[Federal Register Volume 83, Number 247 (Thursday, December 27, 2018)]
[Notices]
[Pages 66787-66789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27999]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84863; File No. SR-NYSEArca-2018-67]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To Amend NYSE Arca Rule 5.2-E(j)(6) Relating to Equity 
Index-Linked Securities Listing Standards Set Forth in NYSE Arca Rule 
5.2-E(j)(6)(B)(I)

December 19, 2018.
    On September 10, 2018, 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'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend listing standards set 
forth in NYSE Arca Rule 5.2-E(j)(6)(B)(I) relating to criteria 
applicable to components of an index underlying an issue of Equity 
Index-Linked Securities. The proposed rule change was published for 
comment in the Federal Register on October 1, 2018.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 84279 (Sept. 25, 
2018), 83 FR 49437 (``Notice'').
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    On November 13, 2018, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission has received no comment letters on the 
proposed rule change. This order institutes proceedings under Section 
19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 84576, 83 FR 58315 
(Nov. 19, 2018). The Commission designated December 30, 2018, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal \7\
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    \7\ The Commission notes that additional aspects and information 
regarding the proposal can be found in the Notice. See Notice, supra 
note 3.
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    NYSE Arca Rule 5.2-E(j)(6)(B)(I) sets forth the listing standards 
applicable to Equity Index-Linked Securities.\8\ The Exchange proposes 
to amend NYSE Arca Rule 5.2-E(j)(6)(B)(I) relating to criteria 
applicable to components of an index underlying an issue of Equity 
Index-Linked Securities, as described below.\9\
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    \8\ Equity Index-Linked Securities are securities that provide 
for the payment at maturity based on the performance of an 
underlying index or indexes of equity securities, securities of 
closed-end management investment companies registered under the 
Investment Company Act of 1940 (``1940 Act''), and/or Investment 
Company Units (as described in NYSE Arca Rule 5.2-E(j)(3)). In the 
proposal, the Exchange also refers to these securities as 
``Exchange-Traded Notes'' or ``ETNs.''
    \9\ NYSE Arca Rule 5.2-E(j)(6)(B)(I)(1)(b)(v) provides that all 
component securities shall be either: (A) Securities (other than 
foreign country securities and American Depository Receipts 
(``ADRs'')) that are (x) issued by a 1934 Act reporting company or 
by an investment company registered under the 1940 Act, which in 
each case is listed on a national securities exchange, and (y) an 
``NMS stock'' (as defined in Rule 600 of SEC Regulation NMS); or (B) 
Foreign country securities or ADRs, provided that foreign country 
securities or foreign country securities underlying ADRs having 
their primary trading market outside the United States on foreign 
trading markets that are not members of the Intermarket Surveillance 
Group (``ISG'') or parties to comprehensive surveillance sharing 
agreements with the Exchange will not in the aggregate represent 
more than 50% of the dollar weight of the index, and provided 
further that: (i) The securities of any one such market do not 
represent more than 20% of the dollar weight of the index; and (ii) 
the securities of any two such markets do not represent more than 
33% of the dollar weight of the index.
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Proposed Amendments to NYSE Arca Rule 5.2-E(j)(6)(B)(I)(1)(b)(v)

    The Exchange proposes to amend NYSE Arca Rule 5.2-
E(j)(6)(B)(I)(1)(b)(v) to provide that all component securities of an 
index underlying an issue of Equity Index-Linked Securities shall be 
either (1) U.S. Component Stocks (as described in NYSE Arca Rule 5.2-
E(j)(3)) \10\ that are listed on a national securities exchange and are 
NMS Stocks as defined in Rule 600 of Regulation NMS under the Exchange 
Act; or (2) Non-U.S. Component Stocks (as described in NYSE Arca Rule 
5.2-E(j)(3)) \11\ that are listed and traded on an exchange that has 
last-sale reporting.\12\ The proposed amendment,

[[Page 66788]]

therefore, would delete from Rule 5.2-E (j)(6)(B)(I)(1)(b)(v) the 
requirement that foreign country securities or foreign country 
securities underlying ADRs in an index satisfy requirements that a 
specified percentage of the dollar weight of the index have primary 
trading markets that are members of ISG or primary trading markets that 
are parties to comprehensive surveillance sharing agreements with the 
Exchange.
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    \10\ NYSE Arca Rule 5.2-E(j)(3) provides that the term ``US 
Component Stock'' shall mean an equity security that is registered 
under Sections 12(b) or 12(g) of the Securities Exchange Act of 1934 
or an American Depositary Receipt, the underlying equity security of 
which is registered under Sections 12(b) or 12(g) of the Securities 
Exchange Act of 1934.
    \11\ NYSE Arca Rule 5.2-E(j)(3) provides that the term ``Non-US 
Component Stock'' shall mean an equity security that is not 
registered under Sections 12(b) or 12(g) of the Securities Exchange 
Act of 1934 and that is issued by an entity that (a) is not 
organized, domiciled or incorporated in the United States, and (b) 
is an operating company (including Real Estate Investment Trusts 
(REITS) and income trusts, but excluding investment trusts, unit 
trusts, mutual funds, and derivatives).
    \12\ The text of proposed NYSE Arca Rule 5.2-
E(j)(6)(B)(I)(1)(b)(v)(1) is comparable to the requirement for US 
Component Stocks in Commentary .01(a)(A)(5) to NYSE Arca Rule 5.2-
E(j)(3). The text of proposed NYSE Arca Rule 5.2-
E(j)(6)(B)(I)(1)(b)(v)(2) is comparable to the requirement for Non-
US Component Stocks in Commentary .01(a)(B)(5) to NYSE Arca Rule 
5.2-E(j)(3).
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    According to the Exchange, the proposed amendment would eliminate a 
requirement for Equity Index-Linked Securities that is not applicable 
to Investment Company Units and Managed Fund Shares with respect to 
Non-U.S. Component Stock index components or holdings of Non-U.S. 
Component Stocks. The Exchange states that the amendment, therefore, 
would afford greater flexibility to ETN issuers to list securities that 
include foreign stocks and to better compete with issuers of Investment 
Company Units and Managed Fund Shares, which are not subject to this 
requirement.

Proposed Amendments to NYSE Arca Rule 5.2-E(j)(6)(B)(I)(1)(a)

    The Exchange also proposes to amend NYSE Arca Rule 5.2-
E(j)(6)(B)(I)(1)(a) by increasing the required minimum number of 
components in an index underlying Equity Index-Linked Securities that 
includes Non-U.S. Component Stocks.\13\ The Exchange proposes that an 
underlying index consisting only of U.S. Component Stocks (as described 
in Rule 5.2-E(j)(3)) that are listed on a national securities exchange 
and are NMS Stocks as defined in Rule 600 of Regulation NMS under the 
Exchange Act would be required to have at least ten (10) component 
securities; and an underlying index consisting of (a) only Non-U.S. 
Component Stocks (as described in Rule 5.2-E(j)(3)), or (b) both U.S. 
Component Stocks and Non-U.S. Component Stocks, would be required to 
have at least twenty (20) component securities. According to the 
Exchange, an increase in the required minimum number of components in 
an index that includes Non-U.S. Component Stocks would be comparable to 
the requirement applicable to equity indexes underlying series of 
Investment Company Units listed under Commentary .01 to NYSE Arca Rule 
5.2-E(j)(3), and would provide for greater diversification among index 
components.\14\
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    \13\ NYSE Arca Rule 5.2-E(j)(6)(B)(I)(1)(a) provides that each 
underlying index is required to have at least ten (10) component 
securities; provided, however, that there shall be no minimum number 
of component securities if one or more issues of Derivative 
Securities Products (i.e., Investment Company Units (as described in 
Rule 5.2-E(j)(3)) and securities described in Section 2 of Rule 8) 
or Index-Linked Securities (as described in Rule 5.2-E(j)(6)), 
constitute, at least in part, component securities underlying an 
issue of Equity Index-Linked Securities.
    \14\ See Commentary .01(a)(B)(4) to NYSE Arca Rule 5.2-E(j)(3). 
See also Commentary .01(a)(2)(D) to NYSE Arca Rule 8.600-E, which 
provides that, where the equity portion of the portfolio includes 
Non-U.S. Component Stocks, the equity portion of the portfolio shall 
include a minimum of 20 component stocks; provided, however, that 
there shall be no minimum number of component stocks if (i) one or 
more series of Derivative Securities Products or Index-Linked 
Securities constitute, at least in part, components underlying a 
series of Managed Fund Shares, or (ii) one or more series of 
Derivative Securities Products or Index-Linked Securities account 
for 100% of the equity weight of the portfolio of a series of 
Managed Fund Shares.
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    The Exchange reasons that the proposed amendments to the generic 
listing rules for Equity Index-Linked Securities should help ensure 
that index components of the applicable reference asset are adequately 
capitalized, sufficiently liquid, and diversified, and that these 
proposed requirements should significantly minimize the potential for 
manipulation. The Exchange believes the amendments are appropriate and 
in the public interest in that Equity Index-Linked Securities would 
continue to be subject to numerical criteria for index components 
underlying Equity Index-Linked Securities that are comparable in 
significant respects to the criteria for U.S. Component Stocks and Non-
U.S. Component Stocks in Commentary .01 to NYSE Arca Rule 5.2-E(j)(3) 
for Investment Company Units and Commentary .01(a) to NYSE Arca Rule 
8.600-E for Managed Fund Shares.\15\
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    \15\ Commentary .01 to NYSE Arca Rule 5.2-E(j)(3) and Commentary 
.01(a) to NYSE Arca Rule 8.600-E provide generic initial and 
continued listing criteria applicable to an equity index or 
portfolio underlying Investment Company Units and Managed Fund 
Shares, respectively.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2018-67 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act\16\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of such 
proceedings is appropriate at this time in view of the legal and policy 
issues raised by the proposed rule change. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described below, the 
Commission seeks and encourages interested persons to provide comments 
on the proposed rule change.
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    \16\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\17\ the Commission is 
providing notice of the grounds for disapproval under consideration, as 
discussed below. The Commission is instituting proceedings to allow for 
additional analysis of the proposed rule change's consistency with 
Section 6(b)(5) of the Act, which requires, among other things, that 
the rules of a national securities exchange be ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade,'' and ``to protect investors and the 
public interest.'' \18\
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    \17\ Id.
    \18\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, the Exchange would eliminate from NYSE Arca 
Rule 5.2-E (j)(6)(B)(I)(1)(b)(v) the requirement that foreign country 
securities or foreign country securities underlying ADRs in an index 
satisfy requirements that a specified percentage of the dollar weight 
of the index have primary trading markets that are members of ISG or 
primary trading markets that are parties to comprehensive surveillance 
sharing agreements with the Exchange. According to the Exchange, the 
proposed amendment would eliminate a requirement for Equity Index-
Linked Securities that is not applicable to Investment Company Units 
and Managed Fund Shares with respect to Non-U.S. Component Stock index 
components or holdings of Non-U.S. Component Stocks. The Exchange 
asserts that the amendment to NYSE Arca Rule 5.2-E 
(j)(6)(B)(I)(1)(b)(v) would afford greater flexibility to ETN issuers 
to list securities that include foreign stocks and to better compete 
with issuers of Investment Company Units and Managed Fund Shares, which 
are not subject to this requirement. In making this assertion, the 
Exchange compares the listing standards of Equity Index-Linked 
Securities to the standards of Investment Company Units and Managed 
Fund Shares. Based on the differences between ETNs and Investment 
Company Units and Managed Fund Shares, what are commenters' views on 
the applicability of the Exchange's comparisons in justifying the 
proposed amendments? Based on the unique structure of ETNs, which, 
unlike Investment Company Units and Managed Fund Shares, are not 
governed by the requirements of the 1940 Act and the rules thereunder, 
what are commenters' views on the

[[Page 66789]]

Exchange's proposal to eliminate the requirement that a minimum 
percentage of component foreign country securities or foreign country 
securities underlying ADRs in an index be traded primarily on markets 
that are members of ISG or on markets that are parties to comprehensive 
surveillance sharing agreements with the Exchange? In light of the 
proposed amendment to NYSE Arca Rule 5.2-E (j)(6)(B)(I)(1)(b)(v) that 
would eliminate the requirement that a minimum percentage of component 
foreign country securities or foreign country securities underlying 
ADRs in an index be traded primarily on markets that are members of ISG 
or on markets that are parties to comprehensive surveillance sharing 
agreements with the Exchange, what are commenters' views about whether 
the Exchange has met its burden in demonstrating that the proposal is 
consistent with Section 6(b)(5) of the Act, which requires the rules of 
the Exchange be designed to, among other things, prevent fraudulent and 
manipulative acts and practices? The Commission requests any comment, 
data, or analysis that commenters think may be relevant to the 
Commission's consideration of the Exchange's proposal.

III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\19\
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    \19\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by January 17, 2019. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
January 31, 2019. The Commission asks that commenters address the 
sufficiency of the Exchange's statements in support of the proposal, 
which are set forth in the Notice,\20\ in addition to any other 
comments they may wish to submit about the proposed rule change.
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    \20\ See Notice, supra note 3.
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    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-2018-67 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-2018-67. 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-2018-67 and should be submitted 
by January 17, 2019. Rebuttal comments should be submitted by January 
31, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-27999 Filed 12-26-18; 8:45 am]
BILLING CODE 8011-01-P