[Federal Register Volume 85, Number 154 (Monday, August 10, 2020)]
[Notices]
[Pages 48318-48320]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17353]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89472; File No. SR-CboeBZX-2020-036]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether to Approve or Disapprove a
Proposed Rule Change Relating to Rule 14.11, Other Securities, To
Modify a Continued Listing Criterion for Certain Exchange-Traded
Products
August 4, 2020.
On April 29, 2020, Cboe BZX Exchange, Inc. (``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend one of the continued
listing requirements relating to certain exchange-traded products
(``ETPs'') under BZX Rule 14.11. The proposed rule change was published
for comment in the Federal Register on May 7, 2020.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 88795 (May 1, 2020),
85 FR 27254 (``Notice'').
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On June 16, 2020, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ The Commission has received one comment letter on the
proposed rule change.\6\ The Commission is issuing this order to
institute proceedings pursuant to Section 19(b)(2)(B) of the Act \7\ to
determine whether to approve or disapprove the proposed rule change.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 89076, 85 FR 37488
(June 22, 2020). The Commission designated August 5, 2020 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ Comments on the proposed rule change can be found on the
Commission's website at: https://www.sec.gov/comments/sr-cboebzx-2020-036/srcboebzx2020036.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
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I. Description of the Proposal
A continued listing requirement for certain ETPs \8\ currently
provides that, following the initial 12-month period after commencement
of trading on the Exchange, the Exchange will consider the suspension
of trading in, and will commence delisting proceedings under BZX Rule
14.12 for, shares of such ETPs for which there are fewer than 50
beneficial holders for 30 or more consecutive trading days
(``Beneficial Holder Rule''). The Exchange is proposing to change the
date after which an ETP must have at least 50 beneficial holders or be
subject to delisting proceedings under BZX Rule 14.12 (``Non-Compliance
Period''). Specifically, the Exchange seeks to extend the Non-
Compliance Period from 12 months after commencement of trading on the
Exchange to 36 months after commencement of trading on the Exchange.
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\8\ For purposes of the proposal, the term ``ETP'' means
securities listed pursuant to BZX Rule 14.11(c) (Index Fund Shares),
BZX Rule 14.11(i) (Managed Fund Shares), and BZX Rule 14.11(l)
(Exchange-Traded Fund Shares (``ETF Shares'')).
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A. The Exchange's Rationale
The Exchange asserts that it would be appropriate to increase the
Non-Compliance Period from 12 months to 36 months because: (1) It would
bring the rule more in line with the life cycle of an ETP; (2) the
economic and competitive structures in place in the ETP ecosystem
naturally incentivize issuers to de-list products rather than
continuing to list products that do not garner investor interest; and
(3) extending the period from 12 to 36 months will not meaningfully
impact the manipulation concerns that the continued listing standard is
intended to address.
According to the Exchange, the ETP space is more competitive that
it has ever been, with more than 2000 ETPs listed on exchanges. As a
result, distribution platforms have become more restrictive about the
ETPs they will allow on their systems, often requiring a minimum track
record (e.g., twelve months) and a minimum level of assets under
management (e.g., $100 million). Many larger entities also require a
one-year track record before they will invest in an ETP. In the
Exchange's view, this has slowed the growth cycle of the average ETP,
with the result that the Exchange has seen a significant number of
deficiencies with respect to the Beneficial Holders Rule over the last
several years. Specifically, the Exchange notes that it has issued
deficiency notifications to 34 ETPs for non-compliance with the
Beneficial Holders Rule in the last five years, 27 of which ultimately
were able to achieve compliance while going through the delisting
process.
In addition, the Exchange believes that the economic and
competitive structures in place in the ETP ecosystem naturally
incentivize issuers to de-list products with insufficient investor
interest, and that the Beneficial Holders Rule has resulted in the
forced termination of ETPs that issuers believed were still
economically viable. The Exchange states that there are significant
costs associated with the launch and continued operation of an ETP, and
notes that the Exchange has had 69 products voluntarily delist in the
last two years. The Exchange also questions whether the number of
beneficial holders is a meaningful measure of market interest in an
ETP, and believes that an ETP issuer is incentivized to have as many
beneficial holders as possible.
Finally, the Exchange states that the proposal ``does not create
any significant change in the risk of manipulation for ETPs listed on
the exchange.'' The Exchange ``does not believe there is anything
particularly important about the 50th Beneficial Holder that reduces
the manipulation risk associated with an ETP as compared to the 49th,
nor is there any manipulation concern that arises on the 366th day
after an ETP began trading on the Exchange that didn't otherwise exist
on the 1st, 2nd, or 365th day.'' \9\ The Exchange also states that it
has in place a robust surveillance program for ETPs that it believes is
sufficient to deter and detect manipulation and other violative
activity, and that the Exchange (or the Financial Industry Regulatory
Authority on its behalf) communicates as needed with other members of
the Intermarket Surveillance Group. The Exchange believes that ``these
robust surveillance procedures will further act to mitigate concerns
that arise from extending the compliance period for the Beneficial
Holders [Rule] from 12 months to 36 months.'' \10\ Lastly, the Exchange
takes the position that other continued listing standards (e.g., with
respect to the diversity, liquidity and size of an ETP's holdings or
reference assets) ``are generally sufficient to mitigate manipulation
concerns associated with the applicable ETP.'' \11\
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\9\ See Notice, supra note 3, 85 FR at 27256.
\10\ See id.
\11\ See id.
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[[Page 48319]]
B. Comment on the Proposed Rule Change
The Commission received one comment in support of the proposal.\12\
The commenter states that the beneficial owner requirement
disproportionately punishes smaller companies without the resources to
pay for aggressive distribution, and disincentivizes issuers from
launching funds that can prove themselves purely by investment merit
over the long term.\13\ The commenter believes that the purpose of the
beneficial holder minimum likely is to enforce some sort of minimum
liquidity, and accordingly suggests alternative liquidity measures such
as the quality of secondary markets (e.g., spreads and depth of book),
the liquidity of the underlying basket, and the number of potential
liquidity providers. In this commenter's view, increasing the time
period to achieve the minimum number of beneficial holders is a
positive step, but eliminating the requirement altogether would be far
more purposeful.\14\
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\12\ See Letter to Secretary, Commission, from S Phil Bak,
Founder & CEO, SecLenX (May 13, 2020) (``SecLenX Letter'').
\13\ See id. at 1.
\14\ See id. at 2.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2020-036 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \15\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved.
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\15\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\16\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of and input concerning the proposed rule change's consistency
with the Act and, in particular, Section 6(b)(5) of the Act, which
requires, among other things, that the rules of a national securities
exchange be ``designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest; and are not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.'' \17\
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\16\ Id.
\17\ 15 U.S.C. 78f(b)(5).
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The Commission has consistently recognized the importance of the
minimum number of holders and other similar requirements in exchange
listing standards. Among other things, such listing standards help
ensure that exchange listed securities have sufficient public float,
investor base, and trading interest to provide the depth and liquidity
necessary to promote fair and orderly markets.\18\
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\18\ See, e.g., Securities Exchange Act Release No. 57785 (May
6, 2008), 73 FR 27597 (May 13, 2008)(SR-NYSE-2008-17) (stating that
the distribution standards, which includes exchange holder
requirements ``. . . should help to ensure that the [Special Purpose
Acquisition Company's] securities have sufficient public float,
investor base, and liquidity to promote fair and orderly markets'');
Securities Exchange Act Release No. 86117 (June 14, 2019), 84 FR
28879 (June 20, 2018) (SR-NYSE-2018-46) (disapproving a proposal to
reduce the minimum number of public holders continued listing
requirement applicable to Special Purpose Acquisition Companies from
300 to 100).
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As discussed above, the Exchange is proposing to increase the Non-
Compliance Period from 12 months to 36 months, thereby extending by two
years the length of time during which an ETP listed on the Exchange
would have no requirement to have a minimum number of beneficial
holders. In support of its proposal, the Exchange emphasizes that some
ETPs have had difficulty complying with the Beneficial Holders Rule.
The Exchange indicates that noncompliance with the Beneficial Holders
Rule is increasing because the ETP market has become so competitive,
and there are so many of them, that it can be difficult to acquire the
requisite number of beneficial holders within the existing Non-
Compliance Period. The Exchange also believes that the existing
Beneficial Holders Rule forces the delisting of ETPs that may still be
economically viable. With respect to regulatory considerations, the
Exchange takes the position that the manipulation risk would not be
materially greater if an ETP had 49 beneficial holders as opposed to
50, and that no new manipulation concerns would arise with a longer
Non-Compliance Period than a shorter one. The Exchange also asserts
that existing surveillances and other listing standards are sufficient
to mitigate manipulation concerns.
While the Exchange takes the position that the highly-competitive
ETP market has made compliance with the Beneficial Holders Rule
difficult, and led to the delisting of ETPs that may be economically
viable, the Exchange does not explain why these compliance difficulties
justify extending the Non-Compliance Period for this core quantitative
listing standard for an additional two years. For example, the Exchange
states that the manipulation risk is not materially greater with 49
beneficial holders than with 50, but the Exchange is proposing to
require no minimum number during the Non-Compliance Period, and does
not explain why the manipulation and other regulatory risks would not
be greater with a very small number of beneficial holders. The Exchange
also states that no new manipulation concerns would arise with a longer
Non-Compliance Period than a shorter one, but does not explain why
tripling the period during which the same regulatory risks posed by a
Non-Compliance Period would be present, is consistent with the Exchange
Act. The Exchange takes the position that existing surveillances and
other listing standards are sufficient to mitigate manipulation
concerns, but does not explain in any detail the basis for this view,
or the impact of its proposal on the maintenance of fair and orderly
markets or other applicable Exchange Act standards.
Under the Commission's Rules of Practice, the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder . . . is on the
self-regulatory organization [`SRO'] that proposed the rule change.''
\19\ The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding, and any failure of an SRO
to provide this information may result in the Commission not having a
sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\20\
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\19\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\20\ See id.
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For these reasons, the Commission believes it is appropriate to
institute proceedings pursuant to Section 19(b)(2)(B) of the Act to
determine whether the proposal should be approved or disapproved.
[[Page 48320]]
IV. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\21\
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\21\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by August 31, 2020. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
September 14, 2020. The Commission asks that commenters address the
sufficiency of the Exchange's statements in support of the proposal,
which are set forth in the Notice, in addition to any other comments
they may wish to submit about the proposed rule change.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2020-036 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-2020-036. 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-2020-036 and should be submitted
by August 31, 2020. Rebuttal comments should be submitted by September
14, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17353 Filed 8-7-20; 8:45 am]
BILLING CODE 8011-01-P