[Federal Register Volume 84, Number 226 (Friday, November 22, 2019)]
[Notices]
[Pages 64589-64595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25320]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87556; File No. SR-NYSEArca-2019-82]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
and Immediate Effectiveness of Proposed Rule Change Permitting the
Listing and Trading of Shares of the Nationwide Risk-Managed Income ETF
Under NYSE Arca Rule 8.600-E
November 18, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on November 5, 2019, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. 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 permit the listing and trading of shares
under NYSE Arca Rule 8.600-E of the Nationwide Risk-Managed Income ETF,
a series of ETF Series Solutions, notwithstanding that the fund does
not meet the requirements of Commentary .01(d)(2) to Rule 8.600-E. The
proposed rule change is available on the
[[Page 64590]]
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 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 permit the listing and trading under NYSE
Arca Rule 8.600-E (``Managed Fund Shares'') \4\ of shares (``Shares'')
of the Nationwide Risk-Managed Income ETF (the ``Fund''), a series of
ETF Series Solutions (the ``Trust''), notwithstanding that the Fund
does not meet not meet the requirements of Commentary .01(d)(2) to Rule
8.600-E.
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\4\ 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) (``1940 Act'') 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.
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The Shares are offered by the Trust, which is registered with the
Commission as an open-end management investment company consisting of
multiple investment series.\5\ The Fund is a series of the Trust.
Nationwide Fund Advisors (the ``Adviser'') is the investment adviser to
the Fund. Harvest Volatility Management, LLC (``Sub-Adviser'') is the
sub-adviser for the Fund and is responsible for the day-to-day
management of the Fund. U.S. Bank National Association is the custodian
of the Trust (the ``Custodian''). U.S. Bancorp Fund Services, LLC will
serve as administrator and transfer agent for the Fund. Quasar
Distributors, LLC, will serve as the Fund's distributor.
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\5\ The Trust is registered under the 1940 Act. On September 9,
2019, the Trust filed with the Securities and Exchange Commission
(``SEC'' or Commission'') a post-effective amendment to 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. 333-179562 and 811-22668) with respect to Shares of the Fund
(``Registration Statement''). The description of the operation of
the Trust and of the Fund and Shares herein is based, in part, on
the Registration Statement. There are no permissible holdings for
the Fund that are not described in this proposal. The Commission has
issued an order granting certain exemptive relief to the Trust under
the 1940 Act. See Investment Company Act Release No. 33065 (April 3,
2018).
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Commentary .06 to Rule 8.600-E provides that, if the investment
adviser to the investment company issuing Managed Fund Shares is
affiliated with a broker-dealer, such investment adviser shall erect
and maintain a ``fire wall'' between the investment adviser and the
broker-dealer with respect to access to information concerning the
composition and/or changes to such investment company portfolio.\6\ In
addition, Commentary .06 further requires that personnel who make
decisions on the investment company's portfolio composition must be
subject to procedures designed to prevent the use and dissemination of
material nonpublic information regarding the applicable investment
company portfolio. Neither the Adviser nor the Sub-Adviser is a
registered broker-dealer. The Sub-Adviser is not affiliated with a
broker-dealer, but the Adviser is affiliated with a broker-dealer. In
addition, Adviser and Sub-Adviser personnel who make decisions
regarding a Fund's portfolio are subject to procedures designed to
prevent the use and dissemination of material nonpublic information
regarding the Fund's portfolio. The Adviser has implemented and will
maintain a fire wall with respect to its relevant personnel and such
broker-dealer affiliate, as applicable, regarding access to information
concerning the composition and/or changes to the portfolio, and is
subject to procedures designed to prevent the use and dissemination of
material non-public information regarding such portfolio. In the event
that (a) the Adviser or Sub-Adviser becomes registered as a broker-
dealer or newly affiliated with a broker-dealer, 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 such broker-dealer affiliate, as
applicable, 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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\6\ An investment adviser to an open-end fund is required to be
registered under the Investment Advisers Act of 1940 (the ``Advisers
Act''). As a result, the Adviser, Sub-Adviser and their related
personnel are subject to the provisions of Rule 204A-1 under the
Advisers Act relating to codes of ethics. This Rule requires
investment advisers to adopt a code of ethics that reflects the
fiduciary nature of the relationship to clients as well as
compliance with other applicable securities laws. Accordingly,
procedures designed to prevent the communication and misuse of non-
public information by an investment adviser must be consistent with
Rule 204A-1 under the Advisers Act. In addition, Rule 206(4)-7 under
the Advisers Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such investment adviser
has (i) adopted and implemented written policies and procedures
reasonably designed to prevent violation, by the investment adviser
and its supervised persons, of the Advisers Act and the Commission
rules adopted thereunder; (ii) implemented, at a minimum, an annual
review regarding the adequacy of the policies and procedures
established pursuant to subparagraph (i) above and the effectiveness
of their implementation; and (iii) designated an individual (who is
a supervised person) responsible for administering the policies and
procedures adopted under subparagraph (i) above.
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Principal Investments of the Fund
According to the Registration Statement, the investment objective
of the Fund is current income with downside protection. The Fund is an
actively-managed exchange-traded fund (``ETF'') \7\ that will seek,
under normal market conditions,\8\ to achieve its objective principally
by investing in (1) a portfolio of the stocks included in the Nasdaq-
100 Index (the ``Nasdaq-100'' or the ``Reference Index''), and (2) a
mix of written call options and long put options on the Nasdaq-100 (the
``Options Collar'') intended to reduce the Fund's volatility and
provide a measure of downside protection (the ``Options Collar
Strategy'', described more fully below).
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\7\ For purposes of this filing, the term ``ETFs'' means
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 in the U.S. on a
national securities exchange. The Fund will not invest in inverse or
leveraged (e.g., 2X, -2X, 3X or -3X) ETFs.
\8\ The term ``normal market conditions'' is defined in NYSE
Arca Rule 8.600-E(c)(5).
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The Nasdaq-100 is a market capitalization weighted index comprised
of the securities of 100 of the largest non-financial companies listed
on The Nasdaq Stock Market LLC based on market capitalization. Such
securities may include companies domiciled domestically or
internationally (including in emerging markets), and may include common
stocks, ordinary shares, depositary
[[Page 64591]]
receipts representing interests in non-U.S. companies, and tracking
stocks, which instruments, along with the Options Collar, will
constitute the principal investments of the Fund.
The Fund may hold cash and cash equivalents.\9\
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\9\ For purposes of this filing, cash equivalents mean the
securities described in Commentary .01(c) to NYSE Arca Rule 8.600-E.
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The Options Collar Strategy
According to the Registration Statement, the Fund's Options Collar
strategy consists of two components: (1) Selling call options on the
Nasdaq-100 on up to 100% of the value of the equity securities held by
the Fund to generate premium from such options, while (2)
simultaneously reinvesting a portion of such premium to buy put options
on the same reference asset to ``hedge'' or mitigate the downside risk
associated with owning equity securities.
The Fund will use a portion of the premium received from writing
call options to purchase put options. Both the Fund's call and put
options will be traded on a national securities exchange and settled in
cash.
Non-Principal Investments
In addition to the principal investments described above, the Fund
may invest in U.S. exchange-listed options on reference assets other
than the Nasdaq-100 that will comply with Commentary .01(d)(2) to Rule
8.600-E, including but not limited to the NASDAQ-100 Equal Weight
Index, Invesco QQQ Trust, Series 1, S&P 500 Index, and the individual
equity securities comprising the Nasdaq-100 or S&P 500 Index.
The Fund may also invest in U.S. exchange-listed common stocks,
ordinary shares, and American Depositary Receipts representing
interests in non-U.S. companies, and tracking stocks that are not
included in the Nasdaq-100. The Fund may also invest in the securities
of other investment companies registered under the 1940 Act, including
money market funds, exchange traded funds (``ETFs''), and Real Estate
Investment Trusts (``REITS''). The Fund may also invest in exchange-
traded rights and warrants.
The Fund may also invest in U.S. Government securities, including
bills, notes and bonds, which are either issued or guaranteed by the
U.S. Treasury or by U.S. Government agencies or instrumentalities, with
maturities 3 months or longer.
Application of Generic Listing Requirements
The Exchange submits this proposal in order to list and trade
Shares of the Fund and to allow the Fund to hold listed derivatives, in
particular put and call options on the Nasdaq-100 Index, in a manner
that may not comply with Commentary .01(d)(2) to Rule 8.600-E.\10\
Otherwise, the Fund will comply with all other listing requirements of
the Generic Listing Standards \11\ for Managed Fund Shares on an
initial and continued listing basis under Commentary .01 to Rule 8.600-
E.\12\
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\10\ Commentary .01(d)(2) to Rule 8.600-E provides that ``the
aggregate gross notional value of listed derivatives based on any
five or fewer underlying reference assets shall not exceed 65% of
the weight of the portfolio (including gross notional exposures),
and the aggregate gross notional value of listed derivatives based
on any single underlying reference asset shall not exceed 30% of the
weight of the portfolio (including gross notional exposures).'' The
Fund would not meet the generic listing standards because it would
fail to meet the requirement of Commentary .01(d)(2) that prevents
the aggregate gross notional value of listed derivatives based on
any single underlying reference asset from exceeding 30% of the
weight of the portfolio (including gross notional exposures) and the
requirement that the aggregate gross notional value of listed
derivatives based on any five or fewer underlying reference assets
shall not exceed 65% of the weight of the portfolio (including gross
notional exposures).
\11\ For purposes of this proposal, the term ``Generic Listing
Standards'' means the generic listing rules for Managed Fund Shares
under Commentary .01 to Rule 8.600-E.
\12\ The Exchange notes that this proposed rule change is
similar to previous rule changes involving Managed Fund Shares with
similar exposures to one or more underlying reference asset and U.S.
exchange-listed equity securities. See Securities Exchange Act
Release No. 87108 (September 25, 2019), 84 FR 52152 (October 1,
2019) (SR-CboeBZX-2019-067). See generally Securities Exchange Act
Release No. 82906 (March 20, 2018), 83 FR 12992 (March 26, 2018)
(SR-CboeBZX-2017-012) (order approving the listing and trading of
the LHA Market State Tactical U.S. Equity ETF); Securities Exchange
Act Release No. 83679 (July 20, 2018), 83 FR 35505 (July 26, 2018)
(SR-BatsBZX-2017-72) (Notice of Filing of Amendment No. 4 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified
by Amendment No. 4 Thereto, to List and Trade Shares of the
Innovator S&P 500 Buffer ETF Series, Innovator S&P 500 Power Buffer
ETF Series, and Innovator S&P 500 Ultra Buffer ETF Series Under Rule
14.11(i)); Securities Exchange Act Release No. 86773 (August 27,
2019), 84 FR 46051 (September 3, 2019) (SR-CboeBZX-2019-077);
Securities Exchange Act Release No. 83146 (May 1, 2018), 83 FR 20103
(May 2, 2017) (SR-CboeBZX-2018-29); Securities Exchange Act Release
No. 80529 (April 26, 2017), 82 FR 20506 (May 2, 2017) (SR-BatsBZX-
2017-14).
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The market for options contracts on the Nasdaq-100 Index (``Nasdaq-
100 Index Options'') is deep and liquid. In 2018, more than 15,000
options contracts on the Nasdaq-100 Index were traded per day, which is
more than $10 billion in notional volume traded on a daily basis. The
Exchange believes that the liquidity in Nasdaq-100 Index Options
markets mitigates the concerns that Commentary .01(d)(2) to Rule 8.600-
E is intended to address and that such liquidity would discourage
manipulation of the Shares.
In addition, the Exchange believes that sufficient protections are
in place to protect against market manipulation of the Shares and
Nasdaq-100 Index Options for several reasons: (i) The diversity,
liquidity, and market cap of the securities underlying the Nasdaq-100
Index; and (ii) surveillance by the Exchange, other options
exchanges,\13\ and the Financial Industry Regulatory Authority
(``FINRA'') designed to detect violations of the federal securities
laws and self-regulatory organization (``SRO'') rules. The Exchange has
in place a surveillance program for transactions in ETFs to ensure the
availability of information necessary to detect and deter potential
manipulations and other trading abuses. Further, the Exchange believes
that because the Nasdaq-100 Index Options in the Fund's portfolio will
be acquired in liquid and highly regulated markets,\14\ the Exchange
believes that manipulation of Nasdaq-100 Index Options would be
discouraged and that any potential manipulation would be more easily
identified.
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\13\ The Exchange and all nine [sic] U.S. options exchanges are
members of the Options Regulatory Surveillance Authority, which was
established in 2006 to provide efficiencies in looking for insider
trading and serves as a central organization to facilitate
collaboration in investigations for the U.S. options exchanges.
\14\ All exchange-listed securities that the Fund may hold will
trade on a market that is a member of the Intermarket Surveillance
Group (``ISG'') and the Fund will not hold any non-exchange-listed
equities or options; however, not all of the components of the
portfolio for the Fund may trade on exchanges that are members of
the ISG or with which the Exchange has in place a comprehensive
surveillance sharing agreement. For a list of the current members of
ISG, see www.isgportal.org.
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As noted above, options on the Nasdaq-100 Index are among the most
liquid options in the world and derive their value from the actively
traded Nasdaq-100 Index components. The contracts are cash-settled with
no delivery of stocks or ETFs, and trade in competitive auction markets
with price and quote transparency. The Exchange believes the highly
regulated options markets and the broad base and scope of the Nasdaq-
100 Index make securities that derive their value from that index would
discourage market manipulation in view of market capitalization and
liquidity of the Nasdaq-100 Index components, price and quote
transparency, and arbitrage opportunities, and that any potential
manipulation would be more easily identified.
[[Page 64592]]
The Exchange believes that the liquidity of the markets for
securities in the Nasdaq-100 Index, Nasdaq-100 Index Options, and other
related derivatives is sufficiently great to deter fraudulent or
manipulative acts associated with the Fund's Shares price. The Exchange
also believes that such liquidity is sufficient to support the creation
and redemption mechanism. Coupled with the extensive surveillance
programs of the SROs described above, the Exchange does not believe
that trading in the Shares would present manipulation concerns.
Availability of Information
The Fund's website (www.etf.nationwide.com) will include the
prospectus for the Fund that may be downloaded. The Fund's website will
include ticker, CUSIP and exchange information, along with additional
quantitative information updated on a daily basis, including, for the
Fund: (1) The prior business day's net asset value (``NAV'') per share
and the market closing price or mid-point of the bid/ask spread at the
time of calculation of such NAV per share (the ``Bid/Ask Price''),\15\
and a calculation of the premium or discount of the market closing
price or Bid/Ask Price against such NAV per share; and (2) a table
showing the number of days of such premium or discount for the most
recently completed calendar year, and the most recently completed
calendar quarters since that year (or the life of Fund, if shorter). On
each business day, before commencement of trading in Shares in the Core
Trading Session \16\ on the Exchange, the Fund will disclose on its
website the Disclosed Portfolio as defined in NYSE Arca Rule 8.600-
E(c)(2) that forms the basis for the Fund's calculation of NAV at the
end of the business day.
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\15\ The Bid/Ask Price of the Fund's Shares will be determined
using the mid-point of the highest bid and the lowest offer on the
Exchange as of the time of calculation of the Fund's NAV. The
records relating to Bid/Ask Prices will be retained by the Fund and
its service providers.
\16\ The Core Trading Session begins for each security at 9:30
a.m. Eastern time and ends at the conclusion of Core Trading Hours
or the Core Closing Auction, whichever comes later. See NYSE Arca
Rule 7.34-E. ``Core Trading Hours'' is defined as the hours of 9:30
a.m. Eastern time through 4:00 p.m. (Eastern Time) or such other
hours as may be determined by the Exchange from time to time. See
Rule 1.1(j).
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On a daily basis, the Fund will disclose the information required
under NYSE Arca Rule 8.600-E(c)(2) to the extent applicable. The
website information will be publicly available at no charge.
Investors can also obtain the Trust's Statement of Additional
Information (``SAI''), the Fund's Shareholder Reports, and the Fund's
Forms N-CSR and Forms N-CEN. The Fund's SAI and Shareholder Reports
will be available free upon request from the Trust, and those documents
and the Form N-CSR, Form N-PX, Form N-PORT and Form N-CEN may be viewed
on-screen or downloaded from the Commission's website at www.sec.gov.
The intra-day, closing and settlement prices of exchange-traded
options will be readily available from the Options Price Reporting
Authority (``OPRA''), the options exchanges, automated quotation
systems, published or other public sources, or online information
services such as Bloomberg or Reuters.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers.
Quotation and last sale information for the Shares, the stocks
included in the Nasdaq-100, and for portfolio holdings that are U.S.
exchange-listed, including common stocks, rights, warrants, ETFs, REITS
and ADRs will be available via the Consolidated Tape Association
(``CTA'') high-speed line. In addition, the Portfolio Indicative Value
(``PIV''), as defined in NYSE Arca Rule 8.600-E(c)(3), will be widely
disseminated by one or more major market data vendors at least every 15
seconds during the Core Trading Session. The Fund may hold up to an
aggregate amount of 15% of its net assets in illiquid assets
(calculated at the time of investment), deemed illiquid by the Adviser
or Sub-Adviser, consistent with Commission guidance.
Price information regarding U.S. government securities and other
cash equivalents may be obtained from brokers and dealers who make
markets in such securities or through nationally recognized pricing
services through subscription agreements.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\17\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. Trading in the Fund's Shares also
will be subject to Rule 8.600-E(d)(2)(D) (``Trading Halts'').
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\17\ See NYSE Arca Rule 7.12-E.
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Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4 a.m. to 8 p.m., E.T. in accordance
with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions).
The Exchange has appropriate rules to facilitate transactions in the
Shares during all trading sessions. As provided in NYSE Arca Rule 7.6-
E, the minimum price variation (``MPV'') for quoting and entry of
orders in equity securities traded on the NYSE Arca Marketplace is
$0.01, with the exception of securities that are priced less than $1.00
for which the MPV for order entry is $0.0001.
With the exception of the requirements of Commentary .01(d)(2)
(with respect to listed derivatives) as described above, the Shares of
the Fund will conform to the initial and continued listing criteria
under NYSE Arca Rule 8.600-E. Consistent with Commentary .06 of NYSE
Arca Rule 8.600-E, the Adviser or Sub-Adviser will implement and
maintain, or be subject to, procedures designed to prevent the use and
dissemination of material non-public information regarding the actual
components of the Fund's portfolio. The Exchange represents that, for
initial and continued listing, the Fund will be in compliance with Rule
10A-3 \18\ under the Act, as provided by NYSE Arca Rule 5.3-E. The
Exchange will obtain a representation from the issuer of the Shares
that the NAV per Share will be calculated daily and that the NAV and
the Disclosed Portfolio will be made available to all market
participants at the same time.
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\18\ 17 CFR 240.10A-3.
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Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. The Exchange
represents that trading in the Shares will be subject to the existing
trading surveillances, administered by FINRA on behalf of the Exchange,
or by regulatory staff of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities laws.
The Exchange
[[Page 64593]]
represents that these procedures are adequate to properly monitor
Exchange trading of the Shares in all trading sessions and to deter and
detect violations of Exchange rules and federal securities laws
applicable to trading on the Exchange.\19\
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\19\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, options and ETFs
with other markets and other entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in such securities and financial
instruments from such markets and other entities. The Exchange may
obtain information regarding trading in such securities and financial
instruments from markets and other entities that are members of ISG or
with which the Exchange has in place a comprehensive surveillance
sharing agreement. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
All statements and representations made in this filing regarding
(a) the description of the portfolio or reference assets, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange listing rules specified in this rule filing
shall constitute continued listing requirements for listing the Shares
of the Fund on the Exchange.
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 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).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
Equity Trading Permit Holders in an Information Bulletin (``Bulletin'')
of the special characteristics and risks associated with trading the
Shares. Specifically, the Bulletin will discuss the following: (1) The
procedures for purchases and redemptions of Shares in Creation Unit
aggregations (and that Shares are not individually redeemable); (2)
NYSE Arca Rule 9.2-E(a), which imposes a duty of due diligence on its
Equity Trading Permit Holders to learn the essential facts relating to
every customer prior to trading the Shares; (3) the risks involved in
trading the Shares during the Early and Late Trading Sessions when an
updated PIV will not be calculated or publicly disseminated; (4) how
information regarding the PIV and the Disclosed Portfolio is
disseminated; (5) the requirement that Equity Trading Permit Holders
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction; and (6)
trading information.
In addition, the Bulletin will reference that the Fund are subject
to various fees and expenses described in the Registration Statement.
The Bulletin will discuss any exemptive, no-action, and interpretive
relief granted by the Commission from any rules under the Act. The
Bulletin will also disclose that the NAV for the Shares will be
calculated after 4:00 p.m., Eastern time each trading day.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \20\ that an exchange have rules that
are 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, in general, to protect investors and the public interest.
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\20\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in facilitating transactions in
securities, 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 in that the Shares will meet
each of the initial and continued listing criteria in Commentary .01 to
NYSE Arca Rule 8.600-E, with the exception of Commentary .01(d)(2) to
NYSE Arca Rule 8.600-E, which requires that the aggregate gross
notional value of listed derivatives based on any five or fewer
underlying reference assets shall not exceed 65% of the weight of the
portfolio (including gross notional exposures), and the aggregate gross
notional value of listed derivatives based on any single underlying
reference asset shall not exceed 30% of the weight of the portfolio
(including gross notional exposures).\21\ Commentary .01(d)(2) to NYSE
Arca Rule 8.600-E, is intended to ensure that a fund is not subject to
manipulation by virtue of significant exposure to a manipulable
underlying reference asset by establishing concentration limits among
the underlying reference assets for listed derivatives held by a
particular fund. The Exchange notes that this proposed rule change is
similar to previous rule changes involving Managed Fund Shares with
similar exposure to one or more underlying reference asset and U.S.
exchange-listed equity securities.\22\
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\21\ As noted above, the Exchange is submitting this proposal
because the Fund does not meet the requirements of Rule
14.11(i)(4)(C)(iv)(b) [sic] which prevents the aggregate gross
notional value of listed derivatives based on any single underlying
reference asset from exceeding 30% of the weight of the portfolio
(including gross notional exposures) and the aggregate gross
notional value of listed derivatives based on any five or fewer
underlying reference assets from exceeding 65% of the weight of the
portfolio (including gross notional exposures).
\22\ See note 12, supra.
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The market for Nasdaq-100 Index Options is deep and liquid. In
2018, more than 15,000 options contracts on the Nasdaq-100 Price Index
were traded per day, which is more than $10 billion in notional volume
traded on a daily basis. The Exchange believes that the liquidity in
the Nasdaq-100 Index Options markets mitigates the concerns that
Commentary .01(d)(2) to Rule 8.600-E is intended to address and that
such liquidity would discourage manipulation of the Shares.
In addition, the Exchange believes that sufficient protections are
in place to protect against market manipulation of the Shares and
Nasdaq-100 Index Options for several reasons: (i) The diversity,
liquidity, and market cap of the securities underlying the Nasdaq-100
Index; and (ii) surveillance by the Exchange, other options exchanges,
and FINRA designed to detect violations of the federal securities laws
and SRO rules. The Exchange has in place a surveillance program for
transactions in
[[Page 64594]]
ETFs to ensure the availability of information necessary to detect and
deter potential manipulations and other trading abuses. Further, the
Exchange believes that because the Nasdaq-100 Index Options in the
Fund's portfolio will be acquired in highly regulated markets,
manipulation of Nasdaq-100 Index Options would be discouraged and that
any potential manipulation would be more easily identified.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares, options and ETFs
with other markets and other entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in such securities and financial
instruments from such markets and other entities.
The Exchange may obtain information regarding trading in such
securities and financial instruments from markets and other entities
that are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement. In addition, the Exchange
also has a general policy prohibiting the distribution of material,
non-public information by its employees.
As noted above, Nasdaq-100 Index Options are liquid and derive
their value from the actively traded Nasdaq-100 Index components. The
Exchange believes the highly regulated options markets and the broad
base and scope of the Nasdaq-100 Index make securities that derive
their value from the Nasdaq-100 Index would discourage market
manipulation in view of market capitalization and liquidity of the
Nasdaq-100 Index components, price and quote transparency, and
arbitrage opportunities, and that any potential manipulation would be
more easily identified.
The Exchange believes that the liquidity of the markets for
securities in the Nasdaq-100 Index Options and other related
derivatives is sufficiently great to deter fraudulent or manipulative
acts associated with the Fund's Shares price. The Exchange also
believes that such liquidity is sufficient to support the creation and
redemption mechanism. Coupled with the extensive surveillance programs
of the SROs described above, the Exchange does not believe that trading
in the Fund's Shares would present manipulation concerns.
All of the options contracts held by the Fund will trade on markets
that are a member of ISG or affiliated with a member of ISG or with
which the Exchange has in place a comprehensive surveillance sharing
agreement.
The Exchange represents that, except as described above, the Fund
will meet and be subject to all other requirements of the Generic
Listing Standards and other applicable continued listing requirements
for Managed Fund Shares under Rule 8.600-E, including those
requirements regarding the Disclosed Portfolio, Portfolio Indicative
Value, suspension of trading or removal, trading halts, disclosure, and
firewalls. The Trust is required to comply with Rule 10A-3 under the
Act for the initial and continued listing of the Shares of the Fund.
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 notes that the
proposed rule change will permit the listing and trading of an
additional type of Managed Fund Shares that holds U.S. exchange-traded
options and that will enhance competition among market participants, 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
The Exchange has filed the proposed rule change pursuant to Section
19(b)(3)(A)(iii) of the Act \23\ and Rule 19b-4(f)(6) thereunder.\24\
Because the proposed rule change does not: (i) Significantly affect the
protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative prior to
30 days from the date on which it was filed, or such shorter time as
the Commission may designate, if consistent with the protection of
investors and the public interest, the proposed rule change has become
effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6)(iii) thereunder.
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\23\ 15 U.S.C. 78s(b)(3)(A)(iii).
\24\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under Rule 19b-4(f)(6) \25\ normally
does not become operative prior to 30 days after the date of the
filing. However, pursuant to Rule 19b4(f)(6)(iii),\26\ the Commission
may designate a shorter time if such action is consistent with the
protection of investors and the public interest. The Exchange has asked
the Commission to waive the 30-day operative delay so that the proposal
may become operative immediately upon filing. The Fund is seeking an
exception from the generic listing requirements of Commentary .01(d)(2)
to Rule 8.600-E similar to exceptions sought by other exchange-traded
funds with exposure to a single underlying reference asset, and which
have been approved by the Commission.\27\ The Exchange also notes that
the underlying Nasdaq-100 Index Options will be acquired in liquid and
highly regulated markets, which may protect against market manipulation
of such options. Therefore, the Commission believes that the proposal
does not raise new or novel issues, and that waiver of the 30-day
operative delay would permit the Fund to list and trade without undue
delay. For these reasons, the Commission hereby waives the 30-day
operative delay requirement and designates the proposed rule change as
operative upon filing.\28\
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\25\ 17 CFR 240.19b-4(f)(6).
\26\ 17 CFR 240.19b-4(f)(6)(iii).
\27\ See supra note 12.
\28\ For purposes only of waiving the 30-day operative delay,
the Commission also has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of such 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 shall institute proceedings to
determine whether the proposed rule change should be approved or
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:
[[Page 64595]]
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-2019-82 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-2019-82. 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-2019-82 and should be submitted
on or before December 13, 2019.
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\29\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-25320 Filed 11-21-19; 8:45 am]
BILLING CODE 8011-01-P