[Federal Register Volume 85, Number 119 (Friday, June 19, 2020)]
[Notices]
[Pages 37139-37142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13207]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89068; File No. SR-NYSEArca-2020-37]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a
Proposed Rule Change, as Modified by Amendment No. 1, To Make Certain
Changes Regarding the Investments of the PIMCO Enhanced Short Maturity
Active ESG Exchange-Traded Fund
June 15, 2020.
I. Introduction
On April 29, 2020, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to make certain changes regarding the investments
of the PIMCO Enhanced Short Maturity Active ESG Exchange-Traded Fund
(``Fund''). On May 4, 2020, the Exchange filed Amendment No. 1 to the
proposed rule change, which superseded and replaced
[[Page 37140]]
the proposed rule change in its entirety. The proposed rule change, as
modified by Amendment No. 1, was published for comment in the Federal
Register on May 12, 2020.\3\ The Commission has received no comment
letters on the proposal. This order approves the proposed rule change,
as modified by Amendment No. 1.
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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. 88822 (May 6, 2020),
85 FR 28061 (``Notice'').
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I. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
The Exchange proposes certain changes, as described below,
regarding investments of the Fund. The shares (``Shares'') of the Fund
are currently listed and traded on the Exchange under Commentary .01 to
NYSE Arca Rule 8.600-E (``Managed Fund Shares'').\4\ The Fund is a
series of PIMCO ETF Trust (``Trust'').\5\ Pacific Investment Management
Company LLC is the investment adviser (``Adviser'') to the Fund.\6\
PIMCO Investments LLC is the distributor of the Shares and State Street
Bank & Trust Co. acts as the custodian and transfer agent for the Fund.
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\4\ The Shares commenced trading on the Exchange on December 10,
2019.
\5\ The Exchange states that the Trust is registered under the
Investment Company Act of 1940 (``1940 Act''). On November 12, 2019,
the Trust filed with the Commission its registration statement on
Form N-1A under the Securities Act of 1933 (15 U.S.C. 77a), and
under the 1940 Act relating to the Fund (File Nos. 333-155395 and
811-22250) (``Registration Statement''). In addition, the Exchange
states that the Commission has issued an order upon which the Trust
may rely, granting certain exemptive relief under the 1940 Act. See
Investment Company Act Release No. 28993 (November 10, 2009) (File
No. 812-13571).
\6\ The Exchange states that the Adviser is not registered as a
broker-dealer, but the Adviser is affiliated with a broker-dealer
and has implemented and will maintain a ``fire wall'' with respect
to such broker-dealer regarding access to information concerning the
composition and/or changes to the Fund's portfolio. In the event (a)
the Adviser becomes registered as a broker-dealer or newly
affiliated with one or more broker-dealers, or (b) any new adviser
or sub-adviser is a registered broker-dealer or becomes affiliated
with a broker-dealer, it will implement and maintain a fire wall
with respect to its relevant personnel or its broker-dealer
affiliate regarding access to information concerning the composition
and/or changes to the portfolio, and will be subject to procedures
designed to prevent the use and dissemination of material non-public
information regarding such portfolio.
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A. Fund Investments
According to the Exchange, the investment objective of the Fund is
to seek maximum current income, consistent with preservation of capital
and daily liquidity, while incorporating the Adviser's environment,
social responsibility, and governance (``ESG'') investment strategy. In
managing the Fund's portfolio, the Adviser may avoid investment in the
securities of issuers whose ESG practices are not to the Adviser's
satisfaction.
Under normal market conditions,\7\ the Fund invests at least 80% of
its net assets in a diversified portfolio of fixed income securities of
varying maturities, which may be represented by forwards, and will
consist of the following (collectively, ``Fixed Income Instruments''):
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\7\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
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Securities issued or guaranteed by the U.S. government,
its agencies, or U.S. government-sponsored entities;
corporate debt securities of U.S. and non-U.S. issuers,
including convertible securities and corporate commercial paper;
mortgage-backed securities (``MBS'') and other asset-
backed securities (``ABS''), including non-agency, non-government-
sponsored entity (``GSE'') and privately-issued mortgage-related and
other asset-backed securities (``Private ABS/MBS''), collateralized
bond obligations (``CBOs''), collateralized loan obligations
(``CLOs''), and other collateralized debt obligations (``CDOs''); \8\
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\8\ The Exchange states that ``Private ABS/MBS'' as referenced
in the filing are non-agency, non-GSE and privately-issued mortgage-
related and other asset-backed securities as stated in Commentary
.01(b)(5) to NYSE Arca Rule 8.600-E. However, the Exchange also
states that for purposes of this filing, CDOs, CBOs, and CLOs are
excluded from the term Private ABS/MBS. CDOs/CBOs/CLOs are
distinguishable from ABS because they are collateralized by bank
loans or by corporate or government fixed income securities and not
by consumer and other loans made by non-bank lenders, including
student loans.
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inflation-indexed bonds issued both by governments and
corporations;
structured notes, including hybrid or ``indexed''
securities and event-linked bonds;
bank capital and trust preferred securities;
loan participations and assignments;
delayed funding loans and revolving credit facilities;
bank certificates of deposit, fixed time deposits and
bankers' acceptances;
repurchase agreements on Fixed Income Instruments and
reverse repurchase agreements on Fixed Income Instruments;
debt securities issued by states or local governments and
their agencies, authorities and other government-sponsored enterprises;
obligations of non-U.S. governments or their subdivisions,
agencies and government-sponsored enterprises; and
obligations of international agencies or supranational
entities.
With respect to Fixed Income Instruments, the Fund may invest,
without limitation, in U.S. dollar-denominated securities and
instruments of foreign issuers and securities denominated in foreign
currencies.
The Fund may invest in to-be-announced transactions. The Fund may
also purchase and sell securities on a when-issued, delayed delivery or
forward commitment basis. The Fund may, without limitation, seek to
obtain market exposure to the securities in which it primarily invests
by entering into a series of purchase and sale contracts or by using
other investment techniques (such as buy backs or dollar rolls).
The Fund may also hold cash and cash equivalents.\9\
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\9\ For purposes of this filing, the term ``cash equivalents''
includes the short-term instruments enumerated in Commentary .01(c)
to NYSE Arca Rule 8.600-E.
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The Fund may invest in, to the extent permitted by Section 12(d) of
the 1940 Act or exemptive relief therefrom, other affiliated and
unaffiliated funds, such as open-end or closed-end management
investment companies, including other exchange-traded funds
(``ETFs'').\10\
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\10\ The Exchange states that for purposes of this filing, the
term ``ETFs'' are Investment Company Units (as described in NYSE
Arca Rule 5.2-E(j)(3)); Portfolio Depositary Receipts (as described
in NYSE Arca Rule 8.100-E); and Managed Fund Shares (as described in
NYSE Arca Rule 8.600-E). All ETFs will be listed and traded on
national securities exchanges. According to the Exchange, while the
Fund may invest in inverse ETFs, the Fund will not invest in
leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
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B. Use of Derivatives by the Fund
The Exchange states that the Fund may invest in forwards to (1)
provide exposure to Fixed Income Instruments, (2) enhance returns, (3)
manage portfolio duration, or (4) manage the risk of securities price
fluctuations. Investments in forwards will be made in accordance with
the 1940 Act and consistent with the Fund's investment objective and
policies. The Exchange states that, to limit the potential risk
associated with such transactions, the Fund may enter into offsetting
transactions or segregate or ``earmark'' assets determined to be liquid
by the Adviser in accordance with procedures established by the Trust's
Board of Trustees and in accordance with the 1940 Act or as permitted
by applicable Commission guidance. In addition, the Fund has included
risk disclosure in its offering documents, including leveraging
risk.\11\
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\11\ The Exchange states that leveraging risk is the risk that
certain transactions of the Fund, including the Fund's use of
forwards, may give rise to leverage, causing the Fund to be more
volatile than if it had not been leveraged.
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[[Page 37141]]
According to the Exchange, the Adviser believes there will be
minimal, if any, impact to the arbitrage mechanism as a result of the
Fund's use of forwards. The Exchange states that the Adviser
understands that market makers and participants should be able to value
derivatives as long as the positions are disclosed with relevant
information. Further, according to the Exchange, the Adviser believes
that the price at which Shares trade will continue to be disciplined by
arbitrage opportunities created by the ability to purchase or redeem
Shares at their net asset value (``NAV''), which the Exchange states
should ensure that Shares will not trade at a material discount or
premium in relation to their NAV.
C. Application of Generic Listing Requirements
The Exchange states that the proposed changes described below will
result in the portfolio for the Fund not meeting all of the ``generic''
listing requirements of Commentary .01 to NYSE Arca Rule 8.600-E
applicable to the listing of Managed Fund Shares. The Exchange states
that the Fund's portfolio will meet all requirements of Commentary .01
to NYSE Arca Rule 8.600-E except for those set forth in Commentary
.01(b)(1),\12\ Commentary .01(b)(4) \13\ and Commentary .01(b)(5).\14\
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\12\ Commentary .01(b)(1) requires that components that in the
aggregate account for at least 75% of the fixed income weight of the
portfolio each have a minimum original principal amount outstanding
of $100 million or more.
\13\ Commentary .01(b)(4) requires that component securities
that in aggregate account for at least 90% of the fixed income
weight of the portfolio must be either (a) from issuers that are
required to file reports pursuant to Sections 13 and 15(d) of the
Act; (b) from issuers that have a worldwide market value of its
outstanding common equity held by non-affiliates of $700 million or
more; (c) from issuers that have outstanding securities that are
notes, bonds debentures, or evidence of indebtedness having a total
remaining principal amount of at least $1 billion; (d) exempted
securities as defined in Section 3(a)(12) of the Act; or (e) from
issuers that are a government of a foreign country or a political
subdivision of a foreign country.
\14\ Commentary .01(b)(5) provides that non-agency, non-GSE and
privately-issued mortgage-related and other asset-backed securities
components of a portfolio shall not account, in the aggregate, for
more than 20% of the weight of the portfolio.
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According to the Exchange, the Fund's portfolio will not comply
with the requirement in Commentary .01(b)(1) to Rule 8.600-E that
components that in the aggregate account for at least 75% of the fixed
income weight of the portfolio each shall have a minimum original
principal amount outstanding of $100 million or more. Instead, the
Exchange proposes that components, excluding Private ABS/MBS and CDOs/
CBOs/CLOs, that in the aggregate account for at least 50% of the fixed
income weight of the portfolio, each shall have a minimum original
principal amount outstanding of $50 million or more. Investments in
Private ABS/MBS and CDOs/CBOs/CLOs will not be subject to a required
minimum original principal amount outstanding.
The Fund will not comply with the requirements in Commentary
.01(b)(4) to Rule 8.600-E that component securities that in the
aggregate account for at least 90% of the fixed income weight of the
portfolio meet one of the criteria specified in Commentary
.01(b)(4).\15\ Instead, the Exchange proposes that: (1) The Fund's
investments in fixed income securities that do not meet any of the
criteria in Commentary .01(b)(4) will not exceed 10% of the total
assets of the Fund, excluding Private ABS/MBS and CDOs/CBOs/CLOs; (2)
Private ABS/MBS, which will be limited to 20% of the Fund's total
assets, will not be required to comply with the criteria in Commentary
.01(b)(4); and (3) CDOs/CBOs/CLOs, which will be subject to a separate
limit of 20% of the Fund's total assets, will also not be required to
comply with the criteria in Commentary .01(b)(4).
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\15\ See supra note 13.
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In addition, the Exchange states that the Fund's portfolio will not
comply with the requirement in Commentary .01(b)(5) to Rule 8.600-E
that investments in non-agency, non-government sponsored entity and
privately issued mortgage-related and other asset-backed securities
(i.e., Private ABS/MBS) not account, in the aggregate, for more than
20% of the weight of the portfolio. Instead, the Fund will not invest
more than 20% of the Fund's total assets in Private ABS/MBS or more
than 20% of the Fund's total assets in U.S. or foreign CDOs/CBOs/CLOs.
The Exchange notes that, other than Commentary .01(b)(1),
Commentary .01(b)(4), and Commentary .01(b)(5) to Rule 8.600-E, the
Fund's portfolio will meet all other requirements of Rule 8.600-E.
II. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\16\ In particular, the Commission finds that the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Act,\17\ which requires, among other
things, that the Exchange's rules 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.
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\16\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78f(b)(5).
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According to the Exchange, other than Commentary .01(b)(1), (b)(4)
and (b)(5) to Rule 8.600-E, the Fund will meet all other requirements
of NYSE Arca Rule 8.600-E, and the Shares of the Fund will conform to
the continued listing criteria under NYSE Arca Rule 8.600-E.
As discussed above, the Fund will not comply with the requirement
in Commentary .01(b)(1) to Rule 8.600-E that components that in the
aggregate account for at least 75% of the fixed income weight of the
portfolio each have a minimum original principal amount outstanding of
$100 million or more. Instead, the Exchange proposes that components of
the portfolio, excluding Private ABS/MBS and CDOs/CBOs/CLOs, that in
the aggregate account for at least 50% of the fixed income weight of
the portfolio, each shall have a minimum original principal amount
outstanding of $50 million or more. Private ABS/MBS and CDOs/CBOs/CLOs
will not be subject to a requirement for a minimum original principal
amount outstanding. The Exchange represents that at least 50% of the
fixed income weight of the Fund's portfolio will still be required to
have a substantial minimum original principal amount outstanding.\18\
The Exchange asserts that not subjecting Private ABS/MBS and CDOs/CBOs/
CLOs to a standard for minimum original principal amount outstanding
would allow the Fund to invest in a larger variety of Private ABS/MBS
and CDOs/CBOs/CLOs, which would help the Fund meet its investment
objective and diversify its holdings in such securities.\19\ In
addition, the Exchange states that the Adviser has represented that,
with respect to the Fund's investments in CDOs/CBOs/CLOs, the Fund will
invest principally in the
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senior-most tranches of these securities, generally those with an AAA
investment rating that have first claim in the capital structure and
that have less sensitivity to the credit risk of the underlying assets
(e.g., bank loans or commercial real estate).\20\ The Commission notes
that it has previously approved the listing of other series of Managed
Fund Shares for which the fixed income weight of the portfolio does not
comply with Commentary .01(b)(1) to Rule 8.600-E.\21\
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\18\ See Notice, supra note 3, at 28064-65.
\19\ See id. at 28065.
\20\ See id.
\21\ See, e.g., Securities Exchange Act Release No. 86841
(August 30, 2019), 84 FR 47024 (September 6, 2019) (SR-NYSEArca-
2019-38) (Order Approving a Proposed Rule Change, as Modified by
Amendments No. 1 and No. 2, To Amend the Listing Rule Applicable to
Shares of the Aware Ultra-Short Duration Enhanced Income ETF).
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In addition, the Fund will not comply with the requirements in
Commentary .01(b)(4) to Rule 8.600-E that component securities that in
the aggregate account for at least 90% of the fixed income weight of
the portfolio meet one of the criteria specified in Commentary
.01(b)(4).\22\ Instead, the Exchange proposes to allow up to 50% of the
Fund's portfolio to be composed of fixed income securities which would
not satisfy the criteria in Commentary .01(b)(4). Specifically, the
Exchange proposes that: (1) The Fund may invest up to 10% of its total
assets in fixed income securities that do not satisfy the criteria of
Commentary .01(b)(4), excluding Private ABS/MBS and CDOs/CBOs/CLOs; (2)
the Fund's investments in Private ABS/MBS, which may constitute up to
20% of the Fund's total assets, will not be required to satisfy the
criteria of Commentary .01(b)(4); and (3) the Fund's investments in
CDOs/CBOs/CLOs, which may constitute up to 20% of the Fund's total
assets, also will not be required to satisfy the criteria of Commentary
.01(b)(4). The Commission notes that it has previously approved the
listing of other series of Managed Fund Shares with similar investment
strategies that are permitted to hold a similar percentage of fixed
income securities that do not meet one of the criteria set forth in
Commentary.01(b)(4).\23\
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\22\ See supra note 13.
\23\ See, e.g., Securities Exchange Act Release No. 87576
(November 20, 2019), 84 FR 65206 (November 26, 2019) (SR-NYSEArca-
2019-14) (Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, Relating to the Permitted Investments of the PGIM
Ultra Short Bond ETF) (``PGIM Ultra Short Bond ETF Order'').
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Finally, the Fund will not comply with the requirement in
Commentary .01(b)(5) to Rule 8.600-E that investments in non-agency,
non-government sponsored entity and privately issued mortgage-related
and other asset-backed securities (i.e., Private ABS/MBS) not account,
in the aggregate, for more than 20% of the weight of the portfolio.
Instead, the Fund will not invest more than 20% of the Fund's total
assets in Private ABS/MBS or more than 20% of the Fund's total assets
in U.S. or foreign CDOs/CBOs/CLOs. The Exchange believes that these
limitations will help the Fund maintain portfolio diversification and
reduce manipulation risk.\24\ In addition, the Exchange states that the
Fund's investment in CDOs/CBOs/CLOs will be subject to the Fund's
liquidity procedures as adopted by the Trust's Board of Trustees, and
the Adviser does not expect that such investments will have any
material impact on the liquidity of the Fund's investments.\25\ The
Commission notes that it has previously approved the listing of other
series of Managed Fund Shares that are permitted to hold private asset
backed and mortgage-backed securities in excess of the levels permitted
under Commentary .01(b)(5).\26\
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\24\ See Notice, supra note 3, at 28065.
\25\ See id.
\26\ See, e.g., PGIM Ultra Short Bond ETF Order, supra note 23;
Securities Exchange Act Release No. 87410 (October 28, 2019), 84 FR
58750 (November 1, 2019) (SR-NYSEArca-2019-33) (Order Approving a
Proposed Rule Change, as Modified by Amendment No. 2, Regarding
Changes to Investments of the First Trust TCW Unconstrained Plus
Bond ETF).
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The Exchange represents that all statements and representations
made in the filing regarding (1) the description of the portfolio
holdings or reference assets, (2) limitations on portfolio holdings or
reference assets, or (3) the applicability of Exchange listing rules
specified in the filing shall constitute continued listing requirements
for listing the Shares of the Fund on the Exchange. In addition, the
Exchange states that the issuer must notify the Exchange of any failure
by the Fund to comply with the continued listing requirements, and,
pursuant to its obligations under Section 19(g)(1) of the Act, the
Exchange will monitor \27\ for compliance with the continued listing
requirements. If the Fund is not in compliance with the applicable
listing requirements, the Exchange will commence delisting procedures
under NYSE Arca Rule 5.5-E(m).
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\27\ The Commission notes that certain proposals for the listing
and trading of exchange-traded products include a representation
that the exchange will ``surveil'' for compliance with the continued
listing requirements. See, e.g., Securities Exchange Act Release No.
77499 (April 1, 2016), 81 FR 20428, 20432 (April 7, 2016) (SR-BATS-
2016-04). In the context of this representation, it is the
Commission's view that ``monitor'' and ``surveil'' both mean ongoing
oversight of compliance with the continued listing requirements.
Therefore, the Commission does not view ``monitor'' as a more or
less stringent obligation than ``surveil'' with respect to the
continued listing requirements.
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This approval order is based on all of the Exchange's
representations, including those set forth above and in Amendment No.
1. For the foregoing reasons, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with Section
6(b)(5) of the Act \28\ and the rules and regulations thereunder
applicable to a national securities exchange.
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\28\ 15 U.S.C. 78f(b)(5).
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III. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\29\ that the proposed rule change (SR-NYSEArca-2020-37), as
modified by Amendment No. 1, be, and it hereby is, approved.
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\29\ Id.
\30\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13207 Filed 6-18-20; 8:45 am]
BILLING CODE 8011-01-P