[Federal Register Volume 85, Number 130 (Tuesday, July 7, 2020)]
[Notices]
[Pages 40720-40722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14494]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89197; File No. SR-NYSEArca-2020-56]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Amend NYSE Arca Rules 5.2-E(j)(3), 5.2-
E(j)(8), 5.5-E(g)(2), 8.600-E and 8.900-E
June 30, 2020.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on June 18, 2020, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') a proposed rule change described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend NYSE Arca Rules 5.2-E(j)(3)
(Investment Company Units), 5.2-E(j)(8) (Exchange-Traded Fund Shares),
5.5-E(g)(2), 8.600-E (Managed Fund Shares) and 8.900-E (Managed
Portfolio Shares) to (1) remove the listing requirement that, following
the initial twelve-month period after commencement of trading of a
series of Investment Company Units, Exchange-Traded Fund Shares,
Managed Fund Shares, and Managed Portfolio Shares, respectively, on the
Exchange that the applicable fund has at least 50 beneficial holders,
and (2) require that a series of Investment Company Units, Exchange-
Traded Fund Shares, Managed Fund Shares, and Managed Portfolio Shares,
respectively, have at least one creation unit outstanding on an initial
and continued listing basis. The proposed change is available on the
Exchange's website at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change
[[Page 40721]]
and discussed any comments it received on the proposed rule change. The
text of those statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend NYSE Arca Rules 5.2-E(j)(3)
(Investment Company Units), 5.5 E(g)(2), 5.2-E(j)(8) (Exchange-Traded
Fund Shares),\4\ 8.600-E (Managed Fund Shares) and 8.900-E (Managed
Portfolio Shares) (collectively, ``Fund Shares'') to (1) remove the
listing requirement that, following the initial twelve-month period
after commencement of trading of a series of Investment Company Units,
Exchange-Traded Fund Shares, Managed Fund Shares or Managed Portfolio
Shares, respectively, on the Exchange, such series have at least 50
beneficial holders, and (2) require that a series of Fund Shares have
at least one creation unit outstanding on an initial and continued
listing basis.\5\
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\4\ A series of Exchange-Traded Fund Shares listed pursuant to
NYSE Arca Rule 5.2-E (j)(8) is required to be eligible to operate in
reliance on Rule 6c-11 under the Investment Company Act of 1940, as
amended (``1940 Act''). See NYSE Arca Rule 5.2-E (j)(8)(e)(1).
\5\ The term creation unit would have the same meaning as
defined in Rule 6c-11(a)(1) (i.e., a specified number of exchange-
traded fund shares that the exchange-traded fund will issue to (or
redeem from) an authorized participant in exchange for the deposit
(or delivery) of a basket and a cash balancing amount if any).
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The Exchange believes that the requirement that a series of Fund
Shares listed on the Exchange must have at least 50 beneficial
shareholders is no longer necessary. Exchange-Traded Fund Shares are
currently subject to the conditions of Rule 6c-11 under 1940 Act \6\
and Investment Company Units and Managed Fund Shares will be required
to operate in compliance with Rule 6c-11 by December 23, 2020.\7\ The
Exchange believes that the requirements of Rule 6c-11 and, in
particular, the website disclosure requirements of Rule 6c-11(c),
together with the existing creation and redemption process, serve to
mitigate the risks of manipulation and lack of liquidity that the
shareholder requirement was intended to address. The Exchange believes
that requiring at least one creation unit to be outstanding at all
times, together with the enhanced disclosure requirements of Rule 6c-
11, will facilitate an effective arbitrage mechanism that, for
Investment Company Units, Managed Fund Shares and Exchange-Traded Fund
Shares, will provide investors with sufficient transparency into the
holdings of the underlying portfolio and help ensure that the trading
price in the secondary market remains in line with the value per share
of a fund's portfolio.
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\6\ See Release No. 33-10695; IC-33646; File No. S7-15-18
(Exchange-Traded Funds) (September 25, 2019), 84 FR 57162 (October
24, 2019) (``ETF Adopting Release'').
\7\ As of December 23, 2020, the Commission is rescinding those
portions of prior Commission ETF exemptive orders that grant relief
related to the formation and operation of an ETF. See ETF Adopting
Release, note 39 and accompanying text.
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For example, Rule 6c-11(c)(1)(vi), which requires additional
disclosure if the premium or discount is in excess of 2% for more than
seven consecutive days, as well as the related website disclosure and
discussion requirements,\8\ provides additional transparency to
investors in the event that the trading value and the underlying
portfolio deviate for an extended period of time, which could indicate
an inefficient arbitrage mechanism.\9\
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\8\ Rule 6c-11(c)(1)(vi) provides that ``[i]f the exchange-
traded fund's premium or discount is greater than 2% for more than
seven consecutive trading days, a statement that the exchange-traded
fund's premium or discount, as applicable, was greater than 2% and a
discussion of the factors that are reasonably believed to have
materially contributed to the premium or discount, which must be
maintained on the website for at least one year thereafter.''
\9\ The Commission discussed the importance of an effective and
efficient arbitrage mechanism in the ETF Adopting Release at 84 FR
57165 and 57209-57211 (``Secondary Market Trading, Arbitrage and ETF
Liquidity)''.
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With respect to Managed Portfolio Shares, while these securities do
not publicly disclose their portfolio holdings daily and are not
eligible to rely on Rule 6c-11, the Commission, in approving exchange
rules accommodating listing and trading of Managed Portfolio Shares,
stated that the Verified Intraday Indicative Value (``VIIV'') and other
information required to be disseminated in connection with such trading
ensures transparency of key values and information for such
securities.\10\ The Exchange believes that such information is
sufficient to support an effective arbitrage process, independent of
any minimum shareholder requirement.
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\10\ See Securities Exchange Act Release No. 87759 (December 16,
2019) 84 FR 70223 (December 20, 2019) (SR-CboeBZX-2019-047) (Notice
of Filing of Amendment Nos. 4 and 5, and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment Nos. 4
and 5, to Adopt BZX Rule 14.11(k) to Permit the Listing and Trading
of Managed Portfolio Shares). In that order, the Commission stated:
``Although the portfolio holdings of the Managed Portfolio Shares
are not publicly disclosed on a daily basis, the Commission believes
that the proposed continued listing standards and trading rules
under proposed BZX Rule 14.11(k) are adequate to ensure transparency
of key values and information regarding the securities. The
Commission notes that, for continued listing of each series of
Managed Portfolio Shares, the VIIV will be widely disseminated by
the Reporting Authority and/or one or more major market data vendors
in one second intervals during Regular Trading Hours, and will be
disseminated to all market participants at the same time. Further,
transactions in Managed Portfolio Shares would be permitted only
during Regular Trading Hours, when one second VIIVs would be
available. In addition, like all other registered management
investment companies, each series of Managed Portfolio Shares would
be required to publicly disclose its portfolio holdings information
on a quarterly basis, within at least 60 days following the end of
every fiscal quarter.'' [footnotes omitted]. See also, Securities
Exchange Act Release No. 88648 (April 15, 2020) 85 FR 22200 (April
21, 2020) (SR-NYSEArca-2020-32) (Notice of Filing and Immediate
Effectiveness of Proposed Rule Change to Adopt NYSE Arca Rule 8.900-
E).
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The Exchange notes that, as of June 9, 2020, the median creation
unit size for a series of Fund Shares listed on the Exchange is 50,000
shares and the mean creation unit size is approximately 58,012 shares.
As of June 9, 2020, of the approximately 1,368 series of Fund Shares
listed on the Exchange, the median number of creation units outstanding
is approximately 71, approximately 214 series have fewer than 10
creation units outstanding, and approximately 13 series have one
creation unit outstanding.\11\
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\11\ NYSE Arca internal data as of June 9, 2020.
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The arbitrage mechanism relies on the fact that Fund Shares can be
created and redeemed and that Fund Shares are able to flow into the
market when the price of a series of Fund Shares is lower than the net
asset value per share of the portfolio. The resulting buying and
selling of Fund Shares, as well as the underlying portfolio components,
generally causes the market price and the net asset value per share to
align. The functioning of the arbitrage mechanism helps to ensure that
the trading price in the secondary market is at fair value.
The existence of the creation and redemption process, as well as
the proposed requirement that at least one creation unit is always
outstanding, would ensure that market participants are able to redeem
Fund Shares and, thereby, allow the arbitrage mechanism to function
properly. The Exchange believes, therefore, that such arbitrage
mechanism would obviate the need for a minimum shareholder requirement
to support a fair and orderly market in Fund Shares. In addition, the
Exchange's surveillance procedures for Fund Shares and its ability to
halt trading in Fund Shares in specified
[[Page 40722]]
circumstances provide for additional investor protections by further
mitigating any abnormal trading that would affect the Fund Shares'
prices.\12\
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\12\ See, e.g., NYSE Arca Rule 7.18-E(d)(2); NYSE Arca Rule
8.900-E(d)(2).
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2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \13\ in general and Section 6(b)(5) of the Act \14\ in
particular in that it is 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.
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\13\ 15 U.S.C. 78f.
\14\ 15 U.S.C. 78f(b)(5).
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Exchange-Traded Fund Shares are currently subject to the conditions
of Rule 6c-11 under 1940 Act \15\ and Investment Company Units and
Managed Fund Shares will be required to operate in compliance with Rule
6c-11 by December 23, 2020.\16\ The Exchange believes that the
requirements of Rule 6c-11 and in particular the website disclosure
requirements of Rule 6c-11(c), together with the existing creation and
redemption process and proposed requirement that at least one creation
unit is always outstanding, would serve to mitigate the risks of
manipulation and the lack of liquidity that the shareholder requirement
was intended to address. More specifically, the Exchange believes that
requiring at least one creation unit to be outstanding at all times,
together with the enhanced disclosure requirements of Rule 6c-11, would
facilitate an effective arbitrage mechanism that, for Investment
Company Units, Managed Fund Shares and Exchange-Traded Fund Shares,
would provide investors with sufficient transparency into the holdings
of the underlying portfolio and help ensure that the trading price in
the secondary market remains in line with the value per share of a
fund's portfolio.
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\15\ See note 6, supra.
\16\ See note 7, supra.
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With respect to Managed Portfolio Shares, the Commission, in
approving exchange rules accommodating listing and trading of Managed
Portfolio Shares, stated that the VIIV and other information required
to be disseminated in connection with such trading ensures transparency
of key values and information for such securities.\17\ The Exchange
believes that such information is sufficient to support an effective
arbitrage process, independent of any minimum shareholder requirement.
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\17\ See note 10, supra.
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Reliance on the conditions of Rule 6c-11 (for Investment Company
Units, Exchange-Traded Fund Shares and Managed Fund Shares) or the VIIV
and other requirements applicable to Managed Portfolio Shares, together
with the existing creation and redemption process, as well as the
presence of at least one creation unit, would serve to work together to
mitigate the risks of manipulation and the lack of liquidity that the
shareholder requirement was intended to address. By further aligning
the listing requirements with the operational relationship between
investors, market participants and ETF issuers, the proposal
facilitates greater transparency for investors and issuers resulting in
a more efficient market and increased investor protections.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange believes that
the proposed rule change will facilitate growth in development of new
issues of Fund Shares, to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2020-56 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-NYSEArca-2020-56. 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-NYSEArca-2020-56 and should be submitted
on or before July 28, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14494 Filed 7-6-20; 8:45 am]
BILLING CODE 8011-01-P