[Federal Register: October 13, 2009 (Volume 74, Number 196)]
[Notices]
[Page 52514-52520]
[DOCID:fr13oc09-103]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28941; File No. 812-13656]

Morgan Stanley Investment Management Inc., et al.; Notice of
Application

October 6, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order pursuant to sections 6(c)
and 17(b) of the Investment Company Act of 1940 (the ``Act'') for an
exemption from section 17(a) of the Act and pursuant to section 17(d)
of the Act and rule 17d-1 under the Act permitting certain
transactions.

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

    Summary of the Application: Applicants request an order that would
permit (1) registered investment companies for which certain affiliates
of Morgan Stanley (``Morgan Stanley'') act as an adviser to engage in
certain securities transactions with certain affiliates of Citigroup
Inc. (``Citigroup'') and (2) registered investment companies for which
certain affiliates of Citigroup act as an adviser to engage in certain
securities transactions with certain affiliates of Morgan Stanley.
    Applicants: Morgan Stanley Investment Management Inc., Morgan
Stanley Investment Advisors Inc., Van Kampen Asset Management (each, an
``MS Adviser''), Morgan Stanley & Co. Incorporated (``MS & Co.''),
Morgan Stanley Balanced Fund, Morgan Stanley U.S. Government Money
Market Trust, Morgan Stanley Dividend Growth Securities Inc., Morgan
Stanley Natural Resource Development Securities Inc., Morgan Stanley
Special Growth Fund, Morgan Stanley Global Dividend Growth Securities,
Morgan Stanley Limited Term Municipal Trust, Morgan Stanley Technology
Fund, Morgan Stanley Small-Mid Special Value Fund, Morgan Stanley
Global Advantage Fund, Morgan Stanley Limited Duration U.S. Government
Trust, Active Assets California Tax-Free Trust, Active Assets
Government Securities Trust, Active Assets Institutional Government
Securities Trust, Active Assets Institutional Money Trust, Active
Assets Money Trust, Active Assets Tax-Free Trust, Morgan Stanley
Equally-Weighted S&P 500 Fund, Morgan Stanley Series Funds, Morgan
Stanley Health Sciences Trust, Morgan Stanley Special Value Fund,
Morgan Stanley Strategist Fund, Morgan Stanley High Yield Securities
Inc., Morgan Stanley International Value Equity Fund, Morgan Stanley
Liquid Asset Fund Inc., Morgan Stanley Mid-Cap Value Fund, Morgan
Stanley S&P 500 Index Fund, Morgan Stanley Convertible Securities
Trust, Morgan Stanley Fundamental Value Fund, Morgan Stanley Mid Cap
Growth Fund, Morgan Stanley Prime Income Trust, Morgan Stanley Value
Fund, Morgan Stanley European Equity Fund Inc., Morgan Stanley Flexible
Income Trust, Morgan Stanley International Fund, Morgan Stanley
Mortgage Securities Trust, Morgan Stanley Pacific Growth Fund Inc.,
Morgan Stanley Capital Opportunities Trust, Morgan Stanley Real Estate
Fund, Morgan Stanley California Tax-Free Daily Income Trust, Morgan
Stanley California Tax-Free Income Fund, Morgan Stanley Focus Growth
Fund, Morgan Stanley FX Series Funds, Morgan Stanley New York Municipal
Money Market Trust, Morgan Stanley New York Tax-Free Income Fund,
Morgan Stanley Select Dimensions Investment Series, Morgan Stanley Tax-
Exempt Securities Trust, Morgan Stanley Tax-Free Daily Income Trust,
Morgan Stanley U.S. Government Securities Trust, Morgan Stanley Global
Infrastructure Fund, Morgan Stanley Variable Investment Series, Morgan
Stanley Municipal Income Opportunities Trust II, Morgan Stanley
Municipal Income Opportunities Trust III, Morgan Stanley Municipal
Income Opportunities Trust, Morgan Stanley Municipal Premium Income
Trust, Morgan Stanley Income Securities Inc., Morgan Stanley California
Insured Municipal Income Trust, Morgan Stanley California Quality
Municipal Securities, Morgan Stanley Insured California Municipal
Securities, Morgan Stanley Insured Municipal Bond Trust, Morgan Stanley
Insured Municipal Income Trust, Morgan Stanley Insured Municipal
Securities, Morgan Stanley Insured Municipal Trust, Morgan Stanley New
York Quality Municipal Securities, Morgan Stanley Quality Municipal
Income Trust, Morgan Stanley Quality Municipal Investment Trust, Morgan
Stanley Quality Municipal Securities, Morgan Stanley Institutional Fund
Trust, Morgan Stanley Institutional Liquidity Funds, Morgan Stanley
Institutional Fund, Inc., The Universal Institutional Funds, Inc.,
Morgan Stanley Emerging Markets Domestic Debt Fund, Inc., The Turkish
Investment Fund, Inc., Morgan Stanley Asia-Pacific Fund, Inc., Morgan
Stanley China ``A'' Share Fund, Inc., Morgan Stanley Eastern Europe
Fund, Inc., Morgan Stanley Emerging Markets Debt Fund, Inc., Morgan
Stanley Emerging Markets Fund, Inc., Morgan Stanley Global Opportunity
Bond Fund, Inc., Morgan Stanley High Yield Fund, Inc., Morgan Stanley
India Investment Fund, Inc., Morgan Stanley Frontier Emerging Markets
Fund, Inc., The Latin American Discovery Fund, Inc., The Malaysia Fund,
Inc., The Thai Fund, Inc., Van Kampen Equity Trust, Van Kampen Money
Market Fund, Van Kampen Capital Growth Fund, Van Kampen Tax Free Money
Fund, Van Kampen Series Fund, Inc., Van Kampen Senior Loan Fund, Van
Kampen Corporate Bond Fund, Van Kampen Equity Trust II, Van Kampen High
Yield Fund, Van Kampen Trust, Van Kampen Partners Trust, Van Kampen
Retirement Strategy Trust, Van Kampen Government Securities Fund, Van
Kampen Pennsylvania Tax Free Income Fund, Van Kampen Tax Free Trust,
Van Kampen Trust II, Van Kampen Growth and Income Fund, Van Kampen Tax-
Exempt Trust, Van Kampen Comstock Fund, Van Kampen Enterprise Fund, Van
Kampen Equity and Income Fund, Van Kampen Exchange Fund, Van Kampen
Harbor Fund, Van Kampen Life Investment Trust, Van Kampen Limited
Duration Fund, Van Kampen Real Estate Securities Fund, Van Kampen U.S.
Government Trust, Van Kampen Senior Income Trust, Van Kampen Advantage
Municipal Income Trust II, Van Kampen California Value Municipal Income
Trust, Van Kampen Dynamic Credit Opportunities Fund, Van Kampen
Massachusetts Value Municipal Income Trust, Van Kampen Municipal
Opportunity Trust, Van Kampen Municipal Trust, Van Kampen Ohio

Quality Municipal Trust, Van Kampen Pennsylvania Value Municipal Income
Trust, Van Kampen Select Sector Municipal Trust, Van Kampen Trust for
Insured Municipals, Van Kampen Trust for Investment Grade Municipals,
Van Kampen Trust for Investment Grade New Jersey Municipals, Van Kampen
Trust for Investment Grade New York Municipals, Van Kampen Bond Fund,
Van Kampen High Income Trust II (each, an ``MS Fund''), Citigroup
Alternative Investments LLC (the ``Citi Adviser,'' and, together with
the MS Advisers, the ``Advisers''), Citigroup Global Markets Inc.
(``CGMI''), Citigroup Global Markets Limited, Citigroup Financial
Products, Inc., Citibank, N.A., Citibank Canada, Citibank International
plc, and LMP Corporate Loan Fund Inc. (the ``LMP Fund'').

DATES: Filing Dates: The application was filed on May 4, 2009 and
amended on June 16, 2009 and August 10, 2009. Applicants have agreed to
file an amendment during the notice period, the substance of which is
reflected in this notice.
    Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on October 28, 2009, and should be accompanied by proof of
service on applicants, in the form of an affidavit or, for lawyers, a
certificate of service. Hearing requests should state the nature of the
writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-1090. Applicants, Stefanie V. Chang
Yu, Esq., Morgan Stanley Investment Management Inc., 522 Fifth Avenue,
New York, New York 10036 and Marianna Maffucci, Citigroup Global
Markets Inc., 388 Greenwich Street, 17th Floor, New York, New York
10013.
    For Further Information Contact: Jill Ehrlich, Attorney Adviser, at
(202) 551-6819 or Mary Kay Frech, Branch Chief, at<PHONE_NUMBER>
(Division of Investment Management, Office of Investment Company
Regulation).
    Supplementary Information: The following is a summary of the
application. The complete application may be obtained via the
Commission's Web site by searching for the file number, or an applicant
using the Company name box, at http://www.sec.gov/search/search.htm or
by calling<PHONE_NUMBER>.

Applicants' Representations

    1. Each of the MS Funds and the LMP Fund (together, the ``Funds'')
is an open-end or closed-end management investment company registered
under the Act and is organized as a statutory trust, business trust,
corporation, or limited partnership under the laws of Delaware,
Maryland, Massachusetts, Pennsylvania, or California. The MS Funds and
the LMP Fund have a variety of investment objectives, but each may to a
greater or lesser degree invest a portion of its assets in fixed-income
securities. The fixed-income securities in which the Funds may invest
include, but are not limited to, government securities, municipal
securities, tender option bonds, taxable and tax-exempt money market
securities, repurchase agreements, asset- and mortgage-backed
securities, corporate issues and syndicated loans (including
assignments thereof and participations therein), each as the Funds'
respective investment policies allow.
    2. The MS Advisers are direct or indirect wholly-owned subsidiaries
of Morgan Stanley, a Delaware corporation. Each MS Adviser is
registered as an investment adviser under the Investment Advisers Act
of 1940 (the ``Advisers Act''). The MS Advisers act as investment
advisers to each of the MS Funds and may supervise one or more
affiliated or unaffiliated sub-advisers with respect to certain MS
Funds.
    3. The Citi Adviser is an indirect wholly-owned subsidiary of
Citigroup, a Delaware corporation. The Citi Adviser is registered as an
investment adviser under the Advisers Act. The Citi Adviser acts as
investment sub-adviser to the LMP Fund and may act in the future as
adviser to other registered investment companies.
    4. MS & Co., a Delaware corporation, is a wholly-owned subsidiary
of Morgan Stanley. CGMI, a New York corporation, is an indirect wholly-
owned subsidiary of Citigroup. In addition, Citibank, N.A., Citibank
Canada, Citibank International plc, Citigroup Global Markets Limited
and Citigroup Financial Products Inc. are each wholly-owned
subsidiaries (directly or indirectly) of Citigroup (these entities, or
their affiliates, together with CGMI, the ``Citi Trading Entity'').
Each of MS & Co. (or its affiliates, together, the ``MS Trading
Entity'') and the Citi Trading Entity (together with the MS Trading
Entity, the ``Trading Entities'') is registered as a broker-dealer with
the Commission under the Securities Exchange Act of 1934.
    5. On January 13, 2009, Morgan Stanley and Citigroup entered into a
joint venture contribution and formation agreement (the ``JV
Agreement'') to create Morgan Stanley Smith Barney Holdings LLC
(``MSSB'' or the ``Joint Venture''), a Delaware limited liability
company of which the equity capitalization consists solely of one class
of common membership interests (the ``Interests''). MSSB is a holding
company and the sole member of Morgan Stanley Smith Barney LLC, which
conducts most of the Joint Venture's domestic operations as a dual-
registered broker-dealer and investment adviser. On June 1, 2009, the
Joint Venture closed in accordance with the terms of the JV Agreement.
    6. Pursuant to the terms of the JV Agreement, Morgan Stanley
contributed to the Joint Venture its global wealth management (retail
brokerage) and private wealth management businesses (the ``MS
Contributed Businesses'') (together with all contracts, employees,
property licenses and other assets and liabilities). Citigroup
contributed to the Joint Venture its retail brokerage and futures
business operated under the name ``Smith Barney'' in the United States
and Australia and operated under the name ``Quilter'' in the United
Kingdom, Ireland, and the Channel Islands (the ``Citi Contributed
Businesses'') (together with all contracts, employees, property
licenses and other assets and liabilities). Morgan Stanley now owns
indirectly through subsidiaries 51% of the Interests, and Citigroup
owns indirectly through CGMI 49% of the Interests. In addition, under
the JV Agreement, Morgan Stanley has the option to purchase an
additional 14% of the Interests following the third anniversary of the
closing, an additional 15% of the Interests after the fourth
anniversary, and any remaining Interests held by Citigroup after the
fifth anniversary.
    7. MSSB provides retail brokerage and a variety of wealth
management services, including as an investment adviser, insurance
broker, insurance agency and futures broker. MSSB conducts its own
businesses, operating separately from the non-MSSB business units of
Citigroup and Morgan Stanley (although they may perform certain
functions, such as clearing, for MSSB for a certain period of time
following the closing of the Joint Venture). Citigroup and Morgan
Stanley have preserved their distinct brands and continue to offer
independently a wide range of

financial services. Citigroup has no interest in, and will not control
(within the meaning of section 2(a)(9) of the Act) directly or
indirectly, Morgan Stanley, the MS Advisers, or any other Morgan
Stanley entity that is not a MS Contributed Business (together with the
MS Advisers, the ``MS Entities''). Morgan Stanley has no interest in,
and will not control (within the meaning of section 2(a)(9) of the Act)
directly or indirectly, Citigroup, the Citi Adviser, or any other
Citigroup entity that is not a Citi Contributed Business (together with
the Citi Adviser, the ``Citi Entities'').
    8. MSSB is governed by a newly formed board of directors controlled
by Morgan Stanley (``MSSB Board''). Currently, the MSSB Board consists
of four Morgan Stanley designees and two Citigroup designees (as long
as Citigroup owns 10% or more of the Interests) and the president of
MSSB. All matters with regard to MSSB generally will be determined by a
majority vote of the MSSB Board, although the Joint Venture also
includes certain other specified governance and approval rights.\1\
Approval of Citigroup is required for amendment to MSSB's limited
liability company agreement, as long as Citigroup owns at least 20% of
the Interests; thereafter, Citigroup's approval will be required only
as to certain specified matters. Citigroup also may put its Interests
to Morgan Stanley, in the event of a change of control of Morgan
Stanley or after the sixth anniversary of the closing of the Joint
Venture transaction if Morgan Stanley has exercised its first two call
rights.
---------------------------------------------------------------------------

    \1\ These rights require the approval of Morgan Stanley and, for
so long as Citigroup owns at least 20% of MSSB, of Citigroup, with
respect to certain specified major decisions, including (but not
limited to), generally: (a) Any merger, liquidation or sale of MSSB;
(b) any acquisition or disposition of a business representing more
than 20% of assets or revenues; (c) related party transactions other
than those conducted (i) at arm's length and (ii) in the ordinary
course of business (Citigroup may dispute either (i) or (ii)); (d)
issuance, repurchase or redemption of equity securities except in
certain circumstances; (e) removal or replacement of the president
of MSSB or certain other officers; (f) entry into new business lines
in certain circumstances; and (g) certain bankruptcy and tax events.
---------------------------------------------------------------------------

    9. Subsequent to the closing of the Joint Venture, the Citi Trading
Entity and the MS Advisers (and the MS Trading Entity and the Citi
Adviser) continue to operate as separate, independent businesses.\2\
Applicants state that the Funds and their investors are protected from
any undue influence, among other things, by the substantial separation
and independent operation of the Trading Entities from each other and
from MSSB. Applicants state that none of the Funds will engage in
portfolio transactions with MSSB. In addition, applicants state that
each of the Advisers has adopted confidentiality policies designed to
limit the unnecessary flow of information about client holdings and
transactions. Such policies have been extended to prevent unnecessary
information sharing between MSSB and each of the MS Advisers and the
Citi Adviser. For example, information regarding investment advisory
and portfolio execution matters relating to the MS Funds and the Citi
Funds are considered by the MS Advisers and the Citi Adviser,
respectively, as information that may not be communicated outside of
such Adviser except as necessary (e.g., to a potential executing broker
or dealer on an actual trade), including to MSSB. Additionally,
``information barriers'' are in place to prevent the dissemination of
confidential information between the MS Advisers and other MS Entities
and between the Citi Adviser and other Citi Entities, respectively. The
separation of the entities is required to be maintained by the
``Structural Conditions'' proposed by the applicants, including that
the Citi Trading Entity and the MS Advisers (and the MS Trading Entity
and the Citi Adviser) will continue to have separate ownership,
officers and employees, will continue to be separately capitalized, and
will maintain separate books and records and physically separate
offices. Accordingly, applicants submit that neither the Citi Trading
Entity nor the MS Trading Entity will be in a position to cause any
Securities Transaction (as defined below) by the MS Funds or the Citi
Funds (as defined below), respectively.
---------------------------------------------------------------------------

    \2\ No director, officer or employee of the MS Funds or the MS
Advisers also is or will be a director, officer or employee of the
Citi Trading Entity. No director, officer or employee of the Citi
Funds or the Citi Adviser also is or will be a director, officer or
employee of the MS Trading Entity. As noted above, each of Citigroup
and Morgan Stanley has the right to designate members of the MSSB
Board. Currently, the chairman of MSSB is the co-president of Morgan
Stanley.
---------------------------------------------------------------------------

    10. Applicants state that, because of consolidation in the
financial services industry, combined with an increase in industry
assets, a few major broker-dealers account for a large percentage of
the market share in connection with trading in various asset classes.
For example, applicants state that the Citi Trading Entity can be
responsible for more than 10% of the dollar trading volume of primary
offerings and more than 20% of the dollar trading volume of secondary
market trading in certain types of fixed income securities. Applicants
state that the decline in the number of broker-dealers and banks
trading in the securities in which the Funds seek to invest and the
increasing importance of the few remaining institutions have increased
the importance to the Funds of their relationships with such entities,
including the Citi Trading Entity or the MS Trading Entity, as
applicable. Applicants note, for example, that certain MS Funds have
used the Citi Trading Entity for more than 20% of their dollar trading
volume in certain types of fixed-income securities. Applicants assert
that the inability of the MS Funds and the Citi Funds to execute
Securities Transactions involving the Citi Trading Entity and the MS
Trading Entity, respectively (solely as a result of Citigroup's and
Morgan Stanley's direct or indirect interest in MSSB), would
significantly limit the universe of securities broker-dealers and banks
available to the Funds, the universe of underwritings in which the
Funds may participate, and the level and number of Securities
Transactions in which the Funds may engage. Applicants submit that, as
a result, the ability of the Funds to obtain the pricing, terms and
quality of service available from a major dealer would be materially
limited, which may harm the Funds by preventing them from obtaining
best execution.
    11. Applicants request an order (``Order''), pursuant to sections
6(c) and 17(b) of the Act exempting Securities Transactions entered
into in the ordinary course of business by a MS Fund involving the Citi
Trading Entity and by a Citi Fund involving the MS Trading Entity,
under the circumstances described in the application, from the
provisions of sections 17(a) of the Act, and pursuant to section 17(d)
of the Act and rule 17d-1 under the Act permitting the Securities
Transactions described below.\3\ The Order would apply only

where the Citi Trading Entity is deemed to be an affiliated person of
an affiliated person (``second-tier affiliate'') of a MS Fund, or the
MS Trading Entity is deemed to be a second-tier affiliate of a Citi
Fund, solely because of Citigroup's and Morgan Stanley's direct or
indirect ownership interest in MSSB.\4\
---------------------------------------------------------------------------

    \3\ Applicants seek to extend the Order requested to: (a) Any
open-end or closed-end investment company registered under the Act,
whether now existing or organized in the future, that is advised by
any Adviser or by any existing or future investment adviser
controlling, controlled by or under common control with Morgan
Stanley or Citigroup other than MSSB (such funds, when advised by a
Citigroup entity, are hereafter referred to together with the LMP
Fund as the ``Citi Funds'' and, together with the MS Funds are
included in the term ``Funds''); (b) the Advisers and any existing
or future investment adviser controlling, controlled by or under
common control with Morgan Stanley or Citigroup other than MSSB; and
(c) the Trading Entities and any existing or future entity
controlling, controlled by or under common control with Citigroup or
Morgan Stanley other than MSSB, provided that any entity that relies
on the Order complies with the terms and conditions set forth in the
application as though it were an applicant.
    \4\ The relief sought would not apply if the transactions would
be restricted by section 17 and rule 17d-1 because a Trading Entity
is a principal underwriter or promoter of a Fund. No Fund advised or
promoted by MSSB, or for which MSSB acts as principal underwriter,
would be covered by the Order. MSSB may, however, act as principal
underwriter for new closed-end MS Funds or Citi Funds; such role
will cease at the time the syndicate terminates and prior to any
transactions by such MS Fund involving the Citi Trading Entity or by
such Citi Fund involving the MS Trading Entity. In addition, the
proposed Order will not apply to transactions between the MS Funds
and any Morgan Stanley controlled entity or to transactions between
the Citi Funds and any Citigroup controlled entity.
---------------------------------------------------------------------------

    12. The ``Securities Transactions'' that are the subject of the
Order are: (a) primary and secondary market transactions in fixed-
income securities executed on a principal basis between the MS Funds
and the Citi Trading Entity and between the Citi Funds and the MS
Trading Entity \5\ and (b) the following types of transactions in which
the Citi Trading Entity or the MS Trading Entity and the MS Funds or
the Citi Funds, respectively, might each participate jointly or have a
joint interest (referred to as ``Joint Transactions''): (i) Tender
option bond trust structures involving municipal bonds; (ii) asset-
backed securities (``ABS'') or mortgage-backed securities (``MBS'')
transactions; (iii) syndicated loan transactions; and (iv) investments
in the same company.
---------------------------------------------------------------------------

    \5\ ``Fixed-income securities'' for purposes of the Order
include interests in syndicated loans (including loans made directly
as a syndicate member, or the acquisition of a loan interest in the
form of an assignment or participation), as well as convertible
bonds and convertible preferred stock.
---------------------------------------------------------------------------

Applicants' Legal Analysis

    1. Section 17(a) of the Act, among other things, prohibits an
affiliated person of a registered investment company, or any affiliated
person of such a person, acting as principal, from selling to or
purchasing from such registered company any security or other property
and from borrowing money or other property from such investment
company. Section 17(b) of the Act authorizes the Commission to exempt a
transaction from section 17(a) of the Act if evidence establishes that
the terms of the proposed transaction, including the consideration to
be paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned and the proposed
transaction is consistent with the policy of each registered investment
company concerned and with the general purposes of the Act.
    2. Section 17(d) of the Act and rule 17d-1 thereunder prohibit any
affiliated person of or principal underwriter for a registered
investment company or any second-tier affiliate, acting as principal,
from effecting any transaction in connection with any joint enterprise
or other joint arrangement or profit sharing plan in which the
investment company participates, unless an application regarding the
joint transaction has been filed with the Commission and granted by
order. Rule 17d-1 provides that, in passing upon an application for
such an order, the Commission will consider whether the participation
of a registered investment company in a joint transaction is consistent
with the provisions, policies and purposes of the Act and the extent to
which such participation is on a basis different from or less
advantageous than that of the other applicants.
    3. Section 6(c) of the Act, in relevant part, authorizes the
Commission to exempt any person or transaction, or any class or classes
of persons or transactions, from any provision or provisions of the
Act, if and to the extent that such exemption is necessary or
appropriate in the public interest and consistent with the protection
of investors and the purposes fairly intended by the policy and
provision of the Act.
    4. Section 2(a)(3) of the Act defines ``affiliated person'' of
another person to include: (a) Any person directly or indirectly
owning, controlling, or holding with power to vote, 5% or more of the
outstanding voting securities of such other person; (b) any person 5%
or more of whose outstanding voting securities are directly or
indirectly owned by, controlled, or held with power to vote, by such
person; and (c) any person directly or indirectly controlling,
controlled by, or under common control with, such other person.
    5. Applicants state that, as a result of the Joint Venture, the
Citi Trading Entity would arguably become a second-tier affiliate of
the MS Funds (and the MS Trading Entity a second-tier affiliate of the
Citi Funds) within the meaning of section 2(a)(3) of the Act.
Applicants state that, if the MS Funds are assumed to be under the
control of the MS Advisers, and Morgan Stanley also controls MSSB, then
MSSB and the MS Funds are affiliated persons (``first-tier
affiliates'') by virtue of being under common control. Applicants
further state that the Citi Trading Entity also could be viewed as a
first-tier affiliate of MSSB, and a second-tier affiliate of the MS
Funds, because of CGMI's ownership of more than five percent of the
voting securities of MSSB and its control of MSSB. Applicants represent
that the affiliation analysis would be generally the same with respect
to the Citi Funds and the MS Trading Entity. Applicants submit that,
due to their second-tier affiliation, any Securities Transaction by the
MS Funds involving the Citi Trading Entity, and by the Citi Funds
involving the MS Trading Entity, would be subject to section 17(a) of
the Act where it constitutes a principal transaction between them, and
for Joint Transactions, section 17(d) of the Act and rule 17d-1
thereunder.
    6. Applicants submit that the primary purpose of section 17(a) is
to prevent a person with the power to control an investment company
from essentially engaging in self-dealing, to the detriment of the
investment company's shareholders. Similarly, applicants submit that
section 17(d) and rule 17d-1 were intended to prohibit abuses arising
from conflicts of interest where rather than being on opposite sides of
a transaction, an investment company and its affiliates share ``some
element of combination'' in a transaction.
    7. Applicants submit that the policies which sections 17(a) and
17(d) of the Act, and rule 17d-1 thereunder, were meant to further are
not implicated here because Citigroup and the Citi Trading Entity are
not in a position to cause a MS Fund to enter into a Securities
Transaction or otherwise influence portfolio decisions by the MS
Advisers on behalf of the MS Funds; and, similarly, applicants submit
that Morgan Stanley and the MS Trading Entity are not in a position to
cause a Citi Fund to enter into a Securities Transaction or otherwise
influence portfolio decisions by the Citi Adviser on behalf of the Citi
Fund. Applicants state that, as a result, no Trading Entity is in a
position to engage in self-dealing or otherwise cause any of the
relevant Funds to enter into transactions that are not in the best
interests of its shareholders.
    8. Applicants state that compliance with the ``Structural
Conditions'' set forth below is intended to assure that the MS Advisers
and the MS Funds continue to operate independently of, and free of any
undue influence by, Citigroup and the Citi Trading Entity and
similarly, that the Citi Adviser and the Citi Funds continue to operate
independently of, and free of any undue influence by, Morgan Stanley
and the MS Trading Entity.

    9. Applicants state that compliance with the ``Transactional
Conditions'' set forth below is designed to assure that the terms of
the individual transactions are fair from the perspective of the Funds.
For example, applicants note that, at the outset, the conditions
require each Fund's board of directors, board of trustees or other
governing body of such Fund, as applicable (each, a ``Board''),
including a majority of its disinterested directors or trustees, as
applicable (``Necessary Majority''), to approve, and the Fund to
implement, procedures governing all Securities Transactions pursuant to
the Order. Applicants submit that, pursuant to such procedures, the
Securities Transactions will be subject to ongoing review by each
Fund's chief compliance officer, and will be reviewed by its Board,
including the Necessary Majority, on a quarterly basis. In addition,
among other procedures, the relevant Adviser will make a determination
that each Securities Transaction is consistent with the investment
objectives of the relevant Fund and in the best interests of such
Fund's shareholders. The conditions also require price quotes from
unaffiliated sources to assure fairness of price.
    10. Applicants state that the Securities Transactions described in
the Application satisfy the standards of sections 6(c) and 17(b).
Applicants submit that there is no danger of overreaching or self-
dealing by a Trading Entity in connection with a Securities
Transaction, and there will be no conflict of interest associated with
an Adviser's decision to engage in a Securities Transaction with a
Trading Entity on behalf of a Fund. Moreover, applicants state that the
Order is consistent with the policies of the Funds and the protection
of investors, as the Advisers will manage the Funds in accordance with
the policies and investment objectives of the Funds and without any
influence by the Trading Entities. Finally, applicants state that
permitting the Securities Transactions will be appropriate in the
public interest and consistent with general purposes of the Act because
the ability to engage in Securities Transactions increases the
likelihood of a Fund achieving best price and execution in such
transactions and results in none of the abuses that the Act was
designed to prevent.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will
be subject to the following conditions:

A. Structural

    1. Citigroup will control none of the MS Advisers or the MS Funds
or any principal underwriter for the MS Funds,\6\ directly or
indirectly, within the meaning of section 2(a)(9) of the Act. The Order
will remain in effect only so long as Morgan Stanley, or such other
entity not controlling, controlled by or under common control with
Citigroup, primarily controls the MS Advisers.
---------------------------------------------------------------------------

    \6\ MSSB may act as principal underwriter with respect to
certain newly organized closed-end MS Funds; however, such role will
cease at the time the syndicate terminates and prior to any
transactions by such MS Funds involving the Citi Trading Entity.
---------------------------------------------------------------------------

    2. Morgan Stanley will control none of the Citi Adviser or the Citi
Funds or any principal underwriter for the Citi Funds,\7\ directly or
indirectly, within the meaning of section 2(a)(9) of the Act. The Order
will remain in effect only so long as Citigroup, or such other entity
not controlling, controlled by or under common control with Morgan
Stanley, primarily controls the Citi Adviser.
---------------------------------------------------------------------------

    \7\ MSSB may act as principal underwriter with respect to
certain newly organized closed-end Citi Funds; however, such role
will cease at the time the syndicate terminates and prior to any
transactions by such Citi Funds involving the MS Trading Entity.
---------------------------------------------------------------------------

    3. Citigroup will not directly or indirectly consult with Morgan
Stanley, the MS Advisers or any portfolio manager of the MS Advisers
concerning securities purchases or sales or the selection of a broker
or dealer for any Securities Transaction placed or to be placed on
behalf of a MS Fund, or otherwise seek to influence the choice of
broker or dealer for any Securities Transaction by a MS Fund other than
in the normal course of sales activities of the same nature that are
being carried out during the same time period with respect to
unaffiliated institutional clients of the Citi Trading Entity, or that
existed between the Citi Trading Entity and the MS Advisers prior to
consummation of the Joint Venture.
    4. Morgan Stanley will not directly or indirectly consult with
Citigroup, the Citi Adviser or any portfolio manager of the Citi
Adviser concerning securities purchases or sales or the selection of a
broker or dealer for any Securities Transaction placed or to be placed
on behalf of a Citi Fund, or otherwise seek to influence the choice of
broker or dealer for any Securities Transaction by a Citi Fund other
than in the normal course of sales activities of the same nature that
are being carried out during the same time period with respect to
unaffiliated institutional clients of the MS Trading Entity, or that
existed between the MS Trading Entity and the Citi Adviser prior to
consummation of the Joint Venture.
    5. No officer, director or employee of MSSB will directly or
indirectly seek to influence in any way the terms of any Securities
Transaction covered by the Order.
    6. The MS Advisers and the Citi Trading Entity will operate as
separate organizations, with separate capitalization, separate books
and records, separate officers and employees, and physically separate
offices. The Citi Trading Entity will adopt and implement policies that
prohibit the Citi Trading Entity from (a) linking any approval or
action relating to MSSB to any action by any MS Fund, or by any MS
Adviser relating to any MS Fund, or (b) using the existence of MSSB as
a basis for seeking to persuade any MS Fund or MS Adviser to engage in
business with the Citi Trading Entity. The MS Advisers have adopted
policies designed to keep information about client holdings and
transactions on a confidential basis, prior to any public disclosure.
Pursuant to these policies, the MS Advisers will designate information
regarding investment advisory and portfolio execution matters relating
to the MS Funds as information that may not be communicated between
MSSB, on one hand, and the MS Advisers, on the other hand, prior to any
public disclosure.
    7. The Citi Adviser and the MS Trading Entity will operate as
separate organizations, with separate capitalization, separate books
and records, separate officers and employees, and physically separate
offices. The MS Trading Entity will adopt and implement policies that
prohibit the MS Trading Entity from (a) linking any approval or action
relating to MSSB to any action by any Citi Fund, or by any Citi Adviser
relating to any Citi Fund, or (b) using the existence of MSSB as a
basis for seeking to persuade any Citi Fund or Citi Adviser to engage
in business with the MS Trading Entity. The Citi Adviser has adopted
policies designed to keep information about client holdings and
transactions on a confidential basis, prior to any public disclosure.
Pursuant to these policies, the Citi Adviser will designate information
regarding investment advisory and portfolio execution matters relating
to the Citi Funds as information that may not be communicated between
MSSB, on the one hand, and the Citi Adviser, on the other hand, prior
to any public disclosure.
    8. Citigroup will not adopt any compensation scheme any component
of which is based on (a) a factor that treats the MS Funds differently
than

unaffiliated counterparties or (b) the amount of business done by the
Citi Funds with the MS Trading Entity except to the extent such
business might affect indirectly the profits or losses of the Citi
Adviser.
    9. Morgan Stanley will not adopt any compensation scheme any
component of which is based on (a) a factor that treats the Citi Funds
differently than unaffiliated counterparties or (b) the amount of
business done by the MS Funds with the Citi Trading Entity except to
the extent such business might affect indirectly the profits or losses
of the MS Advisers.
    10. The respective legal/compliance departments of the MS Advisers
and the Citi Trading Entity, and of the Citi Adviser and the MS Trading
Entity, will prepare guidelines for their respective personnel to make
certain that Securities Transactions effected pursuant to the Order
comply with its conditions, and that the respective Advisers and
Trading Entities maintain an arms-length relationship. The respective
compliance departments of the Advisers and Trading Entities will
monitor periodically the activities of the Advisers and Trading
Entities, respectively, to make certain that the conditions to the
Order are met.

B. Transactional

    With respect to each Securities Transaction entered into or
effected pursuant to the Order:
    1. Each Fund's Board, including the Necessary Majority, shall
approve, and the Fund shall implement, procedures governing all
transactions pursuant to the Order and the Fund's Board shall no less
frequently than quarterly review all such transactions and receive and
review a report of those transactions. Such report, which will be
prepared by the Fund's Adviser, and reviewed and approved by the Fund's
Chief Compliance Officer, will indicate for each transaction that the
conditions of the Order have been satisfied, and will include a
discussion of any significant changes in the volume, type or terms of
transactions between the relevant Fund and Trading Entity, the reasons
for these changes, and a determination that such changes are
legitimate.
    2. For each transaction, the MS Advisers will adhere to a ``best
execution'' standard and will consider only the interests of the MS
Funds and will not take into account the impact of a MS Fund's
investment decision on the Citi Trading Entity or its affiliates. For
each transaction, the Citi Adviser will adhere to a ``best execution''
standard and will consider only the interests of the Citi Funds and
will not take into account the impact of a Citi Fund's investment
decision on the MS Trading Entity or its affiliates. Before entering
into any such transaction, the Adviser will determine that the
transaction is consistent with the investment objectives and policies
of the Fund and is in the best interests of the Fund and its
shareholders.
    3. Each Fund will (a) for so long as the Order is relied upon,
maintain and preserve in an easily accessible place a written copy of
the procedures and conditions (and any modifications thereto) that are
described herein, and (b) maintain and preserve for a period of not
less than six years from the end of the fiscal year in which any
Securities Transaction in which the Fund's Adviser knows that both a
Trading Entity and the Fund directly or indirectly have an interest
occurs, the first two years in an easily accessible place, a written
record of each such transaction setting forth a description of the
security purchased or sold by the Fund, a description of the Trading
Entity's interest or role in the transaction, the terms of the
transaction, and the information or materials upon which the
determination was made that each such transaction was made in
accordance with the procedures and conditions set forth herein and in
the application.
    4. Except as otherwise provided in 4(a) and 4(b) below, before any
secondary market principal transaction is entered into between a Fund
and a Trading Entity, the Fund's Adviser must obtain a competitive
quotation for the same securities (or in the case of securities for
which quotations for the same securities are not available, a
competitive quotation for Comparable Securities \8\) from at least two
unaffiliated dealers that are in a position to quote favorable market
prices. For each such transaction, the Adviser will determine, based
upon the quotations and such other relevant information (such as
available transaction prices and any other information regarding the
value of the securities) as is reasonably available to the Adviser,
that the price available from the Trading Entity is at least as
favorable as that available from other sources.
---------------------------------------------------------------------------

    \8\ The term ``Comparable Securities'' refers to securities with
substantially identical maturities, credit risk and repayment terms
(including floating or fixed-rate coupons, attached options, or any
other provisions that affect the expected size or timing of the
payments from the securities) as the securities to be purchased or
sold.
---------------------------------------------------------------------------

    (a) With respect to each such transaction involving repurchase
agreements, a Fund will enter into such agreements only where the
Adviser has determined, based upon relevant information reasonably
available to the Adviser, that the income to be earned from the
repurchase agreement is at least equal to that available from other
sources. Before any repurchase agreements are entered into pursuant to
the exemption, the Fund or the Adviser must obtain competitive
quotations from at least two unaffiliated dealers with respect to
repurchase agreements comparable to the type of repurchase agreement
involved, except that if quotations are unavailable from two such
dealers, only one other competitive quotation is required.
    (b) With respect to each such transaction involving variable rate
demand notes for which dealer quotes are not ordinarily available, a
Fund will only undertake purchases and sales where the Adviser has
determined, based on relevant information reasonably available to the
Adviser, that the income earned from the variable rate demand note is
at least equal to that of variable rate demand notes of comparable
quality that are available from other sources.
    5. With respect to securities offered in a primary market
underwritten transaction, a Fund will undertake such purchase from the
Trading Entity only where the Adviser has determined, based upon
relevant information reasonably available to the Adviser, that the
securities were purchased at a price that is no more than the price
paid by each other purchaser of securities from the Trading Entity or
other members of the underwriting syndicate in that offering or in any
concurrent offering of the securities, and on the same terms as such
other purchasers (except in the case of an offering conducted under the
laws of a country other than the United States, for any rights to
purchase that are required by law to be granted to existing securities
holders of the issuer).
    6. In the case of an arrangement regarding a tender option bond
trust for which a Trading Entity acts as a liquidity provider or
remarketing agent and owns an interest (or may own an interest as a
result of such capacity):
    (a) Where such arrangement was structured prior to the closing of
the Joint Venture, the terms of such arrangement will not change after
such closing without the approval of the Necessary Majority of the
Fund's Board, based on a finding that it is in the best interests of
the Fund to continue such arrangement, as proposed to be modified;
provided that if the Trading Entity owns the residual interest and a
Fund owns the floating rate interest, such Board approval will not be
required if: (i) The Fund is eligible to

participate in any discretionary tender on the same basis as any
similarly situated holder of floating rate interests; (ii) the Fund
must participate in any mandatory tender on the same basis as each
similarly situated holder; and (iii) less than 50% of the floating rate
interests are owned by Funds (and other discretionary accounts) managed
by the Fund's Adviser.
    (b) In the case of such arrangements structured after the closing
of the Joint Venture:
    (i) The Necessary Majority of the Fund's Board will adopt
procedures designed to assure that it is in the best interests of the
Fund to participate in any such arrangements. Such procedures will take
into consideration, among other things, the terms of the arrangement,
the nature of the respective interests in the trusts that may be held
by the Trading Entity and the Funds, and the circumstances under which
the Trading Entity may cause termination of the trust and the transfer
of the underlying bonds back to the Fund; and
    (ii) where a Trading Entity owns the residual interest and a Fund
owns a floating rate interest: (1) The Fund must be eligible to
participate in any discretionary tender on the same basis as any
similarly situated holder of floating rate interests; (2) the Fund must
participate in any mandatory tender on the same basis as each similarly
situated holder; and (3) less than 50% of the floating rate interests
must be owned by Funds (and other discretionary accounts) managed by
the Fund's Adviser.
    (c) Before any such arrangements are entered into pursuant to the
exemption, where the Fund holds the residual interest, the Fund or the
Adviser must obtain competitive quotations from at least two
unaffiliated institutions with respect to fees charged by such
institutions for acting as liquidity provider or remarketing agent,
except that if quotations are unavailable from two such institutions,
only one other competitive quotation is required. Any fees paid to the
Trading Entity as liquidity provider or remarketing agent will be no
greater than the lowest of such quotations, unless the Board finds that
such difference is justified by a corresponding difference in the
nature of the services provided.
    7. With respect to ABS or MBS that are newly issued by special
purpose entities sponsored by a Trading Entity (or an affiliate) under
circumstances in which both the following are true: (a) The residual
interest in the special purpose entity is owned directly or indirectly
by the Trading Entity (or an affiliate); and (b) the Trading Entity (or
an affiliate) acts as the servicer of assets, purchases of such
securities will be made by a Fund only where, based on relevant
information that is reasonably available to the Adviser, the Adviser
believes that, upon the close of the transaction, Funds (and other
discretionary advisory accounts) managed by the Adviser will purchase
less than 50% of the dollar amount of securities of each class acquired
by the Fund in the aggregate, and the Fund participates in each such
class on the same terms as other purchasers of that class.
    8. With respect to a syndicated loan facility in which a Fund and a
Trading Entity participate in a manner that might otherwise be
prohibited by section 17(d) of the Act and rule 17d-1 thereunder: (a)
The participation by the Fund and the Trading Entity will involve no
coordination between the Fund and the Trading Entity beyond that of a
type the Trading Entity engages in with other unaffiliated participants
in such facility; (b) the terms of the Fund's participation in the
facility (to the extent within the knowledge and control of the Trading
Entity) will be on a basis no less advantageous than that of other
similarly situated participants (i.e., the Fund will receive the same
priority, security, interest rate and fees as other participants in the
same tranche or other portion of the loan in which the Fund is a
participant), except to the extent such difference is related to
services performed with respect to the facility or their role in the
facility; and (c) in the case of the primary syndication of a loan
facility where the Trading Entity is lead agent with primary
responsibility for structuring, arranging or placing such facility, the
Fund will participate in the facility only where, based on relevant
information that is reasonably available to the Adviser, the Adviser
believes that, upon conclusion of allocations to holders of record in
the primary syndication of the facility, less than 50% of the
participations will be held by Funds (and other discretionary advisory
accounts) managed by the Adviser.
    9. With respect to situations in which a Fund and a Trading Entity
have invested in the same company and that might otherwise be
prohibited by section 17(d) of the Act and rule 17d-1 thereunder (other
than a syndicated loan transaction, which is subject to condition B.8
above): (a) The Fund's and the Trading Entity's investment will involve
no coordination between the Trading Entity and the Fund beyond that of
a type the Trading Entity engages in with other unaffiliated investors
in such company; and (b) the Fund will participate or invest in a type
or class of securities (e.g., equity securities) of the company only
where, based on relevant information that is reasonably available to
the Adviser, the Adviser believes that, upon the close of the
investment transaction, less than 50% of the dollar amount of the
securities of such type or class will be owned by Funds (and other
discretionary advisory accounts) managed by the Adviser.

    For the Commission, by the Division of Investment Management,
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-24537 Filed 10-9-09; 8:45 am]

BILLING CODE 8011-01-P


[Federal Register Volume 85, Number 12 (Friday, January 17, 2020)]
[Notices]
[Pages 3096-3099]
[FR Doc No: 2020-00681]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87946; File No. SR-CboeBZX-2020-001]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change Relating
To Amend Its Fee Schedule

January 13, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 2, 2020, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to amend its Fee Schedule. The text of the proposed rule
change is provided in Exhibit 5.
    The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend its fee schedule for its equity
options platform (``BZX Options''), effective January 2, 2020.
    The Exchange first notes that it operates in a highly competitive
market in which market participants can readily direct order flow to
competing venues if they deem fee levels at a particular venue to be
excessive or incentives to be insufficient. More specifically, the
Exchange is only one of 16 options venues to which market participants
may direct their order flow. Based on publicly available information,
no single options exchange has more than 22% of the market share and
currently the Exchange represents less than 8% of the market share.\3\
Thus, in such a low-concentrated and highly competitive market, no
single options exchange, including the Exchange, possesses significant
pricing power in the execution of option order flow. The Exchange
believes that the ever-shifting market share among the exchanges from
month to month demonstrates that market participants can shift order
flow, or discontinue to reduce use of certain categories of products,
in response to fee changes. Accordingly, competitive forces constrain
the Exchange's transaction fees, and market participants can readily
trade on competing venues if they deem pricing levels at those other
venues to be more favorable.
---------------------------------------------------------------------------

    \3\ See Cboe Global Markets U.S. Options Market Volume Summary
by Month (December 26, 2019), available at https://markets.cboe.com/us/options/market_statistics/.
---------------------------------------------------------------------------

    The Exchange's Fees Schedule sets forth standard rebates and rates
applied per contract. For example, the Exchange assesses a standard
rebate of $0.29 per contract for Market Maker orders that add liquidity
in Penny Pilot Securities \4\ and $0.40 per contract for such orders in
non-Penny Pilot Securities. Additionally, in response to the
competitive environment, the Exchange also offers tiered pricing which
provides Members opportunities to qualify for higher rebates or reduced
fees where certain volume criteria and thresholds are met. Tiered
pricing provides an incremental incentive for Members to strive for
higher tier levels, which provides increasingly higher benefits or
discounts for satisfying increasingly more stringent criteria. For
example, the Exchange currently offers nine Market Maker Penny Pilot
Add Volume Tiers (``MM Penny Add Tiers'') under footnote 6, which
provide an enhanced rebate between $0.33 and $0.46 per contract for
qualifying Market Maker orders which meet certain add liquidity
thresholds and yield fee code PM.
---------------------------------------------------------------------------

    \4\ ``Penny Pilot Securities'' are those issues quoted pursuant
to Exchange Rule 21.5, Interpretation and Policy .01.
---------------------------------------------------------------------------

    Under the current MM Penny Add Tiers, a Member receives an enhanced
rebate where the Member has an ADV, ADAV, or ADRV (depending on the
Tier) \5\ in Market Maker orders greater than or equal to a specified
percentage of OCV \6\ or TCV \7\ (currently in Tier 4).

The Exchange proposes to adopt new MM Penny Add Tier 9 and,
accordingly, relocate current MM Penny Add Tier 9 to a new Tier 10. The
Exchange believes the proposed MM Penny Add Tier will provide Members
an additional opportunity and alternative means to receive an enhanced
rebate for meeting the corresponding proposed criteria. The Exchange
believes the proposed tier, along with the existing tiers, also
provides an incremental incentive for Members to strive for the highest
tier levels, which provide increasingly higher discounts for such
transactions. Specifically, the Exchange proposes to adopt a new MM
Penny Add Tier 9 (and subsequently move current Tier 9 to a new Tier
10), which would provide an enhanced rebate of $0.44 per contract where
a Member: (1) Has an ADAV in Market Maker orders greater than or equal
to 0.10% of average OCV; (2) has on BZX Equities an ADV greater than or
equal to 0.60% of average TCV; and (3) has a step-up ADAV in Market
Maker orders from December 2019 greater than or equal to 0.05% of
average OCV. As such, under the proposed Tier, the Exchange is adopting
an additional set of criteria that Members could meet to achieve an
enhanced rebate. Particularly, Members must additionally satisfy a (i)
ADAV threshold as it relates to a percentage of OCV, that is less
stringent than such criteria under current Tier 9 (relocated to new
Tier 10), (ii) cross-asset threshold, which is designed to incentivize
Members to achieve certain levels of participation on both the
Exchange's options and equities platform (``BZX Equities'') and (iii) a
step-up ADAV threshold, which is designed to encourage growth (i.e.,
Members must increase their relative liquidity each month over a
predetermined baseline (in this case the month being December 2019)).
Overall, the proposed enhanced rebate and corresponding criteria is
designed to encourage Members to increase their order flow, thereby
contributing to a deeper and more liquid market, which benefits all
market participants and provides greater execution opportunities on the
Exchange.
---------------------------------------------------------------------------

    \5\ ``ADAV'' means average daily added volume calculated as the
number of contracts added, ``ADRV'' means average daily removed
volume calculated as the number of contracts removed, and ``ADV''
means average daily volume calculated as the number of contracts
added or removed, combined, per day. ADAV, ADRV and ADV are
calculated on a monthly basis.
    \6\ ``OCC Customer Volume'' or ``OCV'' means the total equity
and ETF options volume that clears in the Customer range at the
Options Clearing Corporation (``OCC'') for the month for which the
fees apply, excluding volume on any day that the Exchange
experiences an Exchange System Disruption and on any day with a
scheduled early market close.
    \7\ ``TCV'' means total consolidated volume calculated as the
volume reported by all exchanges to the consolidated transaction
reporting plan for the month for which the fees apply, excluding
volume on any day that the Exchange experiences an Exchange System
Disruption and on any day with a scheduled early market close.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with the Section 6 of the Act,\8\ in general, and Section 6(b)(4),\9\
in particular, as it is designed to provide for the equitable
allocation of reasonable dues, fees and other charges among its Members
and other persons using its facilities.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    In particular, the Exchange believes the proposed tier is
reasonable because it provides an additional opportunity for Members to
receive higher rebates by providing a different set of criteria they
can reach for. The Exchange notes that volume-based incentives and
discounts have been widely adopted by exchanges,\10\ including the
Exchange,\11\ and are reasonable, equitable and non-discriminatory
because they are open to all Members on an equal basis. They also
provide additional benefits or discounts that are reasonably related to
(i) the value to an exchange's market quality and (ii) associated
higher levels of market activity, such as higher levels of liquidity
provision and/or growth patterns. Additionally, as noted above, the
Exchange operates in highly competitive market. The Exchange is only
one of several options venues to which market participants may direct
their order flow, and it represents a small percentage of the overall
market. Competing options exchanges offer similar tiered pricing
structures to that of the Exchange, including schedules of rebates and
fees that apply based upon members achieving certain volume and/or
growth thresholds. These competing pricing schedules, moreover, are
presently comparable to those that the Exchange provides, including
pricing incentives tied to comparable tiers.\12\
---------------------------------------------------------------------------

    \10\ See, e.g., Cboe EDGX U.S. Options Exchange Fee Schedule,
Footnote 2, Market Maker Volume Tiers, which provide reduced fees
between $0.01 and $0.17 per contract for Market Maker Penny and Non-
Penny orders where Members meet certain volume thresholds.
    \11\ See, e.g., Cboe BZX U.S. Options Exchange Fee Schedule,
Footnote 7, Market Maker Non-Penny Pilot Volume Tiers which provide
comparable enhanced rebates for Market Maker orders where Members
meet certain volume thresholds.
    \12\ See supra note 11.
---------------------------------------------------------------------------

    Moreover, the Exchange believes the proposed Market Maker Tier 9 is
a reasonable means to encourage Members to increase their liquidity on
the Exchange and also their participation on BZX Equities. The Exchange
believes that adopting a tier with alternative criteria to the existing
Market Maker Volume Tiers may encourage those Members who could not
previously achieve the criteria under the existing Market Maker Volume
Tiers to increase their order flow on BZX Options and Equities. For
example, the proposed tier would provide an opportunity for Members who
have an ADAV in Market Makers Orders of at least 0.10% of average OCV,
but less than the more stringent 0.75% of average OCV (the requirement
under current Tier 9, i.e., new Tier 10), to receive a higher rebate
than they may currently receive but slightly lower than the rebate they
would receive for reaching the more stringent criteria under current
Tier 9 (new Tier 100), if they otherwise meet the threshold requirement
based on BZX Equities participation and can grow a modest amount since
December 2019. Similarly, for Market Makers that participate on both
BZX Options and Equities, and do not currently meet the 0.75% ADAV
threshold under current Tier 9 (i.e., new Tier 10), but can or do meet
the proposed equities ADV threshold, the proposed tier may incentivize
those participants to grow their options volume in order to receive
enhanced rebates. Increased liquidity benefits all investors by
deepening the Exchange's liquidity pool, offering additional
flexibility for all investors to enjoy cost savings, supporting the
quality of price discovery, promoting market transparency and improving
investor protection. The Exchange also believes that proposed enhanced
rebate is reasonable based on the difficulty of satisfying the tier's
criteria and ensures the proposed rebate and threshold appropriately
reflects the incremental difficulty to achieve the existing Market
Maker Volume Tiers. The proposed enhanced rebate amount also does not
represent a significant departure from the enhanced rebates currently
offered under the Exchange's existing Market Maker Volume Tiers.
Indeed, the proposed enhanced rebate amount ($0.44) is incrementally
higher than current Tiers 7 and 8 ($0.42), which the Exchange believes
offers slightly less stringent criteria than the proposed Tier 9, but
is incrementally lower than the rebate offered under existing Tier 9
(i.e., new Tier 10) ($0.46), which the Exchange believes is more
stringent than the proposed criteria under proposed Tier 9. The
Exchange also notes that the proposed rebate remains within the range
of the enhanced rebates offered under the current Market Maker Volume
Tiers (i.e., $0.33-$0.46).
    The Exchange believes that the proposal represents an equitable
allocation of fees and is not unfairly discriminatory because it
applies uniformly to all Market Makers. Additionally a number of Market
Makers have a reasonable opportunity to satisfy the tier's criteria,
which the Exchange believes is less stringent than the existing Market
Maker Volume Tier 9 (new Tier 10). While the Exchange has no way of
knowing whether this proposed rule change would definitively result in
any particular Market Maker qualifying for the

proposed tier, the Exchange anticipates up to three Market Makers
meeting, or being reasonably able to meet, the proposed criteria. The
Exchange believes the proposed tier could provide an incentive for
other Members to submit additional liquidity on BZX Options and
Equities to qualify for the proposed enhanced rebate. To the extent a
Member participates on the Exchange but not on BZX Equities, the
Exchange does believe that the proposal is still reasonable, equitably
allocated and non-discriminatory with respect to such Member based on
the overall benefit to the Exchange resulting from the success of BZX
Equities. Particularly, the Exchange believes such success allows the
Exchange to continue to provide and potentially expand its existing
incentive programs to the benefit of all participants on the Exchange,
whether they participate on BZX Equities or not. The proposed pricing
program is also fair and equitable in that membership in BZX Equities
is available to all market participants, which would provide them with
access to the benefits on BZX Equities provided by the proposed change,
even where a member of BZX Equities is not necessarily eligible for the
proposed enhanced rebate on the Exchange.
    The Exchange lastly notes that it does not believe the proposed
tier will adversely impact any Member's pricing or ability to qualify
for other tiers. Rather, should a Member not meet the proposed
criteria, the Member will merely not receive the proposed enhanced
rebate, and has nine alternative choices to aim to achieve under the
Market Maker Volume Tiers. Furthermore, the proposed enhanced rebate
would apply to all Members that meet the required criteria under
proposed Market Maker Volume Tier 9.

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 intramarket or intermarket competition that is not
necessary or appropriate in furtherance of the purposes of the Act.
Rather, as discussed above, the Exchange believes that the proposed
change would encourage the submission of additional liquidity to a
public exchange, thereby promoting market depth, price discovery and
transparency and enhancing order execution opportunities for all
Members. As a result, the Exchange believes that the proposed change
furthers the Commission's goal in adopting Regulation NMS of fostering
competition among orders, which promotes ``more efficient pricing of
individual stocks for all types of orders, large and small.'' \13\
---------------------------------------------------------------------------

    \13\ Securities Exchange Act Release No. 51808, 70 FR 37495,
37498-99 (June 29, 2005) (S7-10-04) (Final Rule).
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change does not impose any
burden on intramarket competition that is not necessary or appropriate
in furtherance of the purposes of the Act. Particularly, the proposed
change applies uniformly to market participants. As discussed above, to
the extent a Member participates on the Exchange but not on BZX
Equities, the Exchange notes that the proposed change can provide an
overall benefit to the Exchange resulting from the success of BZX
Equities. Such success enables the Exchange to continue to provide and
potentially expand its existing incentive programs to the benefit of
all participants on the Exchange, whether they participate on BZX
Equities or not. The proposed pricing program is also fair and
equitable in that membership in BZX Equities is available to all market
participants. Additionally, the proposed change is designed to attract
additional order flow to the Exchange and BZX Equities. Greater
liquidity benefits all market participants on the Exchange by providing
more trading opportunities and encourages Members to send orders,
thereby contributing to robust levels of liquidity, which benefits all
market participant.
    Next, the Exchange believes the proposed rule change does not
impose any burden on intermarket competition that is not necessary or
appropriate in furtherance of the purposes of the Act. As previously
discussed, the Exchange operates in a highly competitive market.
Members have numerous alternative venues that they may participate on
and director their order flow, including 15 other options exchanges and
off-exchange venues. Additionally, the Exchange represents a small
percentage of the overall market. Based on publicly available
information, no single options exchange has more than 22% of the market
share.\14\ Therefore, no exchange possesses significant pricing power
in the execution of option order flow. Indeed, participants can readily
choose to send their orders to other exchange and off-exchange venues
if they deem fee levels at those other venues to be more favorable.
Moreover, the Commission has repeatedly expressed its preference for
competition over regulatory intervention in determining prices,
products, and services in the securities markets. Specifically, in
Regulation NMS, the Commission highlighted the importance of market
forces in determining prices and SRO revenues and, also, recognized
that current regulation of the market system ``has been remarkably
successful in promoting market competition in its broader forms that
are most important to investors and listed companies.'' \15\ The fact
that this market is competitive has also long been recognized by the
courts. In NetCoalition v. Securities and Exchange Commission, the D.C.
Circuit stated as follows: ``[n]o one disputes that competition for
order flow is `fierce.' . . . As the SEC explained, `[i]n the U.S.
national market system, buyers and sellers of securities, and the
broker-dealers that act as their order-routing agents, have a wide
range of choices of where to route orders for execution'; [and] `no
exchange can afford to take its market share percentages for granted'
because `no exchange possesses a monopoly, regulatory or otherwise, in
the execution of order flow from broker dealers'. . . .''.\16\
Accordingly, the Exchange does not believe its proposed fee change
imposes any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \14\ See supra note 1.
    \15\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005).
    \16\ NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
---------------------------------------------------------------------------

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

    The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any written comments from members or other interested parties.

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

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \17\ and paragraph (f) of Rule 19b-4 \18\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission will institute proceedings

to determine whether the proposed rule change should be approved or
disapproved.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

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-CboeBZX-2020-001 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-CboeBZX-2020-001. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2020-001 and should be submitted
on or before February 7, 2020.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-00681 Filed 1-16-20; 8:45 am]
BILLING CODE 8011-01-P