[Federal Register Volume 84, Number 228 (Tuesday, November 26, 2019)]
[Notices]
[Pages 65206-65208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25586]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87576; File No. SR-NYSEArca-2019-14]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Approving a
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the
Permitted Investments of the PGIM Ultra Short Bond ETF
November 20, 2019.
I. Introduction
On March 13, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE Arca'')
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 to the listing rule for shares (``Shares'') of the
PGIM Ultra Short Bond ETF (``Fund''). The proposed rule change was
published for comment in the Federal Register on April 2, 2019.\3\ On
May 10, 2019, 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 approve or disapprove the proposed
rule change.\5\ On June 27, 2019, the Commission instituted proceedings
pursuant to Section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposed rule change.\7\ On September 23,
2019, the Commission designated a longer period within which to issue
an order approving or disapproving the proposed rule change.\8\ On
November 14, 2019, the Exchange filed Amendment No. 1 to the proposed
rule change.\9\ 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. 85430 (Mar. 27,
2019), 84 FR 12646 (Apr. 2, 2019) (``Notice'').
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 85829 (May 10,
2019), 84 FR 22221 (May 16, 2019). The Commission designated July 1,
2019, as the date by which the Commission shall approve or
disapprove, or institute proceedings to determine whether to approve
or disapprove, the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 86220, 84 FR 31868
(Jul. 3, 2019).
\8\ See Securities Exchange Act Release No. 87058, 84 FR 51210
(Sep. 27, 2019).
\9\ In Amendment No. 1, the Exchange supplemented the proposed
rule change by adding additional details regarding certain of the
asset backed securities in which the Fund may invest. Amendment No.
1 is available at: https://www.sec.gov/comments/sr-nysearca-2019-14/srnysearca201914-6425213-198531.pdf.
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II. Description of the Proposal
A. The Fund and the Shares
PGIM Investments LLC (``Adviser'') is the investment adviser for
the Fund. PGIM Fixed Income (``Subadviser''), a unit of PGIM, Inc., is
the subadviser to the Fund. According to the Exchange, the investment
objective of the Fund is to seek total return through a combination of
current income and capital appreciation, consistent with preservation
of capital. The Fund seeks to achieve its investment objective by
investing primarily in a portfolio of U.S. dollar denominated short-
term fixed, variable and floating rate debt instruments. Under normal
market conditions,\10\ the Fund invests at least 80% of its net assets
(plus any borrowings for investment purposes) in a portfolio of
financial instruments consisting of (1) the Principal Investment
Instruments (as defined in the First Prior Order); and (2) derivatives
(as described in the Prior Orders) that (a) provide exposure to such
Principal Investment Instruments, or (b) are used to enhance returns,
manage portfolio duration, or manage the risk of securities price
fluctuations, as described in the Prior Orders.\11\
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\10\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
\11\ The terms ``First Prior Order'' and ``Prior Orders'' are
defined infra at note 13.
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The Shares commenced trading on the Exchange on April 10, 2018,
pursuant to the generic listing standards under Commentary .01 to NYSE
Arca Rule 8.600-E (``Managed Fund Shares'').\12\ Since then, the
Exchange has proposed--and the Commission has approved--two proposed
rule changes to expand the permitted investments of the Fund beyond
what is permitted under the generic listing requirements.\13\ By this
proposed rule change, the Exchange proposes to again amend the listing
rule applicable to the Shares.
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\12\ A Managed Fund Share is a security that represents an
interest in an investment company registered under the Investment
Company Act of 1940 (15 U.S.C. 80a-1) organized as an open-end
investment company or similar entity that invests in a portfolio of
securities selected by its investment adviser consistent with its
investment objectives and policies. In contrast, an open-end
investment company that issues Investment Company Units, listed and
traded on the Exchange under NYSE Arca Rule 5.2-E(j)(3), seeks to
provide investment results that correspond generally to the price
and yield performance of a specific foreign or domestic stock index,
fixed income securities index or combination thereof.
\13\ See Securities Exchange Act Release No. 83319 (May 24,
2018), 83 FR 25097 (May 31, 2018) (SR-NYSEArca-2018-15) (``First
Prior Order''); and Securities Exchange Act Release No. 84818
(December 13, 2018) (SR-NYSEArca-2018-75) (together with the First
Prior Order, ``Prior Orders'').
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B. The Proposed Modifications to the Shares' Listing Rule
The Exchange proposes to amend two requirements of the Shares'
current listing rule as set forth in the First Prior Order, namely the
requirements that: (1) The Fund's investments in non-U.S. Government,
non-agency, non-GSE and other privately issued asset backed securities
(including mortgage-backed securities) (``Private ABS/MBS'') are
limited to 20% of the total assets of the Fund;\14\ and (2) the Fund
may invest
[[Page 65207]]
only 10% of its total assets in fixed income securities that do not
satisfy the criteria of Commentary .01(b)(4) to NYSE Arca Rule 8.600-
E.\15\
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\14\ At the time the proposed rule change was filed, Commentary
.01(b)(5) to NYSE Arca Rule 8.600-E provided that non-agency, non-
government sponsored entity and privately issued mortgage-related
and other asset-backed securities components of a portfolio may not
account, in the aggregate, for more than 20% of the weight of the
fixed income portion of the portfolio. Recently, however, the
Exchange amended Commentary .01(b)(5) to NYSE Arca Rule 8.600-E, and
it now provides that non-agency, non-government sponsored entity and
privately issued mortgage-related and other asset-backed securities
components of a portfolio may not account, in the aggregate, for
more than 20% of the weight of the portfolio. See Securities
Exchange Act Release No. 86017 (June 3, 2019), 84 FR 26711 (June 7,
2019) (SR-NYSEArca-2019-06).
\15\ Commentary .01(b)(4) requires that 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.
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The Exchange proposes to modify the Fund's current limit on Private
ABS/MBS by removing collateralized debt obligations (``CDOs'') \16\
from the definition of Private ABS/MBS and by allowing the Fund to
invest up to 20% of its total assets in CDOs. Therefore, the Exchange
is proposing to allow up to 40% of the Fund's portfolio to be composed
of what had previously been defined as Private ABS/MBS. The Exchange
asserts that the ability to invest up to 20% of the Fund's portfolio in
CDOs would help the Fund maintain portfolio diversification and would
reduce manipulation risk.\17\ The Exchange argues that CDOs can be
distinguished from asset backed securities (``ABS'') because CDOs are
collateralized by bank loans or by corporate or government fixed income
securities, while ABS are collateralized by consumer and other loans
(including student loans) made by non-bank lenders.\18\ Additionally,
the Exchange states that the Fund's investments in CDOs would be
subject to the Fund's liquidity procedures, and that the Fund's
investment adviser does not expect that such investments would
materially impact the liquidity of the Fund's investments.\19\
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\16\ The Exchange defines CDOs as collateralized loan
obligations (``CLOs'') and collateralized bond obligations
(``CBOs''). The Exchange defines CLOs as securities issued by a
trust or other special purpose entity that are collateralized by a
pool of loans by U.S. banks and participations in loans by U.S.
banks that are unsecured or secured by collateral other than real
estate. The Exchange defines CBOs as securities issued by a trust or
other special purpose entity that are backed by a diversified pool
of fixed income securities issued by U.S. or foreign governmental
entities or fixed income securities issued by U.S. or corporate
issuers.
\17\ See Notice, supra note 3, 84 FR at 12647-48.
\18\ See id. at 12647, n.12.
\19\ See id. at 12648.
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With respect to the requirement that the Fund may invest only up to
10% of its total assets in fixed income securities that do not satisfy
the criteria of Commentary .01(b)(4), the Exchange proposes that the
Fund's Private ABS/MBS (which may constitute up to 20% of the
portfolio) and CDOs (which also may constitute up to 20% of the
portfolio) would not count toward that 10% limit. As a result, up to
50% of the Fund's fixed income securities might not satisfy the
criteria in Commentary .01(b)(4). The Exchange argues that this
alternative limit is appropriate because the criteria in Commentary
.01(b)(4) ``do not appear to be designed for structured finance
vehicles such as Private ABS/MBS.'' \20\
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\20\ Id.
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The Exchange proposes no other changes to the Shares' listing rule.
C. The Fund's Investments in CDOs
In Amendment No. 1, the Exchange added information regarding the
CDOs in which the Fund may invest. The Adviser and Subadviser represent
that, with respect to the Fund's investments in CDOs (which, for
purposes of this filing, include CBOs and CLOs), (1) the Fund will
invest principally in the senior-most tranches of these securities,
generally with an AAA investment rating which have first claim in the
capital structure and generally have less sensitivity to the credit
risk of the underlying assets (e.g., bank loans or commercial real
estate); and (2) CDOs/CLOs represent about one quarter of the non-
agency securitized credit market and have issuances of about $793.9
billion as of September 30, 2019.\21\ The Exchange states that the
senior-most tranches provide investors with additional protections by
distinguishing such investments from many of the attributes associated
with the underlying assets and this credit enhancement provides the
senior-most tranches ``loss absorption'' as credit losses from the
collateral would be borne mainly by the more junior tranches.\22\
According to the Exchange, the relative lack of sensitivity to
underlying credit exposure for senior CDO tranches allows market
participants to more accurately assess current valuations, which may
result in greater market liquidity.\23\
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\21\ See Amendment No. 1, supra note 9, at 3.
\22\ See id.
\23\ See id.
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The Adviser and Subadviser also represent that the senior-most CLO
tranches generally make up at least 60% of the total amount issued in
each securitization, and the Subadviser notes that the senior-most CLO
tranches also make up most of the secondary trading volume for these
securities.\24\ According to the Exchange, most investors in these
tranches are institutional and professional investors (such as asset
managers, insurance companies, pensions and money-center bank treasury
offices), and transparency in the underlying collateral is robust as
trustees and servicers generally must report holdings on a monthly
basis.\25\ The Exchange also states that the underlying collateral
(e.g., U.S. broadly-syndicated bank loans) for CLOs is actively traded
throughout the day as most of the underlying collateral held by retail
mutual funds also serves as the underlying collateral for CLOs and,
because mutual funds must calculate a daily price for these
investments, there is more readily available information for investors
to establish a market price.\26\ According to the Exchange, the asset
transparency along with the seniority of the CLO tranches tends to
create more stable and predictable cash flows and, as a result, pricing
can be more readily established and analyzed, including in volatile
markets.\27\ Therefore, the Exchange asserts, the senior-most CLO
tranches generally trade at tighter spreads even in times of market
volatility.\28\
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\24\ See id.
\25\ See id.
\26\ See id.
\27\ See id.
\28\ See id.
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Additionally, the Adviser and Subadviser represent that the JPM CLO
Index, which reflects recent total return performance across the CLO
capital structure, provides a readily available indication of the
amount of volatility (as measured by standard deviation) that CLOs have
experienced and illustrates how large the ``drawdown'' (worst 12-month
total return) has been in times of stress.\29\ In the Exchange's view,
these two measures show significant differences in the stability of
returns and the ``drawdown'' between the senior-most (``AAA CLO'') and
the most junior tranches (``B CLO'').\30\ Additionally, the Adviser and
Subadviser represent that, like the corporate credit market, the
investment grade portions of the securitized credit market are
generally more liquid than lower-rated securities, with ample price
[[Page 65208]]
discovery, while lower-rated securities are more volatile, with
valuations that are more difficult to discern in times of market
stress.\31\
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\29\ See id.
\30\ See id. at 3-4.
\31\ See id. at 4.
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Further, the Adviser and Subadviser represent that analysis of both
data from the Trade Reporting and Compliance Engine of the Financial
Industry Regulatory Authority and collateralized mortgage-backed
securities (``CMBS'')/CLO spreads over time show how markets have
behaved in past periods of volatility.\32\ The Exchange states that:
(1) During the period from January 2012 through September 2019, CLO
spread widening occurred during periods of broader market volatility;
(2) there was a relatively high volume of CLOs trading in the secondary
market, especially in the senior-most tranches; and (3) the spread
moves were most pronounced in the junior tranches, while AAA CLOs did
not experience a large spread move.\33\
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\32\ See id.
\33\ See id.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the Exchange's
proposal to continue listing and trading the Shares is consistent with
the Act and the rules and regulations thereunder applicable to a
national securities exchange.\34\ In particular, the Commission finds
that the proposed rule change is consistent with Section 6(b)(5) of the
Act,\35\ which requires, among other things, that the Exchange's rules
be designed 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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\34\ 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).
\35\ 15 U.S.C. 78f(b)(5).
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The Exchange proposes to modify the Fund's current limit on Private
ABS/MBS to allow up to 40% of the Fund's portfolio to be composed of
what had previously been defined as Private ABS/MBS. The Commission
notes that it has previously approved listing rules which permit other
series of Managed Fund Shares to hold private asset backed and
mortgage-backed securities in excess of the levels permitted under
Commentary .01(b)(5).\36\ The Commission also notes that it recently
approved modifications to the listing rule of another issue of Managed
Fund Shares, which included permitting that fund to hold up to 50% of
its total assets in private asset-backed and mortgage-backed
securities.\37\
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\36\ See, e.g., Securities Exchange Act Release Nos. 84047
(September 6, 2018), 83 FR 46200 (September 12, 2018) (SR-Nasdaq-
2017-128) (approving the listing and trading of shares of the
Western Asset Total Return ETF); and 84826 (December 14, 2018), 83
FR 65386 (December 20, 2018) (SR-NYSEArca-2018-25) (approving the
continued listing and trading of shares of the Natixis Loomis Sayles
Short Duration Income ETF).
\37\ See Securities Exchange Act Release No. 87410 (October 28,
2019), 84 FR 58750 (November 1, 2019) (SR-NYSEArca-2019-33).
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The Exchange also 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), in that: (1) Under the
First Prior Order, 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); and (2) the Fund's investments in Private ABS/MBS (which may
constitute up to 20% of the portfolio) and CDOs (which also may
constitute up to 20% of the portfolio) would not be required to satisfy
the Commentary .01(b)(4) criteria. The Commission notes that it has
previously approved the listing of other series of Managed Fund Shares
with similar investment objectives and strategies without imposing
requirements that a certain percentage of such funds' securities meet
one of the criteria set forth in Commentary .01(b)(4).\38\
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\38\ See, e.g., Securities Exchange Act Release No. 67894
(September 20, 2012), 77 FR 59227 (September 26, 2012) (SR-BATS-
2012-033) (order approving the listing and trading of shares of the
iShares Short Maturity Bond Fund); Securities Exchange Act Release
No. 70342 (September 6, 2013), 78 FR 56256 (September 12, 2013) (SR-
NYSEArca-2013-71) (order approving the listing and trading of shares
of the SPDR SSgA Ultra Short Term Bond ETF, SPDR SSgA Conservative
Ultra Short Term Bond ETF, and SPDR SSgA Aggressive Ultra Short Term
Bond ETF).
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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 and the rules and regulations thereunder applicable
to a national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-NYSEArca-2019-14), as modified by
Amendment No. 1, be, and it hereby is, approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25586 Filed 11-25-19; 8:45 am]
BILLING CODE 8011-01-P