municipal debt obligations
that may provide interim financing in anticipation of tax
collection, receipt of grants, bond sales, or revenue receipts.
    \60\ Municipal commercial paper is generally unsecured debt that
is issued to meet short-term financing needs.
    \61\ Tender option bonds are synthetic floating-rate or
variable-rate securities issued when long-term bonds are purchased
in the primary or secondary market and then deposited into a trust.
Custodial receipts are then issued to investors, such as the Fund,
evidencing ownership interests in the trust.
    \62\ VRDOs are tax-exempt obligations that contain a floating or
variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period
not to exceed seven days.
    \63\ Municipal lease obligations include certificates of
participation issued by government authorities or entities to
finance the acquisition or construction of equipment, land, and/or
facilities.
    \64\ Stripped securities are created when an issuer separates
the interest and principal components of an instrument and sells
them as separate securities. In general, one security is entitled to
receive the interest payments on the underlying assets and the other
to receive the principal payments.
    \65\ Structured securities are privately negotiated debt
obligations where the principal and/or interest is determined by
reference to the performance of an underlying investment, index, or
reference obligation, and may be issued by governmental agencies.
While structured securities are part of the principal holdings of
the Fund, the Issuer represents that such securities, when combined
with those instruments held as part of the other portfolio holdings
described below, will not exceed 20% of the Fund's net assets.
    \66\ The Fund may purchase or sell securities that it is
entitled to receive on a when issued or delayed delivery basis as
well as through a forward commitment.
    \67\ Zero coupon securities are securities that are sold at a
discount to par value and do not pay interest during the life of the
security. The discount approximates the total amount of interest the
security will accrue and compound over the period until maturity at
a rate of interest reflecting the market rate of the security at the
time of issuance. Upon maturity, the holder of a zero coupon
security is entitled to receive the par value of the security.
    \68\ The Fund currently anticipates investing in only registered
open-end investment companies, including mutual funds and the open-
end investment company funds described in BATS Rule 14.11. The Fund
may invest in the securities of other investment companies to the
extent permitted by law.
---------------------------------------------------------------------------

    In the last year of operation, as the bonds held by the Fund
mature, the proceeds will not be reinvested in bonds but instead will
be held in cash and cash equivalents, including, without limitation,
shares of affiliated money market funds, AMT-free tax-exempt municipal
notes, VRDOs, tender option bonds and municipal commercial paper. In or
around December 2025, the Fund will wind up and terminate, and its net
assets will be distributed to then current shareholders.
    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 Adviser, consistent with the Fund's
investment objective and in the best interest of the Fund. For example,
the Fund may hold a higher than normal proportion of its assets in cash
in response to adverse market, economic or political conditions.
    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended.\69\ The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
---------------------------------------------------------------------------

    \69\ 26 U.S.C. 851.
---------------------------------------------------------------------------

Other Portfolio Holdings
    The Fund may also, to a limited extent (under normal circumstances,
less than 20% of the Fund's net assets), engage in transactions in
futures contracts, options, or swaps in order to facilitate trading or
to reduce transaction costs.\70\ The Fund's investments will be
consistent with its investment objective and will not be used to
achieve leveraged returns (i.e. two times or three times the Fund's
benchmark, as described in the Registration Statement).
---------------------------------------------------------------------------

    \70\ Derivatives might be included in the Fund's investments to
serve the investment objectives of the Fund. Such derivatives
include only the following: Interest rate futures, interest rate
options, interest rate swaps, and swaps on Municipal Securities
indexes. The derivatives will be centrally cleared and they will be
collateralized. Derivatives are not a principal investment strategy
of the Fund.

---------------------------------------------------------------------------

    The Fund may also enter into repurchase and reverse repurchase
agreements for Municipal Securities (collectively, ``Repurchase
Agreements''). Repurchase Agreements involve the sale of securities
with an agreement to repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics of borrowing as
part of the Fund's principal holdings.\71\
---------------------------------------------------------------------------

    \71\ The Fund's exposure to reverse repurchase agreements will
be covered by liquid assets having a value equal to or greater than
such commitments. The use of reverse repurchase agreements is a form
of leverage because the proceeds derived from reverse repurchase
agreements may be invested in additional securities. As further
stated below, the Fund's investments will be consistent with its
investment objective and will not be used to achieve leveraged
returns.
---------------------------------------------------------------------------

    The Fund may also invest in short-term instruments (``Short-Term
Instruments''),\72\ which includes exchange traded and non-exchange
traded investment companies (including investment companies advised by
BFA or its affiliates) that invest in money market instruments.
---------------------------------------------------------------------------

    \72\ The Fund may invest in Short-Term Instruments, including
money market instruments, on an ongoing basis to provide liquidity
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of
money market funds (including those advised by BFA or otherwise
affiliated with BFA); (ii) obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities (including
government-sponsored enterprises); (iii) negotiable certificates of
deposit (``CDs''), bankers' acceptances, fixed-time deposits and
other obligations of U.S. and non-U.S. banks (including non-U.S.
branches) and similar institutions; (iv) commercial paper, including
asset-backed commercial paper; (v) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at
the date of purchase of not more than 397 days and that satisfy the
rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of non-U.S.
banks (including U.S. branches) that, in the opinion of BFA, are of
comparable quality to obligations of U.S. banks which may be
purchased by the Fund. All money market securities acquired by the
Fund will be rated investment grade. The Fund does not intend to
invest in any unrated money market securities. However, it may do
so, to a limited extent, such as where a rated money market security
becomes unrated, if such money market security is determined by the
Adviser to be of comparable quality. BFA may determine that unrated
securities are of comparable quality based on such credit quality
factors that it deems appropriate, which may include, among other
things, performing an analysis similar, to the extent possible, to
that performed by a nationally recognized statistical rating
organization rating similar securities and issuers.
---------------------------------------------------------------------------

Investment Restrictions
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment), as
deemed illiquid by the Adviser \73\ under the 1940 Act.\74\ The Fund
will monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
---------------------------------------------------------------------------

    \73\ In reaching liquidity decisions, the Adviser may consider
factors including: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer); any legal or contractual
restrictions on the ability to transfer the security or asset;
significant developments involving the issuer or counterparty
specifically (e.g., default, bankruptcy, etc.) or the securities
markets generally; and settlement practices, registration
procedures, limitations on currency conversion or repatriation, and
transfer limitations (for foreign securities or other assets).
    \74\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    The Fund may also invest up to 20% of its net assets in Municipal
Securities that pay interest that is subject to the AMT.
    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, (iii) investments
in securities of state, territory, possession or municipal governments
and their authorities, agencies, instrumentalities or political
subdivisions or (iv) investments in repurchase agreements
collateralized by any such obligations.\75\
---------------------------------------------------------------------------

    \75\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests in more than 25%
of the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
---------------------------------------------------------------------------

iShares iBonds Dec 2026 AMT-Free Muni Bond ETF
    According to the Registration Statement, the Fund will seek to
maximize tax-free current income and terminate on or around December
2026. To achieve its objective, the Fund will invest, under normal
circumstances,\76\ at least 80% of its net assets in Municipal
Securities, as defined below, such that the interest on each security
is exempt from U.S. federal income taxes and the federal alternative
minimum tax (the ``AMT''). The Fund is not a money market fund and does
not seek to maintain a stable net asset value of $1.00 per share. The
Fund will be classified as a ``non-diversified'' investment company
under the 1940 Act.\77\
---------------------------------------------------------------------------

    \76\ 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 financial markets; 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.
    \77\ The diversification standard is set forth in Section
5(b)(1) of the 1940 Act.
---------------------------------------------------------------------------

    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended. The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
Principal Holdings--Municipal Securities
    To achieve its objective, the Fund will invest, under normal
circumstances, in U.S.-dollar denominated investment-grade fixed-rate
Municipal Securities, as defined below. The Fund will invest in both
callable and non-callable municipal bonds. Investment-grade securities
are rated a minimum of BBB- or higher by Standard & Poor's Ratings

Services and/or Fitch, or Baa3 or higher by Moody's, or if unrated,
determined by the Adviser to be of equivalent quality.\78\ Under normal
circumstances, the Fund's effective duration will vary within one year
(plus or minus) of the effective duration of the securities comprising
the S&P AMT-Free Municipal Series Dec 2026 Index, which, as of December
15, 2015, was 9.22 years.\79\
---------------------------------------------------------------------------

    \78\ According to the Adviser, BFA may determine that unrated
securities are of ``equivalent quality'' based on such credit
quality factors that it deems appropriate, which may include among
other things, performing an analysis similar, to the extent
possible, to that performed by a nationally recognized statistical
ratings organization when rating similar securities and issuers. In
making such a determination, BFA may consider internal analyses and
risk ratings, third party research and analysis, and other sources
of information, as deemed appropriate by the Adviser.
    \79\ Effective duration is a measure of the Fund's price
sensitivity to changes in yields or interest rates.
---------------------------------------------------------------------------

    Municipal securities (``Municipal Securities'') are fixed and
variable rate securities issued in the U.S. by U.S. states and
territories, municipalities and other political subdivisions, agencies,
authorities, and instrumentalities of states and multi-state agencies
and authorities and will include only the following instruments:
General obligation bonds,\80\ limited obligation bonds (or revenue
bonds),\81\ municipal notes,\82\ municipal commercial paper,\83\ tender
option bonds,\84\ variable rate demand obligations (``VRDOs''),\85\
municipal lease obligations,\86\ stripped securities,\87\ structured
securities,\88\ when issued securities,\89\ zero coupon securities,\90\
and exchange traded and non-exchange traded investment companies
(including investment companies advised by BFA or its affiliates) that
invest in such Municipal Securities.\91\
---------------------------------------------------------------------------

    \80\ General obligation bonds are obligations involving the
credit of an issuer possessing taxing power and are payable from
such issuer's general revenues and not from any particular source.
    \81\ Limited obligation bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific
revenue source, and also include industrial development bonds issued
pursuant to former U.S. federal tax law. Industrial development
bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of industrial
development bonds are usually related to the credit of the corporate
user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
    \82\ Municipal notes are shorter-term municipal debt obligations
that may provide interim financing in anticipation of tax
collection, receipt of grants, bond sales, or revenue receipts.
    \83\ Municipal commercial paper is generally unsecured debt that
is issued to meet short-term financing needs.
    \84\ Tender option bonds are synthetic floating-rate or
variable-rate securities issued when long-term bonds are purchased
in the primary or secondary market and then deposited into a trust.
Custodial receipts are then issued to investors, such as the Fund,
evidencing ownership interests in the trust.
    \85\ VRDOs are tax-exempt obligations that contain a floating or
variable interest rate adjustment formula and a right of demand on
the part of the holder thereof to receive payment of the unpaid
principal balance plus accrued interest upon a short notice period
not to exceed seven days.
    \86\ Municipal lease obligations include certificates of
participation issued by government authorities or entities to
finance the acquisition or construction of equipment, land, and/or
facilities.
    \87\ Stripped securities are created when an issuer separates
the interest and principal components of an instrument and sells
them as separate securities. In general, one security is entitled to
receive the interest payments on the underlying assets and the other
to receive the principal payments.
    \88\ Structured securities are privately negotiated debt
obligations where the principal and/or interest is determined by
reference to the performance of an underlying investment, index, or
reference obligation, and may be issued by governmental agencies.
While structured securities are part of the principal holdings of
the Fund, the Issuer represents that such securities, when combined
with those instruments held as part of the other portfolio holdings
described below, will not exceed 20% of the Fund's net assets.
    \89\ The Fund may purchase or sell securities that it is
entitled to receive on a when issued or delayed delivery basis as
well as through a forward commitment.
    \90\ Zero coupon securities are securities that are sold at a
discount to par value and do not pay interest during the life of the
security. The discount approximates the total amount of interest the
security will accrue and compound over the period until maturity at
a rate of interest reflecting the market rate of the security at the
time of issuance. Upon maturity, the holder of a zero coupon
security is entitled to receive the par value of the security.
    \91\ The Fund currently anticipates investing in only registered
open-end investment companies, including mutual funds and the open-
end investment company funds described in BATS Rule 14.11. The Fund
may invest in the securities of other investment companies to the
extent permitted by law.
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    In the last year of operation, as the bonds held by the Fund
mature, the proceeds will not be reinvested in bonds but instead will
be held in cash and cash equivalents, including, without limitation,
shares of affiliated money market funds, AMT-free tax-exempt municipal
notes, VRDOs, tender option bonds and municipal commercial paper. In or
around December 2026, the Fund will wind up and terminate, and its net
assets will be distributed to then current shareholders.
    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 Adviser, consistent with the Fund's
investment objective and in the best interest of the Fund. For example,
the Fund may hold a higher than normal proportion of its assets in cash
in response to adverse market, economic or political conditions.
    The Fund intends to qualify each year as a regulated investment
company (a ``RIC'') under Subchapter M of the Internal Revenue Code of
1986, as amended.\92\ The Fund will invest its assets, and otherwise
conduct its operations, in a manner that is intended to satisfy the
qualifying income, diversification and distribution requirements
necessary to establish and maintain RIC qualification under Subchapter
M.
---------------------------------------------------------------------------

    \92\ 26 U.S.C. 851.
---------------------------------------------------------------------------

Other Portfolio Holdings
    The Fund may also, to a limited extent (under normal circumstances,
less than 20% of the Fund's net assets), engage in transactions in
futures contracts, options, or swaps in order to facilitate trading or
to reduce transaction costs.\93\ The Fund's investments will be
consistent with its investment objective and will not be used to
achieve leveraged returns (i.e. two times or three times the Fund's
benchmark, as described in the Registration Statement).
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    \93\ Derivatives might be included in the Fund's investments to
serve the investment objectives of the Fund. Such derivatives
include only the following: Interest rate futures, interest rate
options, interest rate swaps, and swaps on Municipal Securities
indexes. The derivatives will be centrally cleared and they will be
collateralized. Derivatives are not a principal investment strategy
of the Fund.
---------------------------------------------------------------------------

    The Fund may also enter into repurchase and reverse repurchase
agreements for Municipal Securities (collectively, ``Repurchase
Agreements''). Repurchase Agreements involve the sale of securities
with an agreement to repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics of borrowing as
part of the Fund's principal holdings.\94\
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    \94\ The Fund's exposure to reverse repurchase agreements will
be covered by liquid assets having a value equal to or greater than
such commitments. The use of reverse repurchase agreements is a form
of leverage because the proceeds derived from reverse repurchase
agreements may be invested in additional securities. As further
stated below, the Fund's investments will be consistent with its
investment objective and will not be used to achieve leveraged
returns.
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    The Fund may also invest in short-term instruments (``Short-Term
Instruments''),\95\ which includes

exchange traded and non-exchange traded investment companies (including
investment companies advised by BFA or its affiliates) that invest in
money market instruments.
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    \95\ The Fund may invest in Short-Term Instruments, including
money market instruments, on an ongoing basis to provide liquidity
or for other reasons. Money market instruments are generally short-
term investments that include only the following: (i) Shares of
money market funds (including those advised by BFA or otherwise
affiliated with BFA); (ii) obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities (including
government-sponsored enterprises); (iii) negotiable certificates of
deposit (``CDs''), bankers' acceptances, fixed-time deposits and
other obligations of U.S. and non-U.S. banks (including non-U.S.
branches) and similar institutions; (iv) commercial paper, including
asset-backed commercial paper; (v) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at
the date of purchase of not more than 397 days and that satisfy the
rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of non-U.S.
banks (including U.S. branches) that, in the opinion of BFA, are of
comparable quality to obligations of U.S. banks which may be
purchased by the Fund. All money market securities acquired by the
Fund will be rated investment grade. The Fund does not intend to
invest in any unrated money market securities. However, it may do
so, to a limited extent, such as where a rated money market security
becomes unrated, if such money market security is determined by the
Adviser to be of comparable quality. BFA may determine that unrated
securities are of comparable quality based on such credit quality
factors that it deems appropriate, which may include, among other
things, performing an analysis similar, to the extent possible, to
that performed by a nationally recognized statistical rating
organization rating similar securities and issuers.
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Investment Restrictions
    The Fund may hold up to an aggregate amount of 15% of its net
assets in illiquid assets (calculated at the time of investment), as
deemed illiquid by the Adviser \96\ under the 1940 Act.\97\ The Fund
will monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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    \96\ In reaching liquidity decisions, the Adviser may consider
factors including: The frequency of trades and quotes for the
security; the number of dealers wishing to purchase or sell the
security and the number of other potential purchasers; dealer
undertakings to make a market in the security; the nature of the
security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer); any legal or contractual
restrictions on the ability to transfer the security or asset;
significant developments involving the issuer or counterparty
specifically (e.g., default, bankruptcy, etc.) or the securities
markets generally; and settlement practices, registration
procedures, limitations on currency conversion or repatriation, and
transfer limitations (for foreign securities or other assets).
    \97\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
---------------------------------------------------------------------------

    The Fund may also invest up to 20% of its net assets in Municipal
Securities that pay interest that is subject to the AMT.
    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, (iii) investments
in securities of state, territory, possession or municipal governments
and their authorities, agencies, instrumentalities or political
subdivisions or (iv) investments in repurchase agreements
collateralized by any such obligations.\98\
---------------------------------------------------------------------------

    \98\ See Form N-1A, Item 9. The Commission has taken the
position that a fund is concentrated if it invests in more than 25%
of the value of its total assets in any one industry. See, e.g.,
Investment Company Act Release No. 9011 (October 30, 1975), 40 FR
54241 (November 21, 1975).
---------------------------------------------------------------------------

Net Asset Value
    According to the Registration Statement, the net asset value
(``NAV'') of the Funds will be calculated each business day as of the
close of regular trading on the New York Stock Exchange (``NYSE''),
generally 4:00 p.m. Eastern Time (the ``NAV Calculation Time''), on
each day that the NYSE is open for trading, based on prices at the NAV
Calculation Time. NAV per Share is calculated by dividing each Fund's
net assets by the number of Shares outstanding.
    According to the Registration Statement, unless otherwise described
below, the Funds will value Municipal Securities using prices provided
directly from one or more broker-dealers, market makers, or independent
third-party pricing services which may use matrix pricing and valuation
models, as well as recent market transactions for the same or similar
assets, to derive values.
    Exchange traded investment companies will be valued at market
closing price or, if no closing price is available, at the last traded
price on the primary exchange on which they are traded. Price
information for such securities will be taken from the exchange where
the security is primarily traded. Investment companies not listed on an
exchange are valued at their net asset value.
    Futures and options contracts will be valued at their last sale
price or settle price as of the close of the applicable exchange.
    Repurchase Agreements will generally be valued at par. In certain
circumstances, Short-Term Instruments may be valued on the basis of
amortized cost.
    According to the Registration Statement, generally, trading in
money market instruments, and certain Municipal Securities is
substantially completed each day at various times prior to the close of
business on the Exchange. Additionally, trading in certain derivatives
is substantially completed each day at various times prior to the close
of business on the Exchange. The values of such securities and
derivatives used in computing the NAV of the Funds are determined at
such times.
    According to the Registration Statement, when market quotations are
not readily available or are believed by BFA to be unreliable, the
Funds' investments are valued at fair value. Fair value determinations
are made by BFA in accordance with policies and procedures approved by
the Trust's board of trustees and in accordance with the 1940 Act. BFA
may conclude that a market quotation is not readily available or is
unreliable if a security or other asset or liability is thinly traded,
or where there is a significant event \99\ subsequent to the most
recent market quotation.
---------------------------------------------------------------------------

    \99\ A ``significant event'' is an event that, in the judgment
of BFA, is likely to cause a material change to the closing market
price of the asset or liability held by the Fund.
---------------------------------------------------------------------------

    According to the Registration Statement, fair value represents a
good faith approximation of the value of an asset or liability. The
fair value of an asset or liability held by a Fund is the amount that
the Fund might reasonably expect to receive from the current sale of
that asset or the cost to extinguish that liability in an arm's-length
transaction. Valuing a Fund's investments using fair value pricing will
result in prices that may differ from current valuations and that may
not be the prices at which those investments

could have been sold during the period in which the particular fair
values were used.
The Shares
    Each Fund will issue and redeem Shares on a continuous basis at the
NAV per Share only in large blocks of a specified number of Shares or
multiples thereof (``Creation Units'') in transactions with authorized
participants who have entered into agreements with the Distributor.
Each Fund currently anticipates that a Creation Unit will consist of
50,000 Shares, though this number may change from time to time,
including prior to listing of the Funds. The exact number of Shares
that will constitute a Creation Unit will be disclosed in the
respective Registration Statement of each Fund. Once created, Shares of
each Fund trade on the secondary market in amounts less than a Creation
Unit.
    The consideration for purchase of Creation Units of a Fund
generally will consist of the in-kind deposit of a designated portfolio
of securities (including any portion of such securities for which cash
may be substituted) (i.e., the ``Deposit Securities''), and the ``Cash
Component'' computed as described below. Together, the Deposit
Securities and the Cash Component constitute the ``Fund Deposit,''
which represents the minimum initial and subsequent investment amount
for a Creation Unit of a Fund.
    The portfolio of securities required for purchase of a Creation
Unit may not be identical to the portfolio of securities a Fund will
deliver upon redemption of Shares. The Deposit Securities and Fund
Securities (as defined below), as the case may be, in connection with a
purchase or redemption of a Creation Unit, generally will correspond
pro rata to the securities held by the Fund.
    The Cash Component will be an amount equal to the difference
between the NAV of the Shares (per Creation Unit) and the ``Deposit
Amount,'' which will be an amount equal to the market value of the
Deposit Securities, and serve to compensate for any differences between
the NAV per Creation Unit and the Deposit Amount. Each Fund generally
offers Creation Units partially for cash. BFA will make available
through the National Securities Clearing Corporation (``NSCC'') on each
business day, prior to the opening of business on the Exchange, the
list of names and the required number or par value of each Deposit
Security and the amount of the Cash Component to be included in the
current Fund Deposit (based on information as of the end of the
previous business day) for the Fund.
    The identity and number or par value of the Deposit Securities may
change pursuant to changes in the composition of a Fund's portfolio as
rebalancing adjustments and corporate action events occur from time to
time. The composition of the Deposit Securities may also change in
response to adjustments to the weighting or composition of the holdings
of a Fund.
    Each Fund reserves the right to permit or require the substitution
of a ``cash in lieu'' amount to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient
quantity for delivery or that may not be eligible for transfer through
the Depository Trust Company (``DTC'') or the clearing process through
the NSCC.\100\
---------------------------------------------------------------------------

    \100\ The Adviser represents that, to the extent the Trust
permits or requires a ``cash in lieu'' amount, such transactions
will be effected in the same manner or in an equitable manner for
all authorized participants.
---------------------------------------------------------------------------

    Except as noted below, all creation orders must be placed for one
or more Creation Units and must be received by the Distributor in
proper form no later than 4:00 p.m., Eastern Time, in each case on the
date such order is placed in order for creation of Creation Units to be
effected based on the NAV of Shares of the Fund as next determined on
such date after receipt of the order in proper form. Orders requesting
substitution of a ``cash in lieu'' amount generally must be received by
the Distributor no later than 2:00 p.m., Eastern Time on the Settlement
Date. The ``Settlement Date'' is generally the third business day after
the transmittal date. On days when the Exchange or the bond markets
close earlier than normal, a Fund may require orders to create or to
redeem Creation Units to be placed earlier in the day.
    Fund Deposits must be delivered through the Federal Reserve System
(for cash and government securities), through DTC (for corporate and
municipal securities), or through a central depository account, such as
with Euroclear or DTC, maintained by State Street or a sub-custodian (a
``Central Depository Account'') by an authorized participant. Any
portion of a Fund Deposit that may not be delivered through the Federal
Reserve System or DTC must be delivered through a Central Depository
Account. The Fund Deposit transfer must be ordered by the authorized
participant in a timely fashion so as to ensure the delivery of the
requisite number of Deposit Securities to the account of the Fund by no
later than 3:00 p.m., Eastern Time, on the Settlement Date.
    A standard creation transaction fee will be imposed to offset the
transfer and other transaction costs associated with the issuance of
Creation Units.
    Shares of a Fund may be redeemed only in Creation Units at their
NAV next determined after receipt of a redemption request in proper
form by the Distributor and only on a business day. BFA will make
available through the NSCC, prior to the opening of business on the
Exchange on each business day, the designated portfolio of securities
(including any portion of such securities for which cash may be
substituted) that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form on that day
(``Fund Securities''). Fund Securities received on redemption may not
be identical to Deposit Securities that are applicable to creations of
Creation Units.
    Unless cash redemptions are available or specified for a Fund, the
redemption proceeds for a Creation Unit generally will consist of a
specified amount of cash, Fund Securities, plus additional cash in an
amount equal to the difference between the NAV of the Shares being
redeemed, as next determined after the receipt of a request in proper
form, and the value of the specified amount of cash and Fund
Securities, less a redemption transaction fee. Each Fund generally
redeems Creation Units partially for cash.
    A standard redemption transaction fee will be imposed to offset
transfer and other transaction costs that may be incurred by the Fund.
    Redemption requests for Creation Units of a Fund must be submitted
to the Distributor by or through an authorized participant no later
than 4:00 p.m. Eastern Time on any business day, in order to receive
that day's NAV. The authorized participant must transmit the request
for redemption in the form required by the Fund to the Distributor in
accordance with procedures set forth in the authorized participant
agreement.
    Additional information regarding the Shares and each 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 Registration Statement or on the Web
site for the Funds (www.iShares.com), as applicable.
Availability of Information
    The Funds' Web site, which will be publicly available prior to the
public offering of Shares, will include a form of the prospectus for
each Fund that may be downloaded. The Web site will include additional
quantitative

information updated on a daily basis, including, for each Fund: (1) The
prior business day's NAV and the market closing price or mid-point of
the bid/ask spread at the time of calculation of such NAV (the ``Bid/
Ask Price''),\101\ and a calculation of the premium or discount of the
market closing price or Bid/Ask Price against the NAV; and (2) data in
chart format displaying the frequency distribution of discounts and
premiums of the daily Bid/Ask Price against the NAV, within appropriate
ranges, for each of the four previous calendar quarters. Daily trading
volume information will be available in the financial section of
newspapers, through subscription services such as Bloomberg, Thomson
Reuters, and International Data Corporation, which can be accessed by
authorized participants and other investors, as well as through other
electronic services, including major public Web sites. On each business
day, before commencement of trading in Shares during Regular Trading
Hours on the Exchange, each Fund will disclose on its Web site the
identities and quantities of the portfolio of securities and other
assets (the ``Disclosed Portfolio'') held by the Fund that will form
the basis for the Fund's calculation of NAV at the end of the business
day.\102\ The Disclosed Portfolio will include, as applicable, the
names, quantity, percentage weighting and market value of 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.
---------------------------------------------------------------------------

    \101\ The Bid/Ask Price of the Fund will be determined using the
highest bid and the lowest offer on the Exchange as of the time of
calculation of the Fund's NAV. The records relating to Bid/Ask
Prices will be retained by the Fund or its service providers.
    \102\ Under accounting procedures to be followed by each Fund,
trades made on the prior business day (``T'') will be booked and
reflected in NAV on the current business day (``T+1''). Accordingly,
each Fund will be able to disclose at the beginning of the business
day the portfolio that will form the basis for the NAV calculation
at the end of the business day.
---------------------------------------------------------------------------

    In addition, for each Fund, an estimated value, defined in BATS
Rule 14.11(i)(3)(C) as the ``Intraday Indicative Value,'' that reflects
an estimated intraday value of the Fund's portfolio, will be
disseminated. Moreover, the Intraday Indicative Value will be based
upon the current value for the components of the Disclosed Portfolio
and 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.\103\
---------------------------------------------------------------------------

    \103\ Currently, it is the Exchange's understanding that several
major market data vendors display and/or make widely available
Intraday Indicative Values published via the Consolidated Tape
Association (``CTA'') or other data feeds.
---------------------------------------------------------------------------

    The dissemination of the Intraday Indicative Value, together with
the Disclosed Portfolio, will allow investors to determine the value of
the underlying portfolio of each Fund on a daily basis and provide a
close estimate of that value throughout the trading day.
    Intraday, executable price quotations on assets held by each Fund
are available from major broker-dealer firms and for exchange-traded
assets, including investment companies, such intraday information is
available directly from the applicable listing exchange. All such
intraday price information is available through subscription services,
such as Bloomberg, Thomson Reuters and International Data Corporation,
which can be accessed by authorized participants and other investors.
Pricing information for Repurchase Agreements and securities not listed
on an exchange or national securities market will be available from
major broker-dealer firms and/or subscription services, such as
Bloomberg, Thomson Reuters and International Data Corporation.
    Information regarding market price and volume of the Shares will be
continually available on a real-time basis throughout the day on
brokers' computer screens and other electronic services. The previous
day's closing price and trading volume information for the Shares will
be published daily in the financial section of newspapers. Quotation
and last sale information for the Shares will be available on the
facilities of the CTA. Price information relating to all other
securities held by the Funds will be available from major market data
vendors. Quotations and last sale information for the underlying
exchange traded investment companies will be available through CTA.
Initial and Continued Listing
    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. The Exchange represents that, for initial and/or continued
listing, each Fund must be in compliance with Rule 10A-3 under the
Act.\104\ A minimum of 100,000 Shares of each Fund will be outstanding
at the commencement of trading on the Exchange. The Exchange will
obtain a representation from the issuer of the Shares that the NAV per
Share will be calculated daily and that the NAV and the Disclosed
Portfolio will be made available to all market participants at the same
time.
---------------------------------------------------------------------------

    \104\ See 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of each Fund. The Exchange will halt trading in
the Shares under the conditions specified in BATS Rule 11.18. Trading
may be halted because of market conditions or for reasons that, in the
view of the Exchange, make trading in the Shares inadvisable. These may
include: (1) The extent to which trading is not occurring in the
securities and/or the financial instruments composing the Disclosed
Portfolio of the Fund; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present. Trading in the Shares also will be subject to Rule
14.11(i)(4)(B)(iv), which sets forth circumstances under which Shares
of a Fund may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BATS will allow
trading in the Shares from 8:00 a.m. until 5:00 p.m. Eastern Time. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BATS Rule 11.11(a), the
minimum price variation for quoting and entry of orders in Managed Fund
Shares traded on the Exchange is $0.01, with the exception of
securities that are priced less than $1.00, for which the minimum price
variation for order entry is $0.0001.
Surveillance
    The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Managed Fund Shares. The
Exchange may obtain information regarding trading in the Shares and the
underlying shares in exchange traded equity securities via the ISG,
from other exchanges that are members or affiliates of the ISG, or with
which the Exchange has entered into a comprehensive surveillance
sharing

agreement.\105\ In addition, the Exchange is able to access, as needed,
trade information for certain fixed income instruments reported to
FINRA's Trade Reporting and Compliance Engine (``TRACE'').
---------------------------------------------------------------------------

    \105\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Disclosed Portfolio for the Fund may trade on markets that are
members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    As it relates to exchange traded investment companies, the Funds
will only invest in investment companies that trade on markets that are
a member of the ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement.
    The Exchange prohibits the distribution of material non-public
information by its employees.
Information Circular
    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: (1) The procedures for purchases
and redemptions of Shares in Creation Units (and that Shares are not
individually redeemable); (2) BATS Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (3) how information regarding
the Intraday Indicative Value is disseminated; (4) the risks involved
in trading the Shares during the Pre-Opening \106\ and After Hours
Trading Sessions \107\ when an updated Intraday Indicative Value will
not be calculated or publicly disseminated; (5) the requirement that
members deliver a prospectus to investors purchasing newly issued
Shares prior to or concurrently with the confirmation of a transaction;
and (6) trading information.
---------------------------------------------------------------------------

    \106\ The Pre-Opening Session is from 8:00 a.m. to 9:30 a.m.
Eastern Time.
    \107\ The After Hours Trading Session is from 4:00 p.m. to 5:00
p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Funds. Members purchasing Shares from the Funds for
resale to investors will deliver a prospectus to such investors. The
Information Circular will also discuss any exemptive, no-action, and
interpretive relief granted by the Commission from any rules under the
Act.
    In addition, the Information Circular will reference that each Fund
is subject to various fees and expenses described in the Registration
Statement. The Information Circular will also disclose the trading
hours of the Shares of the Funds and the applicable NAV Calculation
Time for the Shares. The Information Circular will disclose that
information about the Shares of the Funds will be publicly available on
the Funds' Web site. In addition, the Information Circular will
reference that the Trust is subject to various fees and expenses
described in each Fund's Registration Statement.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section
6(b) of the Act \108\ in general and Section 6(b)(5) of the Act \109\
in particular in that it is 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.
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78f.
    \109\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in BATS Rule 14.11(i). The
Exchange believes that its surveillance procedures are adequate to
properly monitor the trading of the Shares on the Exchange during all
trading sessions and to deter and detect violations of Exchange rules
and the applicable federal securities laws. BATS Rule 14.11(i)(7)
provides that, if the investment adviser to the investment company
issuing Managed Fund Shares is affiliated with a broker-dealer, such
investment adviser shall erect a ``fire wall'' between the investment
adviser and the broker-dealer with respect to access to information
concerning the composition and/or changes to such investment company
portfolio. The Adviser is not a registered broker-dealer, but is
affiliated with multiple broker-dealers and has implemented ``fire
walls'' with respect to such broker-dealers regarding access to
information concerning the composition and/or changes to a Fund's
portfolio. In addition, Adviser personnel who make decisions regarding
a Fund's portfolio are subject to procedures designed to prevent the
use and dissemination of material nonpublic information regarding the
Fund's portfolio. The Exchange may obtain information regarding trading
in the Shares and the underlying shares in exchange traded equity
securities via the ISG, from other exchanges that are members or
affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement. In addition, the Exchange
is able to access, as needed, trade information for certain fixed
income instruments reported to TRACE.
    According to the Registration Statement, each Fund will invest,
under normal circumstances,\110\ at least 80% of its net assets in
Municipal Securities such that the interest on each security is exempt
from U.S. federal income taxes and the federal AMT. Additionally, each
Fund may hold up to an aggregate amount of 15% of its net assets in
illiquid assets (calculated at the time of investment), as deemed
illiquid by the Adviser \111\ under the 1940 Act.\112\ Each Fund will
monitor its portfolio liquidity on an ongoing basis to determine
whether, in light of current circumstances, an adequate level of
liquidity is being maintained, and will consider taking appropriate
steps in order to maintain adequate liquidity if, through a change in
values, net assets, or other circumstances, more than 15% of the Fund's
net assets are held in illiquid assets. Illiquid assets include
securities subject to contractual or other restrictions on resale and
other instruments that lack readily available markets as determined in
accordance with Commission staff guidance.
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    \110\ See supra note 7.
    \111\ See supra note 27.
    \112\ The Commission has stated that long-standing Commission
guidelines have required open-end funds to hold no more than 15% of
their net assets in illiquid securities and other illiquid assets.
See Investment Company Act Release No. 28193 (March 11, 2008), 73 FR
14618 (March 18, 2008), footnote 34. See also, Investment Company
Act Release No. 5847 (October 21, 1969), 35 FR 19989 (December 31,
1970) (Statement Regarding ``Restricted Securities''); Investment
Company Act Release No. 18612 (March 12, 1992), 57 FR 9828 (March
20, 1992) (Revisions of Guidelines to Form N-1A). A fund's portfolio
security is illiquid if it cannot be disposed of in the ordinary
course of business within seven days at approximately the value
ascribed to it by the fund. See Investment Company Act Release No.
14983 (March 12, 1986), 51 FR 9773 (March 21, 1986) (adopting
amendments to Rule 2a-7 under the 1940 Act); Investment Company Act
Release No. 17452 (April 23, 1990), 55 FR 17933 (April 30, 1990)
(adopting Rule 144A under the Securities Act of 1933).
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    The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that the Exchange will

obtain a representation from the issuer of the Shares that the NAV per
Share will be calculated daily and that the NAV and the Disclosed
Portfolio will be made available to all market participants at the same
time. In addition, a large amount of information is publicly available
regarding the Funds and the Shares, thereby promoting market
transparency. Moreover, the Intraday Indicative Value will be
disseminated by one or more major market data vendors at least every 15
seconds during Regular Trading Hours. On each business day, before
commencement of trading in Shares during Regular Trading Hours, each
Fund will disclose on its Web site the Disclosed Portfolio that will
form the basis for the Fund's calculation of NAV at the end of the
business day. Pricing information will include additional quantitative
information updated on a daily basis, including, for the Fund: (1) The
prior business day's NAV and the market closing price or mid-point of
the Bid/Ask Price,\113\ and a calculation of the premium or discount of
the market closing price or Bid/Ask Price against the NAV; and (2) data
in chart format displaying the frequency distribution of discounts and
premiums of the daily market closing price or Bid/Ask Price against the
NAV, within appropriate ranges, for each of the four previous calendar
quarters. Additionally, information regarding market price and trading
of the Shares will be continually available on a real-time basis
throughout the day on brokers' computer screens and other electronic
services, and quotation and last sale information for the Shares will
be available on the facilities of the CTA. The Web site for each Fund
will include a form of the prospectus for the Fund and additional data
relating to NAV and other applicable quantitative information. Trading
in Shares of a Fund will be halted under the conditions specified in
BATS Rule 11.18. Trading may also be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. Finally, trading in the Shares will
be subject to BATS Rule 14.11(i)(4)(B)(iv), which sets forth
circumstances under which Shares may be halted. In addition, as noted
above, investors will have ready access to information regarding the
Fund's holdings, the Intraday Indicative Value, the Disclosed
Portfolio, and quotation and last sale information for the Shares.
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    \113\ The Bid/Ask Price of a Fund will be determined using the
highest bid and the lowest offer on the Exchange as of the time of
calculation of the Fund's NAV. The records relating to Bid/Ask
Prices will be retained by the Fund or its service providers.
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    Intraday, executable price quotations on assets held by the Funds
are available from major broker-dealer firms and for exchange-traded
assets, including investment companies, such intraday information is
available directly from the applicable listing exchange. All such
intraday price information is available through subscription services,
such as Bloomberg, Thomson Reuters and International Data Corporation,
which can be accessed by authorized participants and other investors.
    The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of actively-managed exchange traded product that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures relating to trading in the Shares and may
obtain information via ISG, from other exchanges that are members of
ISG, or with which the Exchange has entered into a comprehensive
surveillance sharing agreement. In addition, the Exchange is able to
access, as needed, trade information for certain fixed income
instruments reported to TRACE. As noted above, investors will also have
ready access to information regarding each Fund's holdings, the
Intraday Indicative Value, the Disclosed Portfolio, and quotation and
last sale information for the Shares.
    For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional actively-managed exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace.

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

    The Exchange has neither solicited nor received written comments on
the proposed rule change.

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-BATS-2016-02 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-BATS-2016-02. 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 Web site (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 Web site 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 such filing will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BATS-2016-02 and should be
submitted on or before February 17, 2016.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\114\
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    \114\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-01535 Filed 1-26-16; 8:45 am]
 BILLING CODE 8011-01-P